Unassociated Document
United
States Securities And Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB
Annual
Report Pursuant To Section 13 Or 15 (D)
Of
The Securities Exchange Act Of 1934
For
the Fiscal Year Ended November 30, 2006
Commission
File No. 000-30486
Herborium
Group, Inc.
(Name
of
small business issuer in its charter)
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NEVADA
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88-0353141
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(State
or other jurisdiction of
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(I.R.S.
employer identification number)
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incorporation
or organization)
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3
Oak Street, Teaneck, NJ 07666
(Address
of principal executive office)
(201)
836-2424
(Registrant’s
telephone number)
Securities
registered under Section 12(b) of the Act:
None
Securities
registered under Section 12(g) of the Act:
Common
Stock, $0.001 Par Value, 500,000,000 shares authorized
Check
whether the issuer is not required to file reports pursuant to Section 13 or
15((d) of the Exchange Act. o
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
x No
o
Check
if
there is no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B contained in this form and no disclosure will be contained, to the best
of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. x
Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the Exchange Act). Yes o No
x
The
issuer's revenue for fiscal year ended November 30, 2006 was
$827,755.
The
aggregate market value as of March 21, 2007 of the voting common equity held
by
non-affiliates is $3,422,012.
Issuers
Involved In Bankruptcy
Proceeding
During THE PAST 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 o No
o
Applicable
Only To Corporate Registrants
As
of
February 12, 2007, there were 114,067,080 shares of the Company’s no par value
common stock issued and outstanding.
Documents
Incorporated By Reference
None
Transitional
Small Business Disclosure Format (check one): Yes o No
x
Herborium
Group, Inc, Inc.
Form
10-KSB
Table
of Contents
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Page
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Part
I
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Item
1.
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Description
of Business
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1-5
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Item
2.
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Description
of Property
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5
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Item
3.
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Legal
Proceedings
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5-6
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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6
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Part
II
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Item
5.
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Market
for Common Equity, Related Stockholder Matters and Small
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Business
Issuer Purchases of Equity Securities
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7-8
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Item
6.
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Management's
Discussion and Analysis or Plan of Operation
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8-15
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Item
7.
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Financial
Statements
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15
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Item
8.
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Changes
In and Disagreements with Accountants on Accounting and
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Financial
Disclosure
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16
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Item
8A.
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Controls
and Procedures
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16
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Item
8B.
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Other
Information
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16
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Part
III
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Item
9.
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Directors,
Executive Officers, Promoters and Control Persons;
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Compliance
with Section 16(a) of the Exchange Act
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17-20
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Item
10.
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Executive
Compensation
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20-25
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Item
11.
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Security
Ownership of Certain Beneficial Owners and Management
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and
Related Stockholder Matters...
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25-27
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Item
12.
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Certain
Relationships and Related Transactions
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27-28
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Item
13.
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Exhibits
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28-33
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Item
14.
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Principal
Accountant Fees and Services
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33-34
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| HERBORIUM
GROUP, INC. CONSOLIDATED FINANCIAL STATEMENTS AS |
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OF
NOVEMBER 30, 2006 and 2005
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F-1-F-21
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As
used
herein, the terms the “Company,” “Herborium,” “we,” “us,” or “our” refer to
Herborium Group, Inc., a Nevada corporation.
Forward-Looking
Statements
Certain
statements in the "Description of Business" (Item 1), "Management’s Discussion
and Analysis or Plan of Operation" (Item 6) and elsewhere in this Annual Report
on Form 10-KSB 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. The Act may, in certain circumstances, limit our liability
in any lawsuit based on forward-looking statements we have made. All statements,
other than statements of historical facts, included in this Annual Report on
Form 10-KSB 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,” "anticipation,” "intend,”
"could,” "estimate,” or "continue" or the negative or other comparable
terminologies 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.
Additional
factors that could affect future results are set forth throughout the
"Description of Business" (Item 1) section, including the subsection entitled
"Risks Related to Our Business," and elsewhere in this Annual Report on Form
10-KSB. Because of the risks and uncertainties associated with forward-looking
statements, you should not place undue reliance on them. Further, any
forward-looking statement speaks only as of the date on which it is made, and
we
undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which the statement is made or to
reflect the occurrence of unanticipated events.
Part
I
Item
1. Description Of Business
Herborium,
Inc. was incorporated in the State of Delaware in November 2000 and has one
wholly-owned, but dormant subsidiary, Herborium.com Inc., a Delaware
corporation. In June 2002, Herborium, Inc. merged with G.O. International,
Inc.,
a consulting firm specializing in business strategies for pharmaceutical
industry and global technology transfer that was founded by Drs. Olszewski
and
Gilligan. Drs. Olszewski and Gilligan also own a dormant UK entity, Herborium
UK, LLC. Herborium has engaged in research, development and marketing of
botanical supplements since its inception, and prior to the merger, funded
its
operations by equity investments and loans from its founders, Drs. Olszewski
and
Gilligan, of approximately $354,000, funding from friends and family of
approximately $188,500, a revolving credit facility and cash generated by gross
profit from sales.
Herborium
was historically a privately held company, owned primarily by Drs. Olszewski
and
Gilligan. In September 2006, Herborium completed a reverse merger with the
publicly-owned Nevada corporation formerly named Pacific Magtron International
Corp., now named Herborium Group, Inc. See “Company History” below for further
details.
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
Federal Drug Administration (the "FDA").
Our
business model is based on:
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Ÿ
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owning
and/or marketing unique products with established clinical history
in
their country of origin, and
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a
proactive approach to meeting the regulatory changes and challenges
of the
new healthcare marketplace.
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Product
Strategy
Our
products address healthcare issues that many consumers do not believe are
treated satisfactorily by conventional pharmaceuticals and, thus, satisfy niche
market demands resulting from the gap between consumer’s healthcare issues and
currently available treatment options. Our products are presently classified
by
the FDA as dietary supplements and are regulated by the Dietary Supplement
Health and Education Act of 1994 ("DSHEA”).
We
seek
to distinguish our company from the marketers of traditional herbal supplements
and vitamins, as well as those focused on traditional pharmaceuticals and
"over-the-counter" drugs, by offering “bridge products,” which we define as
botanical supplements with a record of clinical efficacy and safety established
in the country of origin. To date our initial products have been tested in
China. Our business model takes advantage of the newly emerging opportunities
afforded by changing FDA perspectives with respect to botanical supplements.
The
present regulatory environment now encourages the performance of clinical
studies of botanical supplements. Through clinical testing, we expect to confirm
the positive outcomes initially demonstrated in China that will enable us to
make claims about the efficacy of our products. Successful completion of
clinical studies would allow advertising claims of “clinically proven” greatly
enhancing our advertising campaigns and facilitating marketing efforts. To
pursue clinical studies with respect to our products, we have developed
preliminary collaborative relationships with proactive medical institutions,
such as Johns Hopkins University, New York University Dermatological Clinic
and
Columbia Presbyterian Hospital in the U.S. and the Traditional Chinese Medicine
Institute in Hong Kong. We will not be able to pursue any such clinical studies
without adequate financing, and we presently have no commitments or
understandings to receive such financing. We believe that if we are able to
obtain sufficient financing to conduct such clinical studies in the U.S. we
will
have the opportunity to establish and maintain a differential advantage over
our
competitors through clinical validation and a proactive regulatory strategy.
We
also
believe that if we are able to obtain sufficient financing we can further
enhance our differential advantage over our competitors by planning
pharmaceutical grade quality control and quality assurance standards for our
products.
We
believe that if we obtain sufficient financing to pursue our objectives, our
company should be poised to take advantage of the accelerating domestic and
global interest in botanical and alternative therapies. The U.S. Department
of
Health and Human Services, National Center for Health Statistics, estimates
that
U.S. public spends between $36-$47 billion on “complementary and alternative”
therapies (Complementary and Alternative Medicine Use Among Adults: United
States, 2002 by Patricia M. Bames and Eve Powel-Griner; Advance Data No. 343,
May 27, 2004). A survey conducted by the National Center for Complimentary
and
Alternative Medicine as a part of NHIS studies in 2002 reported that 49.8%
of
U.S. adults use various forms of alternative and complementary therapies, with
19% of adults using natural products including herbal medicines. In a recent
national survey, 64% of doctors reported that they have recommended
complementary therapies to their patients (New York, NY, September 7, 2005).
Finally, during the closing weeks of the 105th Congress, Senator Tom Harkin,
the
ranking member of the U.S. Senate Appropriations Subcommittee, shared with
his
colleagues a report developed by the Institute for Alternative Futures. The
document noted that at the present, complementary and alternative approaches
to
health and medicine are among the fastest growing aspects of health care, and
that while in 1990, one-third of the U.S. population used some form of
alternative approach to health care, by the year 2010 it is expected that at
least two-thirds of the population will use some form of alternative health
care
approach.
Products
on the Market
Following
is a description of our products. Applicable regulatory requirements are
described below under the caption Regulation.
AcnEase®,
which
we license under an exclusive world-wide license, is
currently the only product that we have on the market. AcnEase®
is a
traditional Chinese herbal remedy composed of a proprietary blend of all natural
substances. We market AcnEase®
for
improving conditions typically associated with acne and rosacea. Based on
Chinese herbal therapy, AcnEase®
seeks to
address the cause of skin-related problems. According to traditional Chinese
medicine, the ingredients in AcnEase®
decrease
“heat” in the body which, practitioners of traditional Chinese medicine believe,
affect bodily functions, resulting in, among other things, gastrointestinal
discomfort and skin blemishes. In Western terms, the ingredients comprising
AcnEase® appear to decrease sebaceous gland secretions. AcnEase®
does not
simply address the external symptoms, as do topical solutions and antibiotics.
AcnEase®
is taken
in tablet form.
AcnEase®
is
typically used by consumers suffering from acne and rosacea. Acne is a disease
of the sebaceous hair follicles. The rapid growth of bacteria in combination
with the accumulated sebum cause the follicle to enlarge and can result in
a
mild form of non-inflammatory acne, known as comedones. Acne may progress to
inflammatory lesions that are red in color called papules, pustules and nodules.
Nodules or cysts are the most advanced and severe form of acne. An estimated
50
million people (13 million adults) in the U.S. suffer from acne. Currently,
the
only FDA-approved drug to treat the causes of acne is accutane (isotretinoin).
Accutane has many serious side effects, and physicians currently require that
patients sign a consent form before prescribing this drug. People of all races
and ages get acne. It is most common in adolescents and young adults. An
estimated 80 percent of all people between the ages of 11 and 30 have acne
outbreaks at some point. For most people, acne tends to go away by the time
they
reach their thirties; however, some people in their forties and fifties continue
to have this skin problem (source: National Institute of Arthritis and
Musculoskeletal and Skin Diseases http://www.niams.nih.gov/hi/topics/
acne/acne.htm#acne_d). Many of the over-the-counter acne products are topical,
including benzoyl peroxide, and only address the overt clinical manifestation
of
acne. Side effects of topical agents may include dry and flaky skin, irritation,
and redness. Prescription pharmaceutical products include broad-spectrum
antibiotics, which non-specifically kill bacteria associated with acne. Systemic
antibiotics, such as tetracycline and minocycline, are the mainstays of acne
therapy. The use of systemic antibiotics for the treatment of acne is in
disfavor with many physicians due to the development of resistant strains of
bacteria. For severe, persistent cases of acne, Retin-A cream (tretinoin) and
Accutane are often recommended. Both products are retinoid derivatives, are
costly and have a multitude of side effects. Accutane is a known potent
teratogen and strictly contraindicated in women not practicing a proven method
of birth control. Recent information has also indicated that Accutane may induce
depression. As a result, the FDA recommends that special caution be used when
prescribing this medication to teenagers and may even consider more severe
restrictions.
Rosacea
is characterized by facial flushing due to dilatation of blood vessels that
occurs in middle-aged men and women. According to the National Rosacea Society,
approximately 14 million adults in the United States suffer from rosacea
(http://www.rosacea.org/). The cause of rosacea is unknown. It affects adults
who are typically in their 30s and 40s, especially those with fair-skin, blue
eyes and of Celtic origin
(http://www.niams.nih.gov/hi/topics/rosacea/rosacea.htm#ros_b). The standard
therapy for rosacea involves the use of a systemic oral antibiotic, such as
tetracycline, minocycline and erythromycin, in combination with a topical
antibiotic gel. Isotretinoins, also known under the brand names Accutane or
Roaccutane, are sometimes considered alternatives to oral antibiotics,
especially in cases of papopustular rosacea. In 1989, Metronidazole was the
first topical treatment approved for the treatment of rosacea and is used to
reduce rosacea flare-ups once the disease is brought under control. If rosacea
progresses to a severe stage, dilated blood vessels that become distended under
the surface of the skin, known as telangiectasis, appear. Treatment options
for
telangiectasis are limited to corrective surgery or mixed light pulse therapy,
known as Photoderm, which directs a series of light pulse to the dermal layer
of
the skin stimulating collagen synthesis and resulting in a thickening of the
skin and decreasing the visible signs of rosacea.
Our
product, AcnEase®,
is a
unique herbal supplement which has been shown in studies conducted in China
to
improve skin conditions associated with juvenile acne and adult acne and
rosacea. AcnEase®
has no
known side effects unlike antibiotics or retinoid derived products.
Clinical
trials of the efficacy of AcnEase®
in
patients with acne have been performed in China. In these trials, approximately
95% of the patients aged 15 to 30 responded to AcnEase®.
In
patients aged 31 to 45, the level of effectiveness was approximately 80%. Based
on anecdotal experience in the U.S. market, AcnEase has proven to be especially
effective in addressing skin conditions associated with cystic acne or androgen
induced acne in women. In addition, AcnEase®
has
demonstrated a high satisfaction rate among our present and past customers
in
the U.S. and U.K. who number approximately 25,000. Over the last four years
of
operations, fewer than 5% of our customers have returned AcnEase®,
which
we back with a 100% guarantee. In clinical studies performed in China and
according to customer surveys, users typically respond within 2-3 weeks of
their
first use of AcnEase®
and
become blemish-free within four to six weeks.
AcnEase®
also has
demonstrated efficacy in improving conditions associated with rosacea in studies
conducted in China. Customers with symptoms of rosacea have been using
AcnEase®
since
2001. Responses from our customers show that 85% of our customers suffering
from
rosacea have experienced improvements in facial flushing, itchy gritty eyes,
acne and gastric reflux.
In
December 2004, AcnEase®
was
featured in New
Generalist,
a
publication of the Royal College of Medicine of London. In July 2005, it was
presented in Dermatology,
an
English language European journal of Dermatology as the only all natural acne
therapeutic product. [Jack - please confirm with Agnes that there was nothing
substantially negative in these reports ]
We
selected AcnEase® as
our
business model prototype to demonstrate our ability to identify herbal-based
products and bring them to the mainstream marketplace in the U.S. and U.K.
We
launched AcnEase®
in 2001.
For the last three fiscal years, AcnEase®
contributed approximately 98% of our revenues. AcnEase®
has
demonstrated high brand recognition, consistently ranking in the top three
acne
products searched on Google and Yahoo.
Since
2001, we have been the exclusive worldwide distributor of AcnEase®
under an
existing license agreement. As these agreements do not explicitly set forth
the
extent of our exclusive rights with AcnEase®,
our
exclusivity rights may be subject to limitation or termination in the
future.
Currently,
we purchase AcnEase®
manufactured on our behalf by our licensor, AH USA. Since 2004, AcnEase®
tablets
have been manufactured in the U.S.
