Unassociated Document
 

U.S. Securities And Exchange Commission
Washington, D.C. 20549

Form 10-QSB

(check one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended August 31, 2008

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934

Commission File Number 000-25277

Herborium Group, Inc.
(Exact Name Of Small Business Issuer As Specified In Its Charter)

Nevada
(State Or Other Jurisdiction Of
Incorporation Or Organization)

88-0353141
(I.R.S. Employer Identification No.)

Park 80W Plaza II, Suite 200, Saddle Brook, NJ 07663
(Address Of Principal Executive Offices)

(201) 291-2602
(Issuer's Telephone Number)

Check whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ¨ No x

As of October 14, 2008, there were 125,067,080 shares of the registrant's common stock, par value $.001 per share, issued and outstanding.

ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS

Check whether the issuer has filed all documents and reports required to be filed
by Section 12, 13 or 15(d) of the Securities