Our
business plan contemplates our future acquisition of the intellectual property
rights related to AcnEase® including the formulation thereof, under an agreement
with AH USA. In the event that we are able to purchase the formulation and
other
intellectual property rights relating to AcnEase®,
AcnEase®
would be
manufactured in the U.S. on our behalf. In that event, all herbs for
AcnEase®
would be
sourced from China using our contacts in Beijing. Such herbs would come from
suppliers that practice cGAP (current Good Agricultural Practice) and the
quality and identity confirmed by a herbalist/pharmacognocist. Routine quality
control (QC) and identity tests would be performed on the raw materials. All
extractions would initially be performed at audited facilities in China (PRC)
or
Hong Kong. The extracts would then be shipped to the U.S. where QC analysis
and
all final product manufacturing testing and release would be performed in
contract labs. Packaging and labeling would also be performed using contract
manufacturers.
Pipeline
Products
We
have a
number of other products in varying stages of development for which we will
need
additional time and financing before introduction to the market. These products
include:
AcnEase®
Skin Management System: This
series of products will include a cleanser, toner, moisturizer, mask and topical
acne treatment product.
Sexual
Health Products: Our
sexual health series line includes all natural products that address selected
sexual disorders resulting from cardiovascular disease, use of anti-depressants,
surgical procedures and other problems.
Energy
Restoration Products: These
products will address overall depletion of energy due to competitive sports,
high-level stress, extensive sexual activities, as well as other conditions
that
are physically demanding on a long-term or temporary basis.
Additional
Products:
We have
also researched expanding our line to include additional products in the areas
of liver disease (including liver damage due to Hepatitis and Cirrhosis),
prostate health for benign prostate hyperplasia (BPH), women’s health for
perimenopausal symptoms, cardiovascular concerns and diabetes. We do not expect
to be able to develop these products and bring them to market until we have
raised substantial financing.
Marketing
and Distribution
We
pursue
a multi-channel marketing and distribution strategy using a strong
brand-building approach and information-driven strategy. We maintain a visible
Internet presence and foster partnerships with selected traditional and
non-traditional health care providers, nutraceutical and supplement sales
channels, as well as high quality consumer products and service providers in
the
U.S. and abroad.
We
sell
products in the U.S., the United Kingdom and Continental Europe. Our long term
plans include expanding into the Indian, Chinese and Australian markets after
sufficient financing is received by our company. In the U.K., we subcontract
with a firm, State of Play LLC, which handles order fulfillment, marketing
and
customer services for our customers in the U.K. and European Union. We also
maintain relationships with advisors in Beijing and Shanghai, PRC.
Manufacturing
We
plan
to become a fully-integrated company by establishing our own manufacturing
and
development capabilities at such time as we receive sufficient financing. If
we
obtain the rights to begin manufacturing our products, we intend to manufacture
our products using contract manufacturing companies that are GMP compliant.
Quality Control analysis will be contracted during the initial stages of
development, though at an appropriate point in time QC may be taken in house.
Currently, AcnEase®
is
manufactured for us by the licensor of the formula, and we outsource packaging
functions for our products.
The
state
of the art for the processing and sourcing of many herbs still resides in Asia.
Through our network, we have contacts that can oversee the manufacturing of
select products in China. Samples and initial batches of one of our sexual
health products have been made for us in China because the product is
manufactured using proprietary process and enrichment steps, as well as raw
materials that are sourced in China. Initial batches of certain of our sexual
health and energy restoration products are currently manufactured in the United
States through several contract manufacturers and we expect will continue to
be
made in the U.S. after we begin marketing the products. AcnEase®
is also
manufactured in the United States. Sourcing of the raw materials can be from
several suppliers in either the United States or Asia.
Raw
Materials
Raw
materials for AcnEase®
and one
of our sexual health products are obtained from China. Raw materials can be
obtained from several suppliers. We have an arrangement with Botanic Century
in
Beijing to work as an agent for the procurement of herbs and in some instances
processing and testing of the raw materials. In addition, we retain CMM
consultants (Oxford UK) to perform similar services. In the case of the sexual
health product, it is not only the raw materials that are important but also
the
extraction and enrichment process that is proprietary. Final product
manufacturing and release testing (QC) can eventually be performed in the United
States following sourcing of the active ingredients in China. Raw materials
for
another of our sexual health products in the pipeline can
be
obtained from suppliers in the United States. All extractions are performed
in
the United States as is final production manufacturing packaging and labeling.
Intellectual
Property
All
of
our existing and pipeline products are presently protected as trade secrets.
Some of our products may qualify for patent protection that will involve the
ingredients, ratios of ingredients, and specific fractions for extracts of
ingredients and/or an extraction process.
The
key
method of protection for our products at the current time is through trade
secrets relating to:
• ingredients
(content and amount),
• part
of
plant used,
• ratio
of
ingredients,
• preparation
and enrichment of ingredients, and
• proprietary
extraction procedures.
Most
of
these trade secrets are owned by our licensor and licensed to us. Therefore,
we
rely on our licensor to continue to adequately protect these trade secrets.
We
intend to source ingredients from different companies to make certain no single
entity has a list of all ingredients. All subsequent processing is performed
at
separate factories. We believe trade secrets are the best method at this time
to
protect herbal based products.
Working
Capital Items
We
carry
varying amounts of inventory. We do not extend payment terms to customers or
provide wholesale customers any rights to return merchandise. Retail customers
in the U.S. are provided with a 100% money-back guarantee; however, the rate
of
returns is de minimus.
Major
Customers
Due
to
the fragmented market, we do not have any one customer that accounts for 10%
or
more of consolidated revenues.
Competition
Our
direct corporate competitors are primarily nutraceutical companies, including
specialty retailers, supermarkets, large chain discount retailers, drug store
chains and independent drug stores, health food stores, on-line merchants,
and
mail order companies. Indirect competition also includes healthcare-focused
online marketers. Some of our more prominent competitors include General
Nutrition Centers, Inc., NBTY, Inc., Invite Health, Vitamin World and Vitamin
Shoppe. The vast majority of products distributed by nutraceutical and herbal
supplement companies are targeted towards dieting and weight management, body
building supplementation, dietary or vitamin supplements and personal care
products. These products represent the commodity approach to satisfying the
markets needs and a selected few qualify as proprietary and unique formulations
with intellectual property value. To our knowledge, no other botanical
supplement targeting a specific health issue currently entertains national
brand
recognition. In addition, the herbaceutical sector is highly fragmented. We
believe that the rudimentary stage of development for this sector, in
conjunction with our superior products and pipeline, provides us an opportunity
for growth, including acquisitions, and the ability to assume a leadership
position in the sector in a relatively short period of time.
Regulation
We
have
determined that all of our existing and proposed products are dietary
supplements as defined under federal statutes and regulations of the FDA.
Neither nutritional supplements nor dietary supplements require FDA or other
governmental approval prior to their marketing in the United States. No
governmental agency or other third party makes a determination as to whether
our
products qualify as nutritional supplements, dietary supplements, or neither.
We
make this determination based on the ingredients contained in the products
and
the claims made for the products. The processing, formulation, packaging,
labeling and advertising of such products, however, are subject to regulation
by
one or more federal agencies including the FDA, the Federal Trade Commission,
the Consumer Products Safety Commission, the Department of Agriculture and
the
Environmental Protection Agency. Our activities also are subject to regulation
by various agencies of the states and localities in which its products are
sold.
We markets products that are covered under FDA regulations for Dietary
Supplements.
Federal
Food, Drug, and Cosmetic Act
The
FDA,
pursuant to the Federal Food, Drug, and Cosmetic Act (“FFDCA”), regulates the
formulation, manufacturing, packaging, labeling, distribution and sale of
dietary supplements. The FDA has broad authority to enforce the provisions
of
the FFDCA applicable to foods and dietary supplements, which by definition
is a
sub-category of foods. The FDA’s powers include (i) issuing a public “Warning
Letter” notifying a company that a product is not in compliance with FDA
regulations, (ii) publicizing information about an illegal product, (iii)
requesting a voluntary recall of an illegal product from the market, (iv)
requesting the Department of Justice to initiate civil seizure and/or injunction
actions, (v) seeking and receiving consumer redress, and (vi) initiating
criminal proceedings in the U.S. federal courts.
Under
the
FFDCA, all labels and labeling claims must be truthful and non-misleading.
As a
general rule, advertising for dietary supplements is regulated by the FTC.
Labeling for these products is regulated by the FDA. Nevertheless, the FDA
takes
the position that, in addition to the FTC, the FDA also has jurisdiction to
review Internet websites and mail order catalogs as it considers these forms
of
media to be labeling. Moreover, the FDA has been known to review advertising
for
dietary supplements to help it determine the intended use of the product being
advertised. Non-compliance with the FDA regulation could lead to, among other
things, injunctions, product withdrawals, recalls, and product
seizures.
Dietary
Supplement Health and Education Act of 1994
Dietary
Supplements is a classification of products resulting from the enactment of
the
Dietary Supplement Health and Education Act of 1994 ("DSHEA") in October 1994.
Our dietary supplement products are subject to DSHEA. DSHEA amended and modified
the application of certain provisions of the FFDCA as they relate to dietary
supplements, and required the FDA to promulgate regulations consistent with
DSHEA. The provisions of DSHEA are generally favorable to the dietary supplement
industry and define dietary supplements and dietary ingredients; establish
a new
framework for assuring safety; outline guidelines for literature displayed
where
dietary supplements are sold; provide for the use of claims and nutritional
support statements; require ingredient and nutrition labeling; and grant the
FDA
the authority to establish regulations concerning good manufacturing practices
(“GMPs”).
DSHEA
defines a dietary supplement to include any product (other than
tobacco):
| |
(i)
|
intended
to supplement the diet that bears or contains one or more of a vitamin,
mineral, herb or other botanical, amino acid, substance to supplement
the
diet by increasing the total dietary intake, or any concentrate,
metabolite, constituent, extract, or combination of any such ingredient,
provided that such product is either intended for ingestion in tablet,
capsule, powder, soft gel, gelcap, or liquid droplet form, or
|
| |
(ii)
|
if
not intended to be ingested in such form, is not represented for
use as a
conventional food or as a sole item of a meal or the diet,
and
|
| |
(iii)
|
is
labeled as a dietary supplement.
|
A
dietary
supplement, which contains an ingredient not on the market before October 15,
1994 (a “new dietary ingredient”) adulterates the product under the FFDCA unless
there is evidence of a history of use or other evidence of safety establishing
that it will reasonably be expected to be safe. The practical effect of such
an
expansive definition is to ensure that the new protections and requirements
of
DSHEA will apply to a wide class of products.
Under
DSHEA, companies that manufacture and distribute dietary supplements are allowed
to make any of the following four types of statements with regard to nutritional
support on labeling without FDA approval:
(i)a
statement that claims a benefit related to a classical nutrient deficiency
disease if it discloses the prevalence of such disease in the United States;
(ii) a
statement that describes the role of a nutrient or dietary ingredient intended
to affect the structure or function of the body;
(iii) a
statement that characterizes the documented mechanism by which a nutrient or
dietary ingredient acts to maintain the structure or function; or
(iv) a
statement that "describes general well-being" from consumption of a nutrient
or
dietary ingredient.
In
addition to making sure that a statement meets one of these four criteria,
a
manufacturer of the dietary supplement must have substantiation that such
statement is truthful and not misleading, must not claim to diagnose, mitigate,
treat, cure, or prevent a specific disease or class of diseases, and for
structure/function claims, must contain the following disclaimer, prominently
displayed in boldface type: "This statement has not been evaluated by the Food
and Drug Administration. This product is not intended to diagnose, treat, cure,
or prevent any disease."
Under
its
authority granted by DSHEA, the FDA has proposed GMPs specifically for dietary
supplements. These new GMPs, when finalized, will be more detailed than the
GMPs
that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged and held in compliance with certain
rules (including quality control provisions) similar to the GMPs applicable
to
drugs. There can be no assurance that, if the FDA adopts GMPs for dietary
supplements, we and/or our suppliers will be able to comply with the new rules
without incurring substantial expenses that might have a material adverse effect
on our consolidated financial position or results of operations.
As
a
formulator, distributor and marketer of dietary supplements, we are subject
to
the risk that one or more of the ingredients in our product may become subject
to regulatory action in the future.
The
Federal Trade Commission
The
FTC
exercises jurisdiction over the advertising of dietary supplements and foods
and
has the authority over both “deceptive” and “unfair” advertising and other
marketing practices. In addition to its broad investigative powers, the FTC
has
the power to initiate administrative and judicial proceedings against a company
and may also seek a temporary restraining order or preliminary injunction
against a company pending the final determination of an action. The FTC’s
remedies also include consumer redress, civil and criminal penalties.
Our
advertising and sale of our dietary supplements is subject to regulation by
the
FTC under the Federal Trade Commission Act (the “FTCA”). The FTCA prohibits
unfair methods of competition and unfair or deceptive acts or practices in
or
affecting commerce. The FTCA provides dissemination or causing to be
disseminated any false advertisement pertaining to drugs or foods (which would
include dietary supplements) is an unfair or deceptive act or practice. Under
the FTC’s “substantiation doctrine”, an advertiser is required to have a
“reasonable basis” for all objective product claims before the claims are made.
Failure to substantiate claims adequately may be considered a deceptive or
unfair practice. Pursuant to this FTC requirement, we are required to have
adequate substantiation for all advertising claims made for our products at
the
time such claims are made.
Research
and Development
We
limit
the amount of expenditures relating to the development of new products through
the use of co-licensing and co-development. We estimate that 30-35% of our
revenues are spent annually on research and development expenditures.
Environmental
Compliance
We
are
not aware of any administrative or other costs incurred which are directly
related to compliance with environmental laws, and we have not experienced
any
other significant effect from the impact of environmental laws.
Company
History
The
Company was incorporated in the State of Delaware on June 4, 2002, and was
the
surviving entity following a merger of G.O. International, Inc. (“G.O.”), a New
Jersey corporation, with and into the Company effective June 6, 2002.
On
September 18, 2006, Herborium 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 Herborium,
with Herborium as the surviving corporation (the “Merger). Under the provisions
of the Merger Agreement and the plan of reorganization, the stockholders of
Herborium exchanged 100% of their common stock of the Company for an 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 of November 30, 2006. This number of shares was used in
the
calculation of net loss per share for the year ended November 30, 2005,
presented on a retroactive basis.
Although
PMIC is deemed the legal acquirer, we are deemed the accounting acquirer since
generally accepted accounting principles require that the entity whose
stockholders retain a majority interest in a combination be treated as the
acquirer under purchase accounting rules. 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.
Employees
We
presently have one full-time employee whose principal responsibility is product
order fulfillment. Dr. Olszewski, our President, Chief Executive Officer and
Acting Chief Financial Officer does not currently devote her full time to us
and
will not do so until such time as we raise at least $1,250,000 in financing.
Dr.
Gilligan will assume full-time employment with us as our Co-President and Chief
Operating Officer within six months after the date that we raise at least
$2,500,000 in financing. Prior to such time, he will serve as a consultant
to
us.
Item
2. Description Of Property
Currently,
we maintain our office at the home of our President and Chief Executive Officer,
Dr. Olszewski, at 3 Oak Street, Teaneck, New Jersey 07666. Fulfillment and
customer service are performed from space at 985 Carteret Ave. in Union, New
Jersey, the home of Dr. Gilligan. We also rent warehouse space to house
inventory in New Jersey.
Item
3. Legal Proceedings
None.
Item
4. Submission Of Matters To A Vote Of Security Holders
None.
Part
II
Item
5. Market
For Common Equity, Related Stockholder Matters
and Small Business Issuer Purchases of Equity Securities
Price
Range Of Common Stock
Our
common stock is presently traded on the Over-the-Counter Bulletin Board under
the symbol HBRM; PMIC was formerly traded on the Over-the-Counter Bulletin
Board
under the symbol PMICQ.OB. The following table shows the high and low sale
prices for 2004, 2005 and 2006 in dollars per share as reported by the OTC
Bulletin Board. These may not be the prices that you would sell or would pay
to
purchase a share of our common stock during the periods shown.
| |
|
High
|
|
Low
|
|
|
Fiscal
Year Ended November 30, 2006*
|
|
|
|
|
|
|
|
|
Quarter
Ended March 31, 2006
|
|
$
|
0.03
|
|
$
|
0.02
|
|
|
Quarter
Ended June 30, 2006
|
|
|
0.05
|
|
|
0.02
|
|
|
Quarter
Ended August 31, 2006
|
|
|
0.04
|
|
|
0.02
|
|
|
Quarter
Ended November 30, 2006
|
|
|
0.06
|
|
|
0.02
|
|
| |
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2005
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.15
|
|
$
|
0.05
|
|
|
Second
Quarter
|
|
|
0.07
|
|
|
0.02
|
|
|
Third
Quarter
|
|
|
0.06
|
|
|
0.03
|
|
|
Fourth
Quarter
|
|
|
0.03
|
|
|
0.02
|
|
| |
|
|
|
|
|
|
|
|
Fiscal
Year Ended December 31, 2004
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
0.15
|
|
$
|
0.06
|
|
|
Second
Quarter
|
|
|
0.07
|
|
|
0.04
|
|
|
Third
Quarter
|
|
|
0.10
|
|
|
0.04
|
|
|
Fourth
Quarter
|
|
|
0.15
|
|
|
0.04
|
|
*
The
initial Form 10-QSB for Herborium Group was filed for the quarter ended August
31, 2006. For purposes of reporting high and low sales prices in this item,
we
have changed from calendar quarters to our fiscal quarters.
The
number of holders of record for our common stock immediately after giving effect
to the merger was approximately 600.
Dividend
Policy
We
have
not paid and have no plan to pay dividends on our common stock.
Recent
Sales Of Unregistered Securities
In
accordance with the PMIC plan of reorganization and in connection with the
merger, we issued 6,580,762 shares of our common stock to the holders of PMIC
common stock other than Advanced Communications Technologies. Inc. (“ACT”),
including the former holders of PMIC’s 4% Series A Convertible Preferred Stock
in exchange for their respective claims as existing shareholders of PMIC. The
issuance of these shares of our common stock constituted an offer of securities
within the purview of § 1145(a) of the Bankruptcy Code and, therefore, was not
subject to the registration requirements of the Securities Act of 1933, as
amended (the “Securities Act”), or state or local law. None of the recipients of
these shares will be deemed an underwriter as specified in Section 1145(a)
of
the Bankruptcy Code.
In
addition, under the PMIC plan of reorganization and in connection with the
merger, we issued 7,454,300 shares of our common stock directly to the
stockholders of ACT, partly in exchange for ACT’s claims and partly in exchange
for the payment of $50,000 in cash by ACT. Further, 2,250,000 shares of our
common stock are being held in escrow: 1,750,000 shares for Mr. Li and Ms.
Lee
pursuant to terms of a settlement agreement and 500,000 shares for certain
unexpired common stock option and warrant grants. The issuance of shares of
our
common stock to stockholders of ACT constituted an offer of securities within
the purview of § 1145(a) of the Bankruptcy Code and was not be subject to the
registration requirements of the Securities Act or state or local law. None
of
the recipients of these shares will be deemed an underwriter as specified in
Section 1145(a) of the Bankruptcy Code.
In
connection with the merger, we issued 92,282,018 shares of our common stock
to
the stockholders of Herborium in exchange for all of the issued and outstanding
common stock of Herborium. The issuance of these shares was made in reliance
upon the exemption from the registration requirements of the Securities Act
set
forth in Rule 506 of Regulation D, promulgated under the Securities Act, and
corresponding provisions of state securities laws, which exempts transactions
by
an issuer not involving any public offering. Accordingly, such shares are
“restricted securities” and may not be offered or sold in the United States
absent registration or an applicable exemption from registration requirements
under the Securities Act.
Issuer
Purchases of Equity Securities
We
did
not make any purchases of equity securities during the fiscal year ended
November 30, 2006.
Item
6. Management’s Discussion And Analysis Or
Plan Of Operation
The
following discussion should be read in conjunction with our financial statements
and the related notes and the other financial information appearing elsewhere
in
this report. In addition to historical information, the following discussion
and
other parts of this Annual Report contain forward-looking information that
involves risks and uncertainties including the use of words
such as "estimates," "expects," "anticipates," "believes," "intends," "will,"
"seek" and other similar expressions, 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, competitive market conditions in the Company's existing lines
of
business and technological obsolescence, as well as other risks and
uncertainties.
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
Federal 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.
SIGNIFICANT
ACCOUNTING POLICIES
a. Principles
of consolidation
The
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.
b. Cash
and
cash equivalents
The
Company maintains its cash accounts in two commercial banks. The balance is
insured by the Federal Deposit Insurance Corporation up to $100,000 at each
bank.
c. Inventory
Inventory,
consisting of finished botanical therapeutic products, is stated the lower
of
cost or market and is valued on the first-in, first-out method. When net
realizable value has fallen below cost, inventory is written down.
d. Shipping
and handling costs
Shipping
and handling costs associated with outbound freight amounted to approximated
$46,000 and $53,000 for the years ended November 30, 2006 and 2005,
respectively, and were charged to cost of sales.
e. Property
and equipment
Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives of the assets ranging from five to seven years.
Maintenance
and repairs are charged to expense when incurred. When property and equipment
are retired or otherwise disposed of, the applicable cost and accumulated
depreciation are removed from the accounts and any gain or loss is credited
or
charged directly to income.
f. Advertising
It
is the
Company’s policy to expense advertising costs as they are incurred. Advertising
expenses for the years ended November 30, 2006 and 2005 were approximately
$199,000 and $192,000, respectively.
g. Estimates
The
preparation of consolidated 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.
h. Income
taxes
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.
i.
Revenues
The
Company recognizes revenue when inventory is shipped to its
customers.
j. Loss
per
share
Basic
earnings (loss) per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding for
the
period. Diluted earnings per share reflect the potential dilution of securities,
using the treasury stock method, that could share in the earnings of an entity.
During the fiscal years ended November 30, 2006 and 2005, the Company had no
securities convertible into common stock that would, in any event, have been
excluded from the calculation of diluted loss per share, as their effect would
have been anti-dilutive.
The
number of shares used in the calculation of net loss per share for the year
ended November 30, 2005, was presented on a retroactive basis as described
in
Note 1.
k. Fair
value of financial instruments
The
carrying amounts of the Company’s accounts payable, accrued expenses, credit
cards payable, lines of credit payable, amounts payable to others and
stockholders approximate fair value due to the relatively short period to
maturity for these instruments.
l.
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.
m. Recent
accounting pronouncements
On
June 7, 2005, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 154, “Accounting Changes
and Error Corrections, (“SFAS 154”).a replacement of APB Opinion No. 20,
Accounting Changes,” and Statement No. 3, “Reporting Accounting Changes in
Interim Financial Statements.” SFAS 154 changes the requirements for the
accounting for and reporting of a change in accounting principle. Previously,
most voluntary changes in accounting principles required recognition of a
cumulative effect adjustment within net income of the period of the change.
SFAS
154 requires retrospective application to prior periods’ financial statements,
unless it is impracticable to determine either the period-specific effects
or
the cumulative effect of the change. SFAS 154 is effective for accounting
changes made in fiscal years beginning after December 15, 2005; however,
the Statement does not change the transition provisions of any existing
accounting pronouncements. The adoption of SFAS 154 has not had a material
effect on the Company’s financial position, results of operations, or cash
flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
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.
Prior
to
SFAS 157, there were different definitions of fair value and limited guidance
for applying those definitions in GAAP. Moreover, that guidance was dispersed
among the many accounting pronouncements that require fair value measurements.
SFAS 157 clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the
liability in the market in which the reporting entity would transact for the
asset or liability, that is, the principal or most advantageous market for
the
asset or liability.
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any, that SFAS 157
will have on its financial position, results of operations and cash
flows.
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 January 1, 2007. The
adoption of this interpretation did not have an impact on the Company’s
financial statements. The Company is currently evaluating the impact this
interpretation may have on its future financial position, results of operations,
earnings per share, or cash flows.
In
September 2006, the Securities and Exchange Commission issued SAB No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 was issued
to address diversity in practice in quantifying financial statement
misstatements. Current practice allows for the evaluation of materiality on
the
basis of either (1) the error quantified as the amount by which the current
year income statement was misstated (“rollover method”) or (2) the
cumulative error quantified as the cumulative amount by which the current year
balance sheet was misstated (“iron curtain method”). The guidance provided in
SAB 108 requires both methods to be used in evaluating materiality (“dual
approach”). SAB No. 108 permits companies to initially apply its provisions
either by (1) restating prior financial statements as if the dual approach
had always been used or (2) recording the cumulative effect of initially
applying the “dual approach” as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to
the opening balance of retained earnings. There
were
no matters warranting the Company’s consideration under the provisions of SAB
No. 108 and, therefore, it did not have an impact on the Company’s
financial position, results of operations, net loss per share or cash
flows.
FINANCIAL
CONDITION
We
had
net losses of $339,757 and $105,243 during the years ended November 30, 2006
and
2005, respectively. As of November 30, 2006, we had cash and current assets
of
$4,649 and $84,397, respectively, and current liabilities of $841,242, with
obligations aggregating $344,655 for trade creditors and accrued expenses,
$134,126 for credit card obligations, $172,913 payable for line of credit
obligations, $35,866 for amounts due to others and $153,682 for amounts due
to
stockholders. 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. While we are actively
seeking a substantial amount of equity or debt financing, we have received
no
commitments for such financing. Our working capital at November 30, 2006, 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 of the sources
described above, or an entirely new source.
To
date
we have not obtained adequate equity or debt financing to enable us to implement
our business plan. As a result of the lack of financial resources, a condition
unfavorably impacting us since inception, revenue and profitability have not
increased as we believe would have otherwise been the case. Without 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.
As
described above, we have merged into PMIC and thereby 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. During the fiscal year ended November 30, 2006, revenue
growth was adversely affected by the time and attention we devoted to the merger
and related financing initiatives.
RELATED
PARTY TRANSACTIONS
During
the fiscal years ended November 30, 2006 and 2005, the Company's due to
stockholders obligation increased by $24,927 and $46,858 to $153,682 and
$128,755, respectively.
COMPARISON
OF THE FISCAL YEAR ENDED NOVEMBER 30, 2006 TO THE FISCAL YEAR ENDED NOVEMBER
30,
2005
Overall
Results of Operations
For
the
year ended November 30, 2006, we incurred a net loss of $339,757, an increase
of
$234,514 from the net loss of $105,243 for the comparable prior year period.
The
increase in net loss in the fiscal 2006 compared to fiscal 2005 period is
principally attributable to an increase in general and administrative expenses,
partially offset by an increase in gross profit.
Sales
Net
sales
for the year ended November 30, 2006 were $827,755 compared to $866,773 for
the
year ended November 30, 2005. The decrease of $39,018, or 4.5%, can be
attributed to a decrease in sales of our principal product, AcnEase, in the
United Kingdom (“UK”) due to a temporary leave of absence on the part of our
local sales representative during the first three quarters of the current year.
Sales for the three month period November 30, 2006 amounted to $259,060 compared
to $245,438 for the year ago period.
Gross
Profit
Gross
profit increased to $531,890 for the year ended November 30, 2006 compared
to
$493,743 for the year ended November 30, 2005, or $38,147 and 7.7%, with gross
margin increasing to 64.3% from 57% for the prior period. The increase in gross
profit is attributable to the increase gross margin, which was caused by an
improvement in the average selling price received for AcnEase due a change
in
the mix of distribution channels into which we sell.
Operating
Expenses
Total
operating expenses increased by $271,795, or 49.1%, to $825,899 for the year
ended November 30, 2006, from $554,104 for the year ended November 30, 2005,
principally attributable to an increase in selling and administrative expenses
for officer salary expense accrued but not paid, an increase in legal,
accounting and auditing fees attributable to our being a public company,
partially offset by lower spending for website, travel and UK commission
expenses.
Other
Income (Expense)
Interest
expense increased to $44,748 from $41,687 for the year ended November 30, 2006
as compared with the year ended November 30, 2005, or $3,061, due principally
to
an increase in credit card debt outstanding in the current year.
COMPARISON
OF THE FISCAL YEAR ENDED NOVEMBER 30, 2005 TO THE FISCAL YEAR ENDED NOVEMBER
30,
2004
Overall
Results of Operations
For
the
fiscal year ended November 30, 2005, we incurred a net loss of $105,243, a
decrease of $186,469 from the net loss of $291,712 for the fiscal year ended
November 30, 2004. The net loss for the fiscal year ended November 30, 2004
included a non-cash charge of $108,466 to set up a valuation allowance to offset
100% of a deferred tax asset. The decrease in net loss in fiscal 2005 compared
to fiscal 2004 is also attributable to an increase in gross profit due to
increased net sales and a decrease in operating expenses in the fiscal year
ended November 30, 2005 compared to the earlier period.
Sales
Net
sales
for the fiscal year ended November 30, 2005 were $866,773 compared to $762,371
for the fiscal year ended November 30, 2004. The increase of $104,402, or 13.7%,
can be attributed to an increase in the number of units sold of AcnEase.
Gross
Profit
Gross
profit increased to $493,743 for the fiscal year ended November 30, 2005
compared to $433,159 for the fiscal year ended November 30, 2004, or $60,584,
with gross margin increasing slightly to 57.0% in the current period from 56.8%
for the prior period.
Operating
Expenses
Total
operating expenses decreased to $554,104 for the fiscal year ended November
30,
2005, from $591,187 for the fiscal year ended November 30, 2004, or $37,083,
principally attributable to decreases in marketing and promotion expenses of
$48,787 and in product development expenses of $57,776, offset by an increase
of
$44,905 in commission, fulfillment and office expenses related to increased
sales and business activities in the UK.
Other
Income (Expense)
Interest
expense increased to $41,687 from $22,884 for the fiscal year ended November
30,
2005 as compared with the fiscal year ended November 30, 2004, or $18,803,
due
principally to an increase in interest rates payable and in the level of credit
card debt outstanding.
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
November 30, 2006, we had a cash balance of $4,649 and a negative cash flow
from
operations of $24,093 for the year 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
others and entering into subscription agreements with “friends and family” for
investment funds. While we are actively seeking a substantial amount of equity
or debt financing, we have received no commitments for such financing. Our
working capital at November 30, 2006, is not sufficient to meet our working
capital needs for the next twelve-month period and will need to obtain
additional financing from one or more of the sources described above, or an
entirely new source.
The
Company has contractual obligations of $496,587 as of November 30, 2006. These
contractual obligations, along with the dates on which such payments are due,
are described below:
| |
|
Contractual
Obligations
(as
of November 30, 2006)
|
|
| |
|
Total
|
|
1
Year or Less
|
|
More
Than 1 Year
|
|
|
Credit
cards payable
|
|
$
|
134,126
|
|
$
|
134,126
|
|
$
|
--
|
|
|
Lines
of credit payable
|
|
|
172,913
|
|
|
172,913
|
|
|
--
|
|
|
Due
to others
|
|
|
34,513
|
|
|
34,513
|
|
|
|
|
|
Due
to stockholders
|
|
|
153,682
|
|
|
153,682
|
|
|
--
|
|
|
Other
|
|
|
1,353
|
|
|
1,353
|
|
|
--
|
|
|
Total
Contractual Obligations
|
|
$
|
496,587
|
|
$
|
496,587
|
|
$
|
--
|
|
Below
is
a discussion of our sources and uses of funds for the years ended November
30,
2006 and 2005.
Net
Cash Used In Operating Activities
Net
cash
used in operating activities was $24,093 and $119,551 in the years ended
November 30, 2006 and 2005, respectively. The use of cash in operating
activities for the year ended November 30, 2006 was principally the result
of a
net loss of $339,757, partially offset by an increase of $307,803 in accounts
payable and accrued expenses. The use of cash in operating activities for the
year ended November 30, 2005 was principally the result of a net loss of
$105,243, as well as an increase in inventory of $22,302 and a decrease in
accounts payable and accrued expenses of $19,154.
Net
Cash Used In Investing Activities
During
the year ended November 30, 2006 and 2005, net cash used in investing activities
consisted of $687 and $5,474, respectively, for the acquisition of property
and
equipment and $9,274 and $1,763, respectively, for the acquisition of other
assets, principally trademark costs.
Net
Cash Provided By Financing Activities
Net
cash
provided by financing activities for the year ended November 30, 2006 amounted
to $38,521, principally attributable to an increase of $24,927 in amount due
to
stockholders, an increase in credit card debt payable of $12,796 and an increase
of $11,863 in amounts due to others. Net cash provided by financing activities
for the year ended November 30, 2005 amounted to $126,970, principally
attributable to an increase of $46,858 in amount due to stockholders, as well
as
an increase of $61,236 in credit card debt payable.
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.” The risks, uncertainties and other factors described 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. Any of the risks, uncertainties and other
factors could have a materially adverse effect on our business, financial
condition or results of operations and could cause the trading price of our
common stock to decline substantially.
Risks
Relating to Our Company
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 $339,757 during
the year ended November 30, 2006. 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.
We
need additional capital, which may not be available to us.
We
have
expended and will continue to expend substantial funds in the research,
development, marketing and clinical testing of our herbaceutical supplements.
Following the merger we will require funds in excess of our existing cash
resources to fund operating deficits, develop new products, purchase additional
rights to existing products, establish and expand our manufacturing
capabilities, and finance general and administrative and research activities.
In
particular, we will need additional capital to:
|
· acquire
intellectual property rights relating to AcnEase®
and other products;
|
|
· conduct
clinical trials and fund marketing and new product
launches;
|
|
· establish
U.S. manufacturing capabilities;
and
|
|
· fund
general working capital requirements if we continue to experience
deficits.
|
Due
to
market conditions at the time we may need additional funding, or due to our
own
financial condition at that time, it is possible that we will be unable to
obtain additional funding as and when we need it. Even if we are able to obtain
capital, it may be on unfavorable terms or terms that excessively dilute
existing shareholders or otherwise negatively affect the interests of existing
shareholders. If we are unable to obtain additional funding as and when needed,
we could be forced to delay our development, marketing and expansion efforts
and, if we continue to experience losses, potentially cease operations.
We
may not be able to obtain or sustain market acceptance for our services and
products.
Failure
to establish a brand and presence in the marketplace on a timely basis could
adversely affect our financial condition and operating results. Moreover, we
cannot be sure that we will successfully complete the development and
introduction of new products or product enhancements or that any new products
developed will achieve acceptance in the marketplace. We may also fail to
develop and deploy new products and product enhancements on a timely basis.
AcnEase®
is
currently our only product providing revenues.
Government
regulation of the processing, formulation, packaging, labeling and advertising
of our products can impact our ability to market products.
Under
the
Dietary Supplement Health and Education Act of 1994, companies that manufacture
and distribute dietary supplements are limited in the statements that they
are
permitted to make about nutritional support on the product label without FDA
approval. In addition, a manufacturer of a dietary supplement must have
substantiation for any such statement made and must not claim to diagnose,
mitigate, treat, cure or prevent a specific disease or class of disease. The
product label must also contain a prominent disclaimer. These restrictions
may
restrict our flexibility in marketing our product.
The
FDA
has proposed GMPs (Good Manufacturing Practices) specifically for dietary
supplements. These new GMPs, when finalized, will be more detailed than the
GMPs
that currently apply to dietary supplements and may, among other things, require
dietary supplements to be prepared, packaged and held in compliance with certain
rules (including quality control provisions) similar to the GMPs applicable
to
drugs. There can be no assurance that, if the FDA adopts GMPs for dietary
supplements, we and/or our suppliers will be able to comply with the new rules
without incurring substantial expenses that might have a material adverse effect
on our consolidated financial position or results of operations. As a
formulator, distributor and marketer of dietary supplements, we are subject
to
the risk that one or more of the ingredients in our product may become subject
to regulatory action in the future.
The
processing, formulizing, packaging, labeling and advertising of such products,
however, are subject to regulation by one or more federal agencies including
the
FDA, the Federal Trade Commission, the Consumer Products Safety Commission,
the
Department of Agriculture and the Environmental Protection Agency. Our
activities also are subject to regulation by various agencies of the states
and
localities in which our products are sold. Among other things, such regulation
puts a burden on our ability to bring products to market. Any changes in the
current regulatory environment could impose requirements that would make
bringing new products to market more expensive or restrict the ways we can
market our products. In addition, the adoption of new regulations or changes
in
the interpretation of existing regulation may result in significant compliance
costs or discontinuation of product sales and may adversely affect our revenue.
The FDA may implement additional regulations with which we would have to comply,
which would increase expenses.
No
governmental agency or other third party makes a determination as to whether
our
products qualify as dietary supplements or not. We make this determination
based
on the ingredients contained in the products and the claims we make for the
products and if our determination is denied by any regulatory authority we
could
face significant penalties that may require us to shut down our operations.
We
face substantial competition.
The
dietary supplement industry is growing rapidly and is highly competitive.
Competition for the sale of nutritional products comes from many sources,
including specialty retailers, supermarkets, large chain discount retailers,
drug store chains and independent drug stores, health food stores, on-line
merchants, mail order companies and a variety of other participants in the
market for nutritional products. Some of our more prominent competitors include
General Nutrition Centers, Inc., NBTY, Inc., Invite Health, Vitamin World and
Vitamin Shoppe. We compete regularly with companies selling nationally
advertised brand name products and with companies that may have more expanded
product lines with much larger volume of sales. This competition could have
a
material adverse effect on our business, results of operations and financial
condition since these companies have greater financial and other resources
available to them and may possess manufacturing, distribution and marketing
capabilities far greater than our own.
Certain
existing products may become more mainstream and thereby increase competition
for those products as more participants enter the market. We may not be able
to
compete effectively and our attempt to do so may require us to reduce our
prices, which may result in lower margins. Failure to compete effectively could
adversely affect our market share, revenues and growth prospects.
Our
competitive position will be affected by the continued acceptance of our
products, our ability to attract and retain qualified personnel, future
governmental regulations affecting nutritional products, and publication of
product safety studies by the media, government and authoritative health and
medical authorities.
We
currently have no manufacturing capabilities and we are dependent upon other
companies to manufacture our products.
We
currently have no manufacturing facilities. We are dependent upon relationships
with independent manufacturers to fulfill our product needs. We use several
manufacturers for various parts of the manufacturing processes for our products.
We believe these are small privately held firms.
Because
the manufacturing processes, which our contract manufacturers perform, are
fairly standard in the industry, we believe that there are a large number of
manufacturers who could provide us with these services if our current contract
manufacturers are unavailable for any reason or seek to impose unfavorable
terms. Our ability to market and sell our products requires that such products
be manufactured in commercial quantities and in compliance with applicable
federal and state regulatory requirements. In addition, we must be able to
manufacture our products at a cost that permits us to charge a price acceptable
to the customer while also accommodating distribution costs and third-party
sales compensation. Competitors who do own their own manufacturing may have
an
advantage over us with respect to pricing, availability of product and in other
areas through their control of the manufacturing process.
We
are dependent on key management and the loss of their services could have a
material adverse impact on us.
We
have
relied extensively on the services of Drs. Agnes P. Olszewski and James P.
Gilligan, our co-founders. Drs. Olszewski and Gilligan play key roles in
our management and the loss of their services would materially and adversely
affect us and our prospects. Until we raise substantial financing, neither
of
these key individuals will spend full-time working for us. Under her employment
agreement, Dr. Olszewski is not required to do so until we have raised
$1,250,000, and under his consulting/employment agreement, Dr. Gilligan is
not
required to do so until six months after we have raised $2,500,000 in financing.
There is no assurance that we will be able to raise such amounts and without
such financing and the full-time employment of these key executives we will
in
all likelihood not be able to further develop our business and will likely
continue to experience losses. The loss of services of any of these persons
could delay or reduce our product development and commercialization efforts
and
harm our ability to compete effectively.
We
may be subject to product liability claims and may not have adequate insurance
to cover such claims.
Like
other retailers, distributors and manufacturers of products that are designed
to
be ingested, we face an inherent risk of exposure to product liability claims
in
the event that the use of our products results in injury. We intend to obtain
general liability coverage of $3 to $5 million that will include product
liability coverage. Because our policies will be purchased on a year-to-year
basis, industry conditions or our own claims experience could make it difficult
for us to secure the necessary insurance at a reasonable cost. In addition,
we
may not be able to secure insurance that will be adequate to cover liabilities.
We generally do not obtain contractual indemnification from parties supplying
raw materials or marketing our products. In any event, any such indemnification
is limited by its terms and, as a practical matter, by the creditworthiness
of
the other party. In the event that we do not have adequate insurance or
contractual indemnification, liabilities relating to defective products could
require us to pay the injured parties’ damages which may be significant compared
to our net worth or revenues.
We
may be adversely affected by unfavorable publicity relating to our product
or
similar products manufactured by our competitors.
We
believe that the dietary supplement market is affected by national media
attention regarding the consumption of these products. Future scientific
research or publicity may be unfavorable to the dietary and nutritional
supplement market generally or to any particular product and may be inconsistent
with earlier favorable research or publicity. Adverse publicity associated
with
illness or other adverse effects resulting from the consumption of products
distributed by other companies that are similar to our products could reduce
consumer demand for our products and consequently our revenues. This may occur
even if the publicity does not relate to our products. Adverse publicity
directly concerning our products could be expected to have an immediate negative
effect on the market for that product.
We
depend on trade secrets to protect our proprietary technology, which may be
inadequate to protect our position.
Our
long-term success will substantially depend upon protecting our technology
from
infringement, misappropriation, discovery and duplication. We expect that we
will apply for patent protection with respect to some of our products. Since
we
do not currently have patents on our products, a competitor could replicate
our
products. Any patents that we might obtain may not provide meaningful protection
or significant competitive advantages over competing products, due to the
complexity of the legal and scientific issues involved in patent defense and
litigation. For these reasons we have elected to protect our current products
through trade secrets.
Because
of the complexity of the legal and scientific issues involved in patent
prosecutions, we cannot be sure that any future patent applications for new
products will be granted. Nor can we be sure that any patent rights that we
do
obtain will provide meaningful protection against others duplicating our
products because of the complexity of the legal and scientific issues that
could
arise in litigation over these issues. Furthermore, patent applications are
maintained in secrecy in the United States until the patents are approved,
and
in most foreign countries for a period of time following the date from which
priority is claimed. A third party’s pending patent applications may cover any
technology that we currently are developing. Additionally, if we must resort
to
legal proceedings to enforce our intellectual property rights, the proceedings
could be burdensome and expensive and could involve a high degree of risk to
our
proprietary rights if we are unsuccessful in, or cannot afford to pursue, such
proceedings.
We
rely
at present completely on trade secrets and contract law to protect our
proprietary technology. There can be no assurance that any such contract will
not be breached, or that if breached, it will have adequate remedies. Currently,
all of our products are protected by trade secrets owned by our licensor and
other third parties . We rely on such third parties to adequately protect such
trade secrets. There can be no assurance that these third parties will protect
and continue to hold the trade secrets relating to our products. Furthermore,
there can be no assurance that any of these trade secrets will not become known
or independently discovered by third parties.
There
can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access
to
our trade secrets and know-how. In addition, we may be required to obtain
licenses to patents or other proprietary rights from third parties. There can
be
no assurance that any licenses required under any patents or proprietary rights
would be made available on acceptable terms, if at all. If we do not obtain
required licenses, we may encounter delays in product development or find that
the development, manufacture or sale of products requiring such licenses could
be foreclosed.
We
have limited the liability of our directors and officers for breaches of the
duty of care.
Our
articles of incorporation limit the liability of our directors for monetary
damages for breaches of directors’ fiduciary duty of care. This provision may
reduce the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from suing directors for breaches
of their duty of care, even though such an action, if successful, might
otherwise benefit our shareholders and us. In addition, our articles of
incorporation provide for the indemnification of directors and officers in
connection with civil, criminal, administrative or investigative proceedings
when acting in their capacities as agents for us.
Our
results of operations may be affected by changing market prices and requirements
for dietary supplements.
Our
results of operations may be affected by changing resale prices or market
requirements for dietary supplements, some of which are priced on a commodity
basis. The sale price, and market demand for, these materials can be volatile
due to numerous factors beyond our control, which may cause significant
variability in its period-to-period results of operations.
Our
results of operations will fluctuate.
Our
revenues and results of operations will vary from quarter to quarter in the
future. A number of factors, many of which are outside of our control, may cause
variations in our results of operations, including:
|
|
·
|
demand
and price for our products;
|
|
|
·
|
the
timing and recognition of product sales;
|
|
|
·
|
unexpected
delays in developing and introducing products;
|
|
|
·
|
unexpected
delays in manufacturing our products;
|
|
|
·
|
increased
expenses, whether related to marketing, product development or
administration or otherwise;
|
|
|
·
|
insufficient
demand in the marketplace could cause our distributors to return
product;
|
|
|
·
|
the
mix of revenues derived from products;
|
|
|
·
|
the
hiring, retention and utilization of personnel; and
|
|
|
·
|
general
economic factors.
|
We
may not succeed in our acquisition of additional
products.
As
part
of our growth strategy, we intend to acquire and develop additional product
candidates or approved products. The success of this strategy depends upon
our
ability to identify, select and acquire bioherbaceutical products that meet
the
criteria we have established. Any product candidate we acquire or license may
require additional research and development efforts prior to commercial sale,
including extensive pre-clinical and/or clinical testing. All product candidates
are prone to the risks of failure inherent in product development, including
the
possibility that the product candidate will not be safe, non-toxic and
effective. In addition, we cannot assure that any approved products that we
develop, acquire or license will be manufactured or produced economically;
successfully commercialized; widely accepted in the marketplace or that we
will
be able to recover our significant expenditures in connection with the
development, acquisition or license of such products. In addition, proposing,
negotiating and implementing an economically viable acquisition or license
is a
lengthy and complex process. Other companies, including those with substantially
greater financial, marketing and sales resources, may compete with us for the
acquisition or license of product candidates and approved products. We may
not
be able to acquire the rights to additional product candidates and approved
products on terms that we find acceptable, or at all. In addition, if we acquire
or license product candidates from third parties, we will be dependent on third
parties to supply such products to us for sale. We could be materially adversely
affected by the failure or inability of such suppliers to meet performance,
reliability and quality standards.
Other
companies may claim that we infringed upon their proprietary
rights.
We
do not
believe that our products or processes violate third-party intellectual property
rights. Nevertheless, there is no guarantee that such rights are not being,
and
will not be, violated. If any of the products or processes are found to violate
third-party intellectual property rights, we may be required to re-engineer
or
cause to be re-engineered one or more of those products or processes or seek
to
obtain licenses from third parties to continue offering its products or
processes without substantial re-engineering, and such efforts may not be
successful.
Our
non-US sales present special risks.
A
subcontractor in London handles fulfillment and coordinates market development
for our products in the U.K. and continental Europe. We anticipate that sales
outside the U.S. will continue to account for a significant percentage of our
product sales and we intend to continue to expand our presence in international
markets. Non-US sales are subject to a number of special risks. For example:
|
|
·
|
sales
agreements may be difficult to enforce;
|
|
|
·
|
receivables
may be difficult to collect through a foreign country’s legal
system;
|
|
|
·
|
foreign
countries may impose additional withholding taxes or otherwise
tax foreign
income, impose tariffs or adopt other restrictions on foreign
trade;
|
|
|
·
|
intellectual
property rights may be more difficult to enforce in foreign
countries;
|
|
|
·
|
terrorist
activity or the outbreak of a pandemic disease may interrupt distribution
channels or adversely impact customers or employees;
and
|
|
|
·
|
regulations
may change relating to dietary supplements that may negatively
impact the
ability to market products in those geographical
regions.
|
Any
of these events could harm our operations or
operating results.
Compliance
with changing regulation of corporate governance and public disclosure will
result in additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002 and new Securities and
Exchange Commission regulations, are creating uncertainty for public companies.
Our management team will be required to invest significant management time
and
financial resources to comply with both existing and evolving standards for
public companies, which may lead to increased general and administrative
expenses and a diversion of management time and attention from revenue
generating activities to compliance activities.
It
is possible that there are claims of which we are unaware that may come to
light
in the future and cost us considerable time, effort and expense to
resolve.
It
is
possible that a claim, whether valid or not, may be asserted against us in
the
future with respect to matters arising prior to the merger. There can be no
assurance given that some person will not devise a claim and attempt to assert
it against us in the hopes of obtaining some monetary benefit. To resolve such
a
claim, including payment, may cost us considerable time, effort and expense.
Any
of these may impair management’s implementation of the business plan with the
consequence of a loss of opportunity.
Risks
Related to Our Common Stock
Because
our common stock is traded on the OTC Bulletin Board, your ability to sell
your
shares in the secondary trading market may be limited.
Our
common stock currently is traded on the over-the-counter market on the OTC
Bulletin Board. Consequently, the liquidity of our common stock is limited,
not
only in the number of shares that are bought and sold, but also through delays
in the timing of transactions, and coverage by security analysts and the news
media, if any, of us. As a result, prices for shares of our common stock may
be
lower than might otherwise prevail if our common stock was traded on a national
securities exchange, such as The New York Stock Exchange or The Nasdaq Stock
Market, LLC.
Our
common stock may be removed from the OTC Bulletin Board, which would likely
cause the trading price of our common stock to decline and affect our ability
to
raise capital in the future.
Under
applicable NASD Rules, if we are delinquent in our reporting obligations three
times in a 24-month period and/or are actually removed from the OTC Bulletin
Board for failure to file two times in a 24-month period, in each case, we
would
be ineligible for quotation on the OTC Bulletin Board for a period of one year.
On April 5, 2006, we received notice from the OTC Bulletin Board that unless
we
cured our delinquency in filing the Annual Report on Form 10-K for the year
ended December 31, 2005 prior to the expiration of the grace period (May 5,
2006), our common stock would be removed from the OTC Bulletin Board effective
May 9, 2006. We cured this delinquency with the filing of our Annual Report
on
Form 10-K filed on May 1, 2006. On March 2, 2007, we received notice from the
OTC Bulletin Board that unless we cured our delinquency in filing the Annual
Report on Form 10-K for the year ended November 30, 2006 prior to the expiration
of the grace period (April 2, 2007), our common stock would be removed from
the
OTC Bulletin Board effective April 3, 2007. We cured this delinquency with
the
filing of our Annual Report on Form 10-K filed on March 30, 2007. To date,
we
have been delinquent two times in the past 24-month period. Should quotation
of
our common stock on the OTC Bulletin Board or a similar facility cease for
any
reason, the liquidity of our common stock and our ability to raise equity
capital would likely decrease.
Because
our shares are “penny stocks,” you may have difficulty selling them in the
secondary trading market.
Federal
regulations under the Exchange Act regulate the trading of so-called “penny
stocks,” which are generally defined as any security not listed on a national
securities exchange, priced at less than $5.00 per share and offered by an
issuer with limited net tangible assets and revenues. Since our common stock
currently trades on the OTC Bulletin Board at less than $5.00 per share, our
common stock is a “penny stock” and may not be traded unless a disclosure
schedule explaining the penny stock market and the risks associated therewith
is
delivered to a potential purchaser prior to any trade.
In
addition, because our common stock is not listed on any national securities
exchange and currently trades at less than $5.00 per share, trading in our
common stock is subject to Rule 15g-9 under the Exchange Act. Under this rule,
broker-dealers must take certain steps prior to selling a “penny stock,” which
steps include:
|
|
•
|
obtaining
financial and investment information from the investor;
|
|
|
•
|
obtaining
a written suitability questionnaire and purchase agreement signed
by the
investor; and
|
|
|
•
|
providing
the investor a written identification of the shares being offered
and the
quantity of the shares.
|
If
these
penny stock rules are not followed by the broker-dealer, the investor has no
obligation to purchase the shares. The application of these comprehensive rules
will make it more difficult for broker-dealers to sell our common stock and
our
shareholders, therefore, may have difficulty in selling their shares in the
secondary trading market.
Our
stock price has been and may continue to be volatile and an investment in our
common stock could suffer a decline in value.
Trading
of our common stock has been sporadic, and the trading volume has generally
been
low. Even a small trading volume on a particular day or over a few days may
affect the market price of our common stock. The market price of our common
stock may fluctuate significantly in response to a number of factors, some
of
which are beyond our control. These factors include:
|
|
•
|
announcements
of research activities and technology innovations or new products
by us or
our competitors;
|
|
|
•
|
changes
in market valuation of companies in our industry
generally;
|
|
|
•
|
variations
in operating results;
|
|
|
•
|
changes
in governmental regulations;
|
|
|
•
|
results
of research studies of our products or our competitors’
products;
|
|
|
•
|
regulatory
action or inaction on our products or our competitors’
products;
|
|
|
•
|
changes
in our financial estimates by securities analysts;
|
|
|
•
|
general
market conditions for companies in our industry;
|
|
|
•
|
broad
market fluctuations; and
|
|
|
•
|
economic
conditions in the United States or abroad.
|
Our
directors and executive officers own a significant number of shares of our
common stock to control our company, which could discourage or prevent a
takeover, even if an acquisition would be beneficial to our stockholders.
Certain
of our directors and our current executive officer own or control approximately
80% of our outstanding voting power. Accordingly, these stockholders,
individually and as a group, will be able to influence the outcome of
stockholder votes, involving votes concerning the election of directors, the
adoption or amendment of provisions in our certificate of incorporation and
bylaws and the approval of certain mergers or other similar transactions, such
as a sale of substantially all of our assets. Such control by existing
stockholders could have the effect of delaying, deferring or preventing a change
in control of us.
We
do not pay cash dividends, so any return on an investment must come from
appreciation.
We
do not
intend to pay any cash dividends in the foreseeable future and, therefore,
any
return on an investment in our common stock must come from increases in the
fair
market value and trading price of our common stock.
We
may issue additional equity securities that will dilute our stockholders.
We
may
issue additional equity securities to raise capital and through the exercise
of
options, warrants and convertible debt that is outstanding or may be
outstanding. These additional issuances will have a dilutive effect on our
existing stockholders.
Item
7. Financial Statements
The
financial statements required by item 7 are included in this Annual Report
on
Form 10-KSB beginning on page F-1.
Item
8. Changes In And Disagreements With Accountants On Accounting And Financial
Disclosure
On
February 28, 2006, we dismissed Weinberg & Co., P.A. ("Weinberg") as the
auditor for Pacific Magtron International Corp. Effective February 28, 2006,
we
engaged Berenson LLP ("Berenson"), subject to the U.S. Bankruptcy Court's
approval, to serve as the independent public accountants to audit our
consolidated financial statements for the calendar year ending December 31,
2005. Weinberg's report on our consolidated financial statements for the
calendar year ended December 31, 2004 did not contain an adverse opinion or
a
disclaimer of opinion, and was not qualified or modified as to uncertainty,
audit scope or accounting principles, except that Weinberg's report on our
consolidated financial statements for the calendar year ended December 31,
2004
did contain a modification paragraph that expressed substantial doubt about
the
Company's ability to continue as a going concern. During our past calendar
years
and the interim period through February 28, 2006, we had no disagreements with
Weinberg on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements,
if
not resolved to Weinberg's satisfaction, would have caused Weinberg to make
reference to the subject matter of the disagreement in connection with its
report. During our past calendar year and the interim period through February
28, 2006, Weinberg did not advise us of any of the matters specified in Item
304(a)(1)(B) of Regulation S-B. During our calendar year ended December 31,
2004, and the interim period through February 28, 2006, we have had no
consultations with Berenson concerning: (a) the application of accounting
principles to a specific transaction or the type of opinion that might be
rendered on our financial statements as to which we received oral advice that
was an important factor in reaching a decision on any accounting, auditing
or
financial reporting issue; or (b) any disagreements, as defined in Item
304(a)(1) of Regulation S-K. The appointment of Berenson as independent public
accountants was recommended and unanimously approved by our Board of
Directors.
Item
8A. Controls And Procedures
(A)
Evaluation Of Disclosure Controls And Procedures
As
of
November 30, 2006, we carried out an evaluation, under the supervision and
with
the participation of our Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as
defined in §240.13a-15(e) or 240.15d-15(e) under the Exchange Act).
Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the
end
of the November
30, 2006
fiscal year,
our
disclosure controls and procedures are effective in timely alerting him to
material information required to be included in our periodic reports that are
filed with the SEC.
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 Control
Over Financial Reporting
There
were no changes
in the Company's internal control
over
financial reporting
(as
defined in Section 240.13a-15(f)
or
240.15d-15(f)
of the Exchange Act)
during
our
fourth
fiscal
quarter
ended November 30, 2006 that has materially affected,
or
is
reasonably likely to materially affect, our internal control over
financial
reporting.
Item
8B. Other
Information
Not
applicable.
Part
III
Item
9. Directors,
Executive Officers,
Promoters and Control Persons; Compliance With Section 16(a) of the Exchange
Act
The
following table sets forth the names of our directors and executive officers,
their ages and the positions they currently hold. Each such person became an
officer and/or director of the company immediately after the closing of the
merger. The positions that Drs. Olszewski and Gilligan held with Herborium
prior
to the merger are described in the biographical information set forth below.
|
Name
|
Age
|
Position
|
|
|
|
|
|
Dr.
Agnes P. Olszewski
|
50
|
President,
Chief Executive Officer, Chief Financial Officer and
Director
|
|
|
|
|
|
Dr.
James P. Gilligan
|
55
|
Consultant
and Director
|
|
|
|
|
|
Max
G. Ansbacher
|
70
|
Director
|
|
|
|
|
|
Wayne
I. Danson
|
53
|
Director
|
Dr.
Agnes Olszewski. Dr.
Olszewski is a co-founder
of Herborium, Inc. and has served as co-Chief Executive Officer and President
Business Development and director of Herborium, Inc. since its inception in
2000. She was appointed as our Chief Executive Officer, Acting Chief Financial
Officer and director concurrently with the closing of the merger. In addition,
concurrently with the closing of the merger, she was appointed director of
our
subsidiary Herborium. Until such time as we receive a minimum of $1,250,000
of
financing, Dr. Olszewski will not devote her full time to our company, and
will
continue to engage in her activities as a professor. Dr. Olszewski has over
20
years experience in business strategy, strategic marketing management and
international business. She holds M.A. in Consumer Psychology and Ph.D. degrees
from Warsaw University, Poland, and an M.B.A. degree from Fordham University,
New York City. Dr. Olszewski has been a consultant and a team leader on
strategic management and competitive marketing strategies for leading American
corporations, as well as foreign companies and institutions. In her capacity
as
an international consultant, she had lead multicultural negotiations and managed
diverse teams of professionals. She has also been responsible for developing
and
implementing business and marketing strategies in the United States and foreign
markets. After the collapse of communism in Central Europe, Dr. Olszewski formed
A&T Global Marketing Inc., one of the first consulting firms in the U.S.
focusing on the transfer of western management and financial know-how into
transitional economies. A&T Global Marketing was also involved in advising
American corporations on entry strategies into the emerging markets of Europe
and Asia. Dr. Olszewski has successfully led the efforts to form Joint Ventures
in Poland, China and France. She was President and Chief Executive Officer
of
G.O. International, Inc., which she co-founded with Dr. James P. Gilligan,
a
consulting firm specializing in business strategies for pharmaceutical industry
and global technology transfer. G.O. International merged with Herborium, Inc.
in June 2002.
Dr.
James P. Gilligan. Dr.
Gilligan is a co-founder of Herborium, Inc. and has served co-Chief Executive
Officer and President Product Development and director of Herborium, Inc. since
its inception in 2000. He was appointed as our director and as a director of
our
subsidiary Herborium concurrently with the closing of the merger. He is
currently providing consulting services to us and has agreed to serve on a
full-time basis as our President and Chief Operating Officer within six months
after we receive a minimum of $2,500,000 of financing. He has over 25 years
experience in the pharmaceutical and biotechnology industry. He received his
Ph.D. in Pharmacology and Toxicology from the University of Connecticut, during
which time he completed a special research fellowship at the Cleveland Clinic
Atherosclerosis Research Unit. He performed his post-doctoral training at the
Roche Institute of Molecular Biology. Dr. Gilligan is author or co-author of
15
U.S. patents, as well as multiple PCT patents and the author of numerous
scientific publications. He also received a M.S. in International Business
from
Seton Hall University. Dr. Gilligan is Vice President of Product Development
at
Unigene Laboratories Inc. Fairfield, NJ, a biopharmaceutical company. He was
a
founding member of Unigene in 1981 and participated in the design of its R&D
facility in 1983 and the cGMP biotechnology manufacturing facility in 1993.
His
responsibilities have included coordination of all U.S. and international
pre-clinical research, toxicology, and regulatory filings as well as design
and
management of clinical studies.
Max
G. Ansbacher.
Mr.
Ansbacher was appointed as our director and as a director of our subsidiary
Herborium concurrently with the closing of the merger. He is the principal
of
Ansbacher Investment Management, a management firm concentrating in
sophisticated options strategies. The firm currently manages over $158 million.
Prior to founding his firm, Mr. Ansbacher managed options accounts for the
investment banking firm Bear Stearns. He is the author of three books on
investing and his book The
New Options Market
is one
of the all-time best selling books on exchange traded options. Mr. Ansbacher
is
a graduate of Phillips Exeter Academy, the University of Vermont and Yale law
school. He also holds an advanced degree in tax law from New York University,
and is a member of the bar in New York, Vermont and the District of Columbia.
Wayne
I. Danson.
Mr. Danson was appointed as our director and as a director of our subsidiary
Herborium.com concurrently with the closing of the merger. Prior to the merger,
Mr. Danson served as Chief Executive Officer and as a director of LW. Mr. Danson
has served as the Chief Financial Officer of Advanced Communications
Technologies, Inc. since December 1, 1999 and was appointed a director on
January 3, 2000, President on April 30, 2002 and Chief Executive Officer on
June
7, 2005. Mr. Danson is the Managing Director and Founder of Danson Partners,
LLC, a financial advisory firm specializing in middle market companies in the
real estate and technology industries. Prior to forming Danson Partners, LLC
in
May 1999, Mr. Danson was Managing Director of PricewaterhouseCoopers LLP's
Real
Estate Capital Markets Group. Prior to rejoining PricewaterhouseCoopers in
1996,
Mr. Danson was a Managing Tax Partner with Kenneth Leventhal & Company in
New York and Washington D.C., where he was also Kenneth Leventhal's National
Director of its International and Debt Restructure Tax Practices. Prior to
his
involvement with Kenneth Leventhal in 1988, Mr. Danson was a Managing Director
with Wolper Ross & Co., Ltd. in New York, a closely-held financial services
company specializing in financial tax, pension consulting, designing financial
instruments and providing venture capital and investment banking services.
Mr.
Danson graduated with honors from Bernard M. Baruch College with a B.B.A. in
Accounting and an M.B.A. in Taxation. He is a certified public accountant and
a
member of the AICPA and the New York State Society of CPAs.
Concurrently
with the closing of the merger, the sole director of PMIC, John E. Donahue,
resigned from the Board of Directors, and Martin Nielson and Anthony Lee
resigned their respective positions as PMIC’s Chief Executive Officer and Chief
Financial Officer. Upon the closing of the merger, in accordance with the plans
of reorganization of PMIC and LW, Dr. Agnes P. Olszewski, Dr. James P. Gilligan,
Wayne I. Danson and Max G. Ansbacher became members of our Board of Directors.
We
intend
to obtain an additional board member who is “independent” as determined in
accordance with the applicable requirements of The Nasdaq Stock Market LLC
and
other applicable rules and regulations of the Securities and Exchange
Commission. While we have had discussions with potential candidates, we had
no
active candidates at the time of filing of this report. All directors will
hold
office until the next annual meeting of stockholders and until their successors
have been elected and qualified. Officers serve at the discretion of the Board
of Directors.
Family
Relationships
There
are
no family relationships among our directors, executive officers or persons
nominated or chosen to become our directors or executive officers.
Involvement
in Certain Legal Proceedings
No
director, person nominated to become a director, executive officer, promoter
or
control person has been involved in any legal proceeding during the past five
years that is required to be disclosed pursuant to Item 401(f) of Regulation
S-K.
Board
Committees
We
do not
have an Audit Committee, and therefore have not determined whether we have
an
“audit committee financial expert,” as such term is defined in Item 401(h) of
Regulation S-K. We also do not have a nominating committee. The functions of
such committees are performed by the entire board. The Company’s difficulty in
obtaining independent directors has prevented it from forming an audit
committee. The Company believes that due to the small size of the Board, no
separate nominating committee is necessary
Other
Significant Employees
Corporate
Governance
In
March
2007, we established a Code of Business Conduct and Ethics (the "Code"),
applicable to all of our employees, including our principal executive,
accounting and financial officers, which states that we are committed to the
highest standards of legal and ethical conduct. This Code sets forth our
policies with respect to the way we conduct ourselves individually and operate
our business. The provisions of this Code are designed to deter wrongdoing
and
to promote honest and ethical conduct among our employees, officers and
directors. The Code is attached as an exhibit to this report. We will satisfy
our disclosure requirement under Item 5.05 of Form 8-K regarding certain
amendments to, or waivers of, any provision of our Code by posting such
information on our corporate website. We will provide a copy of the Code,
without charge, upon request. You may request a copy of the Code by writing
to
the Company’s corporate office located at 3 Oak Street, Teaneck, NJ 07666.
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Exchange requires that our directors and executive officers and
any
persons who own more than ten percent of our common stock file with the SEC
initial reports of ownership and reports of changes in ownership of our common
stock and other equity securities. Such persons are required by SEC regulations
to furnish us with copies of all such reports that they file. As of the fiscal
year ending November 30, 2006, Form 3 reports were not timely filed by James
P.
Gilligan and Max G. Ansbacher, directors of the Company.
Item
10. Executive Compensation
Summary
Compensation Table
The
following table sets forth the compensation paid by PMIC to its Chief Executive
Officer, Martin Nielson, during each of PMIC’s last two fiscal years ended
December 31, 2004 and 2005. Mr. Nielson resigned as President of PMIC on July
19, 2006 and resigned as Chief Executive Officer effective on September 18,
2006. At the end of PMIC’s last completed fiscal year, PMIC did not have any
executive officer whose total annual salary and bonus exceeded
$100,000.
The
following also table sets forth the compensation Herborium paid to Drs. Agnes
P.
Olszewski and James P. Gilligan, its co-Chief Executive Officers and Presidents,
during Herborium’s last three fiscal years ended November 30, 2004, 2005 and
2006. Dr. Olszewski became our Chief Executive Officer and Acting Chief
Financial Officer on September 18, 2006, following the merger. On that date,
Dr.
Gilligan entered into a consulting agreement with us. At the end of Herborium’s
last completed fiscal year, Herborium did not have any executive officer whose
total annual salary and bonus exceeded $100,000.
Summary
Compensation Table
|
|
|
|
|
Annual
Compensation
|
|
|
|
|
Fiscal
|
|
|
|
Other
Annual
|
|
|
Name
and Principal Position
|
|
Year
|
|
Salary
|
|
Bonus
|
|
Compensation(1)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin
Nielson
Former
Chief Executive of PMIC
|
|
|
2006
2005
2004
|
|
$
$
$
|
41,833
41,250
0
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Dr.
Agnes P. Olszewski
Chief
Executive Officer
and
Acting Chief Financial Officer;
Former
co-CEO/President of Herborium
|
|
|
2006*
2005
2004
|
|
$
$
$
|
81,250
0
0
|
|
|
—
|
|
|
|
|
|
—
|
|
|
Dr.
James P. Gilligan
Consultant
Former
co-CEO/President of Herborium
|
|
|
2006*
2005
2004
|
|
$
$
$
|
63,889
0
0
|
|
|
—
|
|
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Such
compensation has been accrued but not paid.
(1)
None
of our executive officers received personal benefits or perquisites in excess
of
the lesser of $50,000 or 10% of his aggregate salary and bonus.
Option
Grants in Last Fiscal Year
No
options were granted to any of the individuals named in the Summary Compensation
Table during fiscal year 2006.
Aggregated
Option Exercises in Fiscal 20065 and FY-End Option
Values
None
of
the individuals named in the Summary Compensation Table held any options to
purchase our common stock or the common stock of Herborium, Inc. as of November
30, 2006.
Long
Term Incentive Plans
On
January 19, 2007, the Board of Directors approved the 2007 Stock Plan to provide
(i) designated employees of the Company and its subsidiaries, (ii) certain
consultants and advisors who perform services for the Company or its
subsidiaries and (iii) non-employee members of the Board of Directors of the
Company with the opportunity to receive grants of incentive stock options,
nonqualified stock options and restricted stock..
Equity
Compensation Plan Information
The
following table sets forth information regarding our existing compensation
plans
and individual compensation arrangements pursuant to which our equity securities
are authorized for issuance to employees or non-employees (such as directors,
consultants and advisors) in exchange for consideration in the form of
services:
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted-average
exercise price of outstanding options, warrants and
rights
|
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
|
| |
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Equity
compensation plans approved by security holders
|
|
|
None
|
|
$
|
N/A
|
|
|
None
|
|
|
Equity
compensation plans not approved by security holders (1)
|
|
|
None
|
|
$
|
N/A
|
|
|
20,000,000
|
|
|
Total
|
|
|
None
|
|
$
|
N/A
|
|
|
20,000,000
|
|
|
|
|
Securities
are issuable pursuant to the Company’s 2007 Stock
Plan.
|
Director
Compensation
Our
directors do not receive any cash compensation for their service on the Board
of
Directors. Our directors are reimbursed for actual out-of-pocket expenses
incurred by them in connection with their attendance at meetings of the Board
of
Directors.
Employment
Agreements
Agreement
with Dr. Agnes P. Olszewski
On
September 18, 2006 we entered into an employment agreement with Dr. Olszewski
who will serve as President, Chief Executive Officer and Acting Chief Financial
Officer until such time as we hire a controller or Chief Financial Officer.
Dr.
Olszewski has the position of Chairman of the Board of Directors. The employment
agreement provides for an initial four-year term of employment, with an addition
twelve-month extension at Dr. Olszewski’s option. Under the agreement, Dr.
Olszewski is not required to work full-time until such time as we have received
debt or equity financing in an aggregate of amount of $1,250,000 or more. Until
we obtain such amount of financing, Dr. Olszewski will receive 75% of her base
salary. Her annual base salary is $200,000 with a bonus equal to (i) for the
first three years, 5% of EBITDA (as defined in the agreement) and (ii)
thereafter 5% of Net Income before bonus (as defined in the agreement). She
will
be eligible for an additional bonus ranging from $75,000 to $200,000 in the
event that our Pre-Tax Income for a fiscal year exceeds that of the prior fiscal
year by 150% or more. Under the employment agreement,. Dr. Olszewski will be
an
eligible participant under one or more stock option plans adopted by us. Dr.
Olszewski will be subject to non-competition provisions during the term of
the
agreement or until September 30, 2012 in the event that she extends the
agreement for the additional twelve month period. Dr. Olszewski’s employment may
be terminated in the event of extended disability or incapacity or a “For Cause
Event” as defined in the agreement. Dr. Olszewski may terminate her employment
voluntarily with 180 days prior written notice, upon our material breach of
the
agreement with 10 days prior written notice and upon a “Change of Control” as
defined in the agreement upon 90 days prior written notice. In the event of
her
termination, Dr. Olszewski or her beneficiary, as the case may be, will have
the
right to receive all accrued but unpaid base salary. In the event of her death,
her termination based on a material breach by us or our termination of her
for
any reason other than a For Cause Event, she will be entitled to receive
$600,000. In the event of her termination for or after a Change of Control,
she
will be entitled to receive an amount equal to the product of her base salary
multiplied by 2.99. After (i) the expiration of the term (including an extension
of one year by Dr. Olszewski) or (ii) her voluntary termination of the
employment agreement, Dr. Olszewski may, at her or our option in the case of
clause (i) or at our option in the case of clause (ii), act as a consultant
to
us for one year and receive compensation equal to 50% of her base
salary.
Agreement
with Dr. James P. Gilligan
On
September 18, 2006 we entered into a consulting and employment agreement with
Dr. Gilligan who will serve as co-President and Chief Operating Officer. The
agreement provides for an initial term of employment expiring on September
20,
2011, with an addition twelve-month extension at Dr. Gilligan’s option. Under
the agreement, Dr. Gilligan’s employment will not commence until six months
after we have received debt or equity financing in the aggregate amount of
$2,500,000, and until such date, Dr. Gilligan will serve as a consultant to
us
at an hourly rate of $120.00 per hour and will be permitted to continue his
full-time employment elsewhere. Upon his full-time employment, his annual base
salary will be $200,000 with a bonus equal to (i) for the first three years,
5%
of EBITDA (as defined in the agreement) and (ii) thereafter 5% of Net Income
before bonus (as defined in the agreement. He will be eligible for an additional
bonus ranging from $75,000 to $200,000 in the event that our Pre-Tax Income
for
a fiscal year exceeds that of the prior fiscal year by 150% or more. Under
the
employment agreement, Dr. Gilligan will be an eligible participant under one
or
more stock option plans adopted by us. Dr. Gilligan will be subject to
non-competition provisions during the term of the agreement or until September
30, 2012 in the event that he extends the agreement for the additional
twelve-month period. Dr. Gilligan’s employment may be terminated in the event of
extended disability or incapacity or a “For Cause Event” as defined in the
agreement. Dr. Gilligan may terminate his employment voluntarily with 180 days
prior written notice, upon our material breach of the agreement with 10 days
prior written notice and upon a “Change of Control” as defined in the agreement
upon 90 days prior written notice. In the event of his termination, Dr. Gilligan
or his beneficiary, as the case may be, will have the right to receive all
accrued but unpaid base salary. In the event of his death, his termination
based
on a material breach by us or our termination of him for any reason other than
a
For Cause Event, he will be entitled to receive $600,000. In the event that
his
employment is terminated for or after a Change of Control, he will be entitled
to receive an amount equal to the product of his base salary multiplied by
2.99.
After (i) the expiration of the term (including an extension of one year by
Dr.
Gilligan) or (ii) his voluntary termination of the employment agreement, Dr.
Gilligan may, at his or our option in the case of clause (i) or at our option
in
the case of clause (ii), act as a consultant to us for one year and receive
compensation equal to 50% of his base salary.
Compensation
Committee Interlocks and Insider Participation
We
do not
currently have a Compensation Committee. Instead the entire Board of Directors
makes executive officer compensation decisions. Prior to the merger, Herborium,
Inc. had no compensation committee. See Certain
Relationships and Related Transactions
below
for more information about related party transactions involving Drs. Olszewski
and Gilligan.
Compensation
Of Directors
Our
directors did not receive any cash or stock compensation for their services
as a
director in fiscal 2006, but were reimbursed for all of their out-of-pocket
expenses incurred in connection with the rendering of services as a
director.
Item
11. Security Ownership Of Certain Beneficial Owners And
Management
and Related Stockholder Matters
The
following table contains information about the beneficial ownership of our
common stock as of March 21, 2007 for:
| · |
any
person, who at November 30, 2006 owned more than five percent (5%)
of our
common stock;
|
| · |
each
of our executive officers named in the Summary
Compensation Table in Part
III - Item 10. Executive Compensation
of
this Annual Report on Form 10-KSB;
and
|
| · |
all
directors and executive officers as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to securities. Except as
indicated by footnote, and subject to community property laws where applicable,
the persons named in the table below have sole voting and investment power
with
respect to all shares of common stock shown as beneficially owned by them.
The
percentage of beneficial ownership is based on 114,067,080 shares of common
stock outstanding as of March 21, 2007.
| |
Common
Stock (1)
|
|
Name
and Address of Stockholder
|
Amount
and Nature
of
Beneficial Ownership(2)
|
Percent
of Class (2)
|
| |
|
Directors
and Officers
|
|
|
|
Dr.
Agnes P. Olszewski
Herborium
Group, Inc.
3
Oak Street
Teaneck,
New Jersey 07666
|
44,811,063(3)
|
39.3%
|
|
Dr.
James P. Gilligan
985
Carteret Ave
Union,
New Jersey 07083
|
42,992,563(4))
|
37.7%
|
|
Max
G. Ansbacher
515
Madison Avenue, 29th Floor
New
York, NY 10022
|
434,268
|
*
%
|
|
Wayne
I. Danson
420
Lexington Avenue, Suite 2739
New
York, NY 10170
|
347,373(5)
|
*
%
|
| |
|
|
|
All
Directors and Officers as a Group
|
88,585,267
|
77.7%
|
*
Less
than 1 percent
|
(1)
|
The
holders of common stock are entitled to one vote per share.
|
|
(2)
|
The
number of shares of common stock and the percent of the class in
the table
and these notes to the table have been calculated in accordance with
Rule
13d-3 under the Exchange Act, and assume, on a stockholder by stockholder
basis, that each stockholder has converted all securities owned by
such
stockholder that are convertible into common stock at the option
of the
holder currently or within 60 days of November 30,
2006.
|
|
(3)
|
Includes
515,693 shares of common stock held by Dr. Olszewksi’s son who resides in
the same household.
|
|
(4)
|
Includes
434,268 shares of common stock held by Dr. Gilligan’s son who resides in
the same household.
|
|
(5)
|
Mr.
Danson’s shares were received as a distribution as a shareholder of
Advanced Communications Technologies, Inc - See “Description of Business -
Company History.”
|
Item
12. Certain Relationships and Related Transactions
Financing
of Herborium’s operations has been provided by equity investments amounting
$200,000 and loans amounting to $153,682 as of November 30, 2006 from our
founders, Drs. Olszewski and Gilligan, and funding from friends and family
of
approximately $188,500 as of November 30, 2006. The loans from founders are
unsecured demand loans that do not bear interest. The funding from friends
and
family was received pursuant to subscription agreements entered into in fiscal
2001 through 2005 in connection with a contemplated private placement of equity
securities. Under the terms of the subscription agreements, the type of equity
security to be issued to the investors will be determined through negotiation
with the principal investors in the private placement, and the price to be
paid
by the investors will be the same as the principal investors in the financing.
The number of shares to be received by each investor will be a function of
the
amount of capital raised from, and the price per share paid by, the principal
investors. The subscription agreements do not have an expiration date; no
provisions for interest payments; nor the manner of the form of the warrants
in
the event the private placement is to be in the form of debt.
Item
13. Exhibits
|
Exhibit
No.
|
Description
|
|
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).
|
|
2.2
|
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).
|
|
2.3
|
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)
|
|
3(i)
|
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)
|
|
3(ii)
|
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)
|
|
10.1
|
Order
Approving Settlement Agreement and Mutual Settlement Agreement and
Release
(incorporated by reference to Exhibit 10.1 to Pacific Magtron
International Corp.’s Current Report on Form 8-K filed on August 16,
2006).
|
|
10.2
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. Agnes P. Olszewski (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
September 22, 2006)
|
|
10.3
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. James P. Gilligan (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
September 22, 2006)
|
|
14
|
Code
of Ethics
|
|
21
|
Subsidiaries
of the Registrant
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
|
|
99.1
|
Audited
Financial Statements of Herborium, Inc. for the fiscal years ended
November 30, 2004 and 2005
|
|
99.2
|
Unaudited
Financial Statements of Herborium, Inc. for the six-month interim
period
ended May 31, 2006
|
|
99.3
|
Consolidated
Financial Statements of Herborium Group. Inc. as of November 30,
2006
|
Item
14. Principal Accountant Fees and Services
Audit
Fees
Our
independent auditor, Berenson LLP, has billed us (a) $44,789 and $0 in the
fiscal years ended November 30, 2006 and 2005 for the audit of the Company’s
annual consolidated financial statements and for the review of the Company’s
Form 10-KSB, (b) a total of $10,069 and $0 in the fiscal years ended
November 30, 2006 and 2005 for the review of our consolidated financial
statements included in the Company’s Forms 10-QSB for the quarter ended
August 31, 2006 and of our consolidated financial statements for the six months
ended May 31, 2006 included in the Company’s Form 8-K.
Audit-Related
Fees
Our
independent auditor, Berenson LLP, has billed us $5,984 and $0 in the fiscal
years ended November 30, 2006 and 2005 for the audit-related
services.
Tax
Fees
No
fees
were billed in each of the last two fiscal years for professional services
rendered by our independent auditors, Berenson LLP, for tax compliance, tax
advice and tax planning services.
All
Other Fees
Other
than the services described above, no other fees were billed by our independent
auditors for the fiscal; years ended November 30, 2006 and 2005.
Policy
For Pre-Approval Of Audit And Non-Audit Services
Our
Company has not adopted an Audit Committee; therefore, there is no Audit
Committee policy in this regard. However, our Company does not require approval
in advance of the performance of professional services to be provided to our
Company by its principal accountant. Additionally, all services rendered by
our
principal accountant are performed pursuant to a written engagement letter
between us and the principal accountant.
Signatures
In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this amended report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
Herborium
Group, Inc.
|
| |
|
| |
By: /s/
Agnes P.
Olszewski
|
| |
Name:
Agnes P. Olszewski
|
| |
Title:
President, Chief Executive Officer, and Chief Financial
Officer
|
| |
Date:
March 29, 2007
|
| |
|
In
accordance with the Exchange Act, this amended report has been signed below
by
the following persons on behalf of the registrant and in the capacities and
on
the dates indicated.
|
Signature
|
Title
|
Date
|
| |
|
|
|
/s/
Agnes P.
Olszewski
|
|
|
|
Agnes
P. Olszewski
|
President,
Chief Executive Officer (Principal Executive
Officer),
Chief Financial Officer (Principal Accounting Officer)
and
Director
|
March
29, 2007
|
| |
|
|
|
/s/
James P.
Gilligan
|
Consultant
and Director
|
March
29, 2007
|
|
James
P. Gilligan
|
|
|
| |
|
|
|
/s/
Max G.
Ansbacher
|
|
|
|
Max
G. Ansbacher
|
Director
|
March
29, 2007
|
| |
|
|
| |
|
|
|
/s/
Wayne I.
Danson
|
|
|
|
Wayne
I. Danson
|
Director
|
March
29, 2007
|
| |
|
|
EXHIBIT
INDEX
|
Exhibit
No.
|
Description
|
|
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).
|
|
2.2
|
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).
|
|
2.3
|
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)
|
|
3(i)
|
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)
|
|
3(ii)
|
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)
|
|
10.1
|
Order
Approving Settlement Agreement and Mutual Settlement Agreement and
Release
(incorporated by reference to Exhibit 10.1 to Pacific Magtron
International Corp.’s Current Report on Form 8-K filed on August 16,
2006).
|
|
10.2
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. Agnes P. Olszewski (incorporated by reference
to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on
September 22, 2006)
|
|
10.3
|
Employment
Agreement dated as of September 18, 2006 between Pacific Magtron
International Corp. and Dr. James P. Gilligan (incorporated by reference
to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on
September 22, 2006)
|
|
14
|
Code
of Ethics
|
|
21
|
Subsidiaries
of the Registrant
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
Section
906 of the Sarbanes-Oxley Act of 2002
|
|
99.1
|
Audited
Financial Statements of Herborium, Inc. for the fiscal years ended
November 30, 2004 and 2005
|
|
99.2
|
Unaudited
Financial Statements of Herborium, Inc. for the six-month interim
period
ended May 31, 2006
|
|
99.3
|
Consolidated
Financial Statements of Herborium Group. Inc. as of November 30,
2006
|
Herborium
Group, Inc.
Consolidated
Financial Statements
As
Of November 30, 2006
HERBORIUM
GROUP, INC.
Contents
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-1-F1a
|
| |
|
|
CONSOLIDATED
BALANCE SHEETS AS OF NOVEMBER
30, 2006 AND 2005
|
F-2
|
| |
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED NOVEMBER 30, 2006
AND
2005
|
F-3
|
| |
|
|
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIENCY FOR THE YEARS ENDED
NOVEMBER 30, 2006 AND 2005
|
F-4
|
| |
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED NOVEMBER 30, 2006
AND
2005
|
F-5
|
| |
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F6
- F-21
|
REPORT
OF
INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
To
the
Board of Directors and Stockholders
of
Herborium Group, Inc.
We
have
audited the accompanying consolidated balance sheets of Herborium Group,
Inc.
(the “Company”) as of November 30, 2006 and 2005, and the related consolidated
statements of operations and accumulated deficit and cash flows for the years
then ended. These consolidated financial statements are the responsibility
of
the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits of these statements in accordance with the standards
of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about
whether the financial statements are free of material misstatements. An audit
also includes examining, on a test basis, evidence supporting the amounts
and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the financial position of Herborium Group, Inc.
as of
November 30, 2006 and 2005, and the results of its operations and its cash
flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming
that
the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company incurred net losses of $339,757
and $105,243 for the years ended November 30, 2006 and 2005, respectively,
and
had working capital deficiencies of $756,845 and $408,974 as of November
30,
2006 and 2005, respectively. These matters raise substantial doubt about
its
ability to continue as a going concern. Management's plans in regards to
these
matters are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
/s/
Berenson, LLP
January
30, 2007
HERBORIUM
GROUP, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
November
30,
|
|
| |
|
2006
|
|
2005
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
4,649
|
|
$
|
182
|
|
|
Accounts
receivable
|
|
|
5,416
|
|
|
23,266
|
|
|
Inventory
|
|
|
73,890
|
|
|
56,740
|
|
|
Prepaid
expenses and other current assets
|
|
|
442
|
|
|
2,528
|
|
|
Total
Current Assets
|
|
|
84,397
|
|
|
82,716
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
6,170
|
|
|
8,459
|
|
|
Other
assets, net of accumulated amortization
|
|
|
27,728
|
|
|
20,553
|
|
|
Total
Other Assets
|
|
|
33,898
|
|
|
29,012
|
|
|
TOTAL
ASSETS
|
|
$
|
118,295
|
|
$
|
111,728
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
344,655
|
|
$
|
36,852
|
|
|
Credit
cards payable
|
|
|
134,126
|
|
|
121,330
|
|
|
Lines
of credit payable
|
|
|
172,913
|
|
|
179,463
|
|
|
Due
to others
|
|
|
34,513
|
|
|
22,650
|
|
|
Current
portion of long-term debt
|
|
|
1,353
|
|
|
2,640
|
|
|
Due
to stockholders
|
|
|
153,682
|
|
|
128,755
|
|
|
Total
Current Liabilities
|
|
|
841,242
|
|
|
491,690
|
|
|
Long-term
debt, net of current portion
|
|
|
-
|
|
|
3,228
|
|
|
TOTAL
LIABILITIES
|
|
|
841,242
|
|
|
494,918
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
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,
108,567,080 shares issued and outstanding
|
|
|
20,000
|
|
|
20,000
|
|
|
Common
stock subscribed; no shares issued
and
outstanding
|
|
|
188,500
|
|
|
188,500
|
|
|
Additional
paid-in capital
|
|
|
180,000
|
|
|
180,000
|
|
|
Accumulated
deficit
|
|
|
(1,111,447
|
)
|
|
(771,690
|
)
|
|
Total
Stockholders’ Deficiency
|
|
|
(722,947
|
)
|
|
(383,190
|
)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’
DEFICIENCY
|
|
|
118,295
|
|
|
111,728
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HERBORIUM
GROUP, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
Years
ended November 30,
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
NET
SALES
|
|
$
|
827,755
|
|
$
|
866,773
|
|
|
COST
OF SALES
|
|
|
295,865
|
|
|
373,030
|
|
|
GROSS
PROFIT
|
|
|
531,890
|
|
|
493,743
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Marketing
and selling
|
|
|
332,883
|
|
|
315,217
|
|
|
General
and administrative
|
|
|
493,016
|
|
|
238,887
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
825,899
|
|
|
554,104
|
|
| |
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(294,009
|
)
|
|
(60,361
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
EXPENSE
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(44,748
|
)
|
|
(41,687
|
)
|
|
TOTAL
OTHER EXPENSE
|
|
|
(44,748
|
)
|
|
(41,687
|
)
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(338,757
|
)
|
|
(102,048
|
)
|
| |
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
1,000
|
|
|
3,195
|
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(339,757
|
)
|
$
|
(105,243
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
-
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding during the
year
- basic and dilutive
|
|
|
108,567,080
|
|
|
108,567,080
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HERBORIUM
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN
STOCKHOLDERS’
DEFICIENCY
| |
|
Common
Stock
|
|
Common
Stock Subscribed
|
|
Additional
|
|
Accumulated
|
|
|
|
| |
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Paid
in Capital
|
|
Deficit
|
|
Total
|
|
|
BALANCE,
DECEMBER 1, 2004
|
|
|
108,567,080
|
|
$
|
20,000
|
|
|
-
|
|
$
|
166,000
|
|
$
|
180,000
|
|
$
|
(666,447
|
)
|
$
|
(300,447
|
)
|
|
Common
stock subscribed
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
22,500
|
|
|
-
|
|
|
-
|
|
|
22,500
|
|
|
Net
loss for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(105,243
|
)
|
|
(105,243
|
)
|
|
BALANCE,
NOVEMBER 30, 2005
|
|
|
108,567,080
|
|
|
20,000
|
|
|
-
|
|
|
188,500
|
|
|
180,000
|
|
|
(771,690
|
)
|
|
(383,190
|
)
|
|
Net
loss for the period
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(339,757
|
)
|
|
(339,757
|
)
|
|
BALANCE,
NOVEMBER 30, 2006
|
|
|
108,567,080
|
|
$
|
20,000
|
|
|
-
|
|
$
|
188,500
|
|
$
|
180,000
|
|
$
|
(1,111,447
|
)
|
$
|
(722,947
|
)
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HERBORIUM
GROUP, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
| |
|
Years
ended November 30,
|
|
| |
|
2006
|
|
2005
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(339,757
|
)
|
$
|
(105,243
|
)
|
|
Adjustments
to reconcile net loss to
net
cash used by operating activities:
|
|
|
|
|
|
|
|
|
Stock
subscribed in exchange for services
|
|
|
-
|
|
|
7,500
|
|
|
Depreciation
and amortization
|
|
|
5,075
|
|
|
5,485
|
|
|
Loss
on disposal of equipment
|
|
|
-
|
|
|
2,576
|
|
|
Changes
in assets (increase) decrease:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
17,850
|
|
|
(22,302
|
)
|
|
Inventory
|
|
|
(17,150
|
)
|
|
11,810
|
|
|
Prepaid
expenses and other assets
|
|
|
2,086
|
|
|
(223
|
)
|
|
Changes
in liabilities increase (decrease):
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
307,803
|
|
|
(19,154
|
)
|
|
Net
cash used by operating activities
|
|
|
(24,093
|
)
|
|
(119,551
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows used by investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(687
|
)
|
|
(5,474
|
)
|
|
Purchase
of amortizable assets
|
|
|
(9,274
|
)
|
|
(1,763
|
)
|
|
Net
cash used by investing activities
|
|
|
(9,961
|
)
|
|
(7,237
|
)
|
| |
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds
from common stock subscribed
|
|
|
-
|
|
|
15,000
|
|
|
Proceeds
from (repayments of) lines of credit
|
|
|
(6,550
|
)
|
|
6,277
|
|
|
Repayments
of long-term debt
|
|
|
(4,515
|
)
|
|
(2,401
|
)
|
|
Increase
in due to others
|
|
|
11,863
|
|
|
-
|
|
|
Increase
in due to stockholders
|
|
|
24,927
|
|
|
46,858
|
|
|
Increase
in credit card payable
|
|
|
12,796
|
|
|
61,236
|
|
|
Net
cash provided by financing activities
|
|
|
38,521
|
|
|
126,970
|
|
| |
|
|
|
|
|
|
|
|
Net
increase in cash
|
|
|
4,467
|
|
|
182
|
|
|
Cash,
beginning of year
|
|
|
182
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Cash,
end of year
|
|
$
|
4,649
|
|
$
|
182
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$
|
1,637
|
|
$
|
1,766
|
|
|
Interest
|
|
|
43,824
|
|
|
41,944
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosure on noncash financing activities:
|
|
|
|
|
|
|
|
|
Stock
subscriptions issued in exchange for services rendered
|
|
$
|
-
|
|
$
|
7,500
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
HERBORIUM
GROUP, INC.
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER
30, 2006 AND 2005
1. ORGANIZATION
AND NATURE OF BUSINESS
Herborium,
Inc., (the “Company”) was incorporated in the State of Delaware on June 4, 2002,
and is the surviving entity following a merger of G.O. International, Inc.
(“G.O.”), a New Jersey corporation, with and into the Company effective June 6,
2002. 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 Federal 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.
On
September 18, 2006, Herborium was acquired by with 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 Herborium,
with Herborium as the surviving corporation (the “Merger). Under the provisions
of the Merger Agreement and the plan of reorganization, the stockholders
of
Herborium exchanged 100% of their common stock of the Company for an 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 of November 30, 2006. This number of shares was used in
calculations of net loss per share for all periods presented on a retroactive
basis.
Although
PMIC is deemed the legal acquirer, the Company is deemed the accounting acquirer
since generally accepted accounting principles require that the entity whose
stockholders retain a majority interest in a combination be treated as the
acquirer under purchase accounting rules. 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.
The
Company's 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 net
losses
of $339,757 and $105,243 for the years ended November 30, 2006 and 2005,
respectively. The Company had a working capital deficiency of $756,244 and
$408,974 as of November 30, 2006 and 2005, respectively. These conditions
raise
substantial doubt about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is dependent upon it
achieving profitability and generating sufficient cash flows to meet its
obligations as they come due. Management is pursuing additional capital and
debt
financing and acquisition of profitable businesses. However, there is no
assurance that these efforts will be successful. The consolidated financial
statements do not include any adjustments that might result from the outcome
of
this uncertainty.
2. SIGNIFICANT
ACCOUNTING POLICIES
a. Principles
of consolidation
The
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.
b. Cash
and cash equivalents
The
Company maintains its cash accounts in two commercial banks. The balance
is
insured by the Federal Deposit Insurance Corporation up to $100,000 at each
bank.
c. Inventory
Inventory,
consisting of finished botanical therapeutic products, is stated the lower
of
cost or market and is valued on the first-in, first-out method. When net
realizable value has fallen below cost, inventory is written down.
d. Shipping
and handling costs
Shipping
and handling costs associated with outbound freight amounted to approximated
$46,000 and $53,000 for the years ended November 30, 2006 and 2005,
respectively, and were charged to cost of sales.
e. Property
and equipment
Depreciation
and amortization are computed using the straight-line method over the estimated
useful lives of the assets ranging from five to seven years.
Maintenance
and repairs are charged to expense when incurred. When property and equipment
are retired or otherwise disposed of, the applicable cost and accumulated
depreciation are removed from the accounts and any gain or loss is credited
or
charged directly to income.
f. Advertising
It
is the
Company’s policy to expense advertising costs as they are incurred. Advertising
expenses for the years ended November 30, 2006 and 2005 were approximately
$199,000 and $192,000, respectively.
g. Estimates
The
preparation of consolidated 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.
h. Income
taxes
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.
i. Revenues
The
Company recognizes revenue when inventory is shipped to its
customers.
j. Loss
per share
Basic
earnings (loss) per share is computed by dividing net loss available to common
stockholders by the weighted average number of common shares outstanding
for the
period. Diluted earnings per share reflect the potential dilution of securities,
using the treasury stock method, that could share in the earnings of an entity.
During the fiscal years ended November 30, 2006 and 2005, the Company had
no
securities convertible into common stock that would, in any event, have been
excluded from the calculation of diluted loss per share, as their effect
would
have been anti-dilutive.
The
number of shares used in the calculation of net loss per share for the year
ended November 30, 2005, was presented on a retroactive basis as described
in
Note 1.
k. Fair
value of financial instruments
The
carrying amounts of the Company’s accounts payable, accrued expenses, credit
cards payable, lines of credit payable, amounts payable to others and
stockholders approximate fair value due to the relatively short period to
maturity for these instruments.
l. 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.
m. Recent
accounting pronouncements
On
June 7, 2005, the Financial
Accounting Standards Board (“FASB”)
issued Statement of Financial Accounting Standards No. 154, “Accounting
Changes and Error Corrections, (“SFAS 154”).a replacement of APB Opinion
No. 20, Accounting Changes,” and Statement No. 3, “Reporting
Accounting Changes in Interim Financial Statements.” SFAS 154 changes the
requirements for the accounting for and reporting of a change in accounting
principle. Previously, most voluntary changes in accounting principles required
recognition of a cumulative effect adjustment within net income of the period
of
the change. SFAS 154 requires retrospective application to prior periods’
financial statements, unless it is impracticable to determine either the
period-specific effects or the cumulative effect of the change. SFAS 154
is
effective for accounting changes made in fiscal years beginning after
December 15, 2005; however, the Statement does not change the transition
provisions of any existing accounting pronouncements. The adoption of SFAS
154
has not had a material effect on the Company’s financial position, results of
operations, or cash flows.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
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.
Prior
to
SFAS 157, there were different definitions of fair value and limited guidance
for applying those definitions in GAAP. Moreover, that guidance was dispersed
among the many accounting pronouncements that require fair value measurements.
SFAS 157 clarifies that the exchange price is the price in an orderly
transaction between market participants to sell the asset or transfer the
liability in the market in which the reporting entity would transact for
the
asset or liability, that is, the principal or most advantageous market for
the
asset or liability.
This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact, if any, that SFAS
157
will have on its financial position, results of operations and cash
flows.
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 January 1, 2007. The
adoption of this interpretation did not have an impact on the Company’s
financial statements. The Company is currently evaluating the impact this
interpretation may have on its future financial position, results of operations,
earnings per share, or cash flows.
In
September 2006, the Securities and Exchange Commission issued SAB No. 108,
“Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements.” SAB No. 108 was issued
to address diversity in practice in quantifying financial statement
misstatements. Current practice allows for the evaluation of materiality
on the
basis of either (1) the error quantified as the amount by which the current
year income statement was misstated (“rollover method”) or (2) the
cumulative error quantified as the cumulative amount by which the current
year
balance sheet was misstated (“iron curtain method”). The guidance provided in
SAB 108 requires both methods to be used in evaluating materiality (“dual
approach”). SAB No. 108 permits companies to initially apply its provisions
either by (1) restating prior financial statements as if the dual approach
had always been used or (2) recording the cumulative effect of initially
applying the “dual approach” as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting adjustment recorded to
the opening balance of retained earnings. There were no matters warranting
the
Company’s consideration under the provisions of SAB No. 108 and, therefore,
it did not have an impact on the Company’s financial position, results of
operations, net loss per share or cash flows.
3. PROPERTY,
PLANT AND EQUIPMENT
Property,
plant and equipment consist of the following:
| |
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
Machinery
and equipment
|
|
$
|
25,185
|
|
$
|
24,498
|
|
|
Less:
accumulated depreciation
|
|
|
(19,015
|
)
|
|
(16,039
|
)
|
| |
|
|
|
|
|
|
|
| |
|
$
|
6,170
|
|
$
|
8,459
|
|
Depreciation
expense amounted to $2,976 and $3,613 for the years ended November 30, 2006
and
2005, respectively.
4. OTHER
ASSETS
Other
assets consist of:
| |
|
2005
|
|
2004
|
|
| |
|
|
|
|
|
|
Organization
costs
|
|
$
|
506
|
|
$
|
506
|
|
|
Trademarks
|
|
|
34,491
|
|
|
25,217
|
|
|
Less:
accumulated amortization
|
|
|
(7,269
|
)
|
|
(5,170
|
)
|
| |
|
|
|
|
|
|
|
| |
|
$
|
27,728
|
|
$
|
20,553
|
|
Amortization
expense amounted to $2,099 and $1,872 for the years ended November 30, 2006
and
2005, respectively.
5. RELATED
PARTIES
Due
to
stockholders consist of unsecured 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.
Repayment is not expected until such time as the Company has adequate funds
available.
6. MAJOR
SUPPLIER
The
Company purchased approximately 90% of its inventory from AH USA, its major
supplier for the years ended November 30, 2006 and 2005. The Company is party
to
into an agreement with AH USA, owner of an acne product of which the Company,
as
licensee, is the exclusive worldwide distributor. Negotiations between the
Company and AH USA are ongoing to acquire the intellectual property rights
to
the product.
7. LINES
OF CREDIT
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%.
8. STOCKHOLDERS’
DEFICIENCY
a. Stock
issued in merger
In
June
2002, the Company issued 300 shares of common stock to the former stockholders
of G.O. pursuant to the terms of the merger transaction. As part of the merger
agreement, all the assets and liabilities of G.O. were assumed by the Company
as
the accounting acquirer.
b. Proceeds
from subscription agreements
As
of
November 30, 2006 and 2005, the Company has received $188,500 from investors
pursuant to subscription agreements entered into in fiscal 2001 through 2005 in
connection with a contemplated private placement of equity securities. Under
the
terms of the subscription agreements, the type of equity security to be issued
to the investors will be determined through negotiation with the principal
investors in the private placement, and the price to be paid by the investors
will be the same as the principal investors in the financing. The number
of
shares to be received by each investor will be a function of the amount of
capital raised from, and the price per share paid by, the principal
investors.
The
subscription agreements do not have an expiration date; no provisions for
interest payments; nor the manner of the form of the warrants in the event
the
private placement is to be in the form of debt.
Additionally,
given that a private placement did not occur prior to certain deadlines,
each
investor is entitled to be granted a warrant to purchase additional shares
in
the equity security issued in the private placement, generally in an amount
equal to the number of shares purchased under the subscription agreement
at an
exercise price equal to the closing price per share of the private
placement.
c. Stock
incentive awards
Commencing
in fiscal 2002, the Company awarded to certain employees, consultants and
advisors restricted common stock awards as incentive compensation. The Company
has no formal plan with respect thereto. Under the terms of the individual
stock
award agreements, the number of shares to be received by each individual
will be
determined based on the terms of the aforementioned contemplated private
placement. The awarded shares will vest immediately upon issuance within
90 days
following the closing of financing for a minimum of $1 million, and will
have
piggyback registration rights. For the years ended November 30, 2006 and
2005,
the expense recorded for such awards amounted to $0 and $7,500, respectively.
The aggregate amount of all of these awards was $63,000 as of November 30,
2006
and 2005.
9. INCOME
TAXES
The
Company has tax net operating loss carryforwards at November 30, 2006 of
approximately $1.1 million expiring through 2024. Due to the merger (note
1),
the amount of carryforwards available to offset future taxable income is
subject
to limitation. The recorded deferred tax asset, representing the expected
benefit from the future realization of net operating losses, net of a 100%
valuation allowance, was $-0-.
Income
tax expense consists of the following:
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
Federal
tax expense
|
|
$
|
-
|
|
$
|
-
|
|
|
State
tax expense
|
|
|
1,000
|
|
|
3,195
|
|
| |
|
|
1,000
|
|
|
3,195
|
|
| |
|
|
|
|
|
|
|
|
Deferred
tax expense
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
| |
|
$
|
1,000
|
|
$
|
3,195
|
|
10. COMMITMENTS
AND CONTINGENCIES
On
September 18, 2006 the Company entered into an employment agreement with
Dr.
Olszewski who will serve as President, Chief Executive Officer and Acting
Chief
Financial Officer until such time as the Company hires a controller or Chief
Financial Officer. Dr. Olszewski will have the position of Chairman of the
Board
of Directors. The employment agreement provides for an initial four-year
term of
employment, with an addition twelve-month extension at Dr. Olszewski’s option.
Under the agreement, Dr. Olszewski is not required to work full-time until
such
time as the Company receives debt or equity financing in an aggregate of
amount
of $1,250,000.00 or more. Until the Company obtains such amount of financing,
Dr. Olszewski will receive 75% of her base salary. Her annual base salary
is
$200,000 with a bonus equal to (i) for the first three years, 5% of EBITDA
(as
defined in the agreement) and (ii) thereafter 5% of Net Income before bonus
(as
defined in the agreement). She will be eligible for an additional bonus ranging
from $75,000 to $200,000 in the event that the Company’s Pre-Tax Income for a
fiscal year exceeds that of the prior fiscal year by 150% or more.
On
September 18, 2006 the Company entered into a consulting and employment
agreement with Dr. Gilligan who will serve as co-President and Chief Operating
Officer. The agreement provides for an initial term of employment expiring
on
September 20, 2011, with an addition twelve-month extension at Dr. Gilligan’s
option. Under the agreement, Dr. Gilligan’s employment will not commence until
six months after the Company receives debt or equity financing in the aggregate
amount of $2,500,000.00, and until such date, Dr. Gilligan will serve as
a
consultant to the Company at an hourly rate of $120.00 per hour and will
be
permitted to continue his full-time employment elsewhere. Upon his full-time
employment, his annual base salary will be $200,000 with a bonus equal to
(i)
for the first three years, 5% of EBITDA (as defined in the agreement) and
(ii)
thereafter 5% of Net Income before bonus (as defined in the agreement). He
will
be eligible for an additional bonus ranging from $75,000 to $200,000 in the
event that the Company’s Pre-Tax Income for a fiscal year exceeds that of the
prior fiscal year by 150% or more.
Under
the
employment agreements, Dr. Olszewski and Dr. Gilligan each will be an eligible
participant under one or more stock option plans adopted by the Company.
Dr.
Olszewski and Dr. Gilligan will be subject to non-competition provisions
during
the term of the agreements or until September 30, 2012 in the event that
either
extends their agreement for the additional twelve-month period. Dr. Olszewski’s
and Dr. Gilligan’s employment may be terminated in the event of extended
disability or incapacity or a “For Cause Event” as defined in the agreement. Dr.
Olszewski and Dr. Gilligan may terminate their employment voluntarily with
180
days prior written notice, upon a material breach of the agreement by the
Company with 10 days prior written notice and upon a “Change of Control” as
defined in the agreement upon 90 days prior written notice. In the event
of his
termination, Dr. Olszewski and Dr. Gilligan or their beneficiaries, as the
case
may be, will have the right to receive all accrued but unpaid base salary.
In
the event of death, termination based on a material breach by us or our
termination of either party for any reason other than a For Cause Event,
that
party will be entitled to receive $600,000. In the event that employment
is
terminated for or after a Change of Control, that party will be entitled
to
receive an amount equal to the product of his or her base salary multiplied
by
2.99. After (i) the expiration of the term (including an extension of one
year
by either party) or (ii) voluntary termination of the employment agreement,
each
individual may, at their or the Company’s option in the case of clause (i) or at
our option in the case of clause (ii), act as a consultant to the Company
for
one year and receive compensation equal to 50% of his or her base
salary.
11. SEGMENT
INFORMATION
The
Company applies Statement of Financial Accounting Standards No. 131 “Disclosures
about Segments of an Enterprise and Related Information”. For the fiscal years
ended November 30, 2006 and 2005, the Company primarily operated in one segment
- botanical therapeutics, with sales of AcnEase representing substantially
all
of the Company’s revenue.
12. SUBSEQUENT
EVENTS
On
January 19, 2007, 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 Registration Statement on Form S-8 with the
Securities and Exchange Commission to in connection with the Plan. 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 will vest immediately, with 5.5
million shares being issued immediately. The remaining shares will vest over
the
term of the Consulting Agreement, and, in the event certain transactions
are
consummated up to an additional 3 million shares could be issued per terms
of
the Consulting Agreement.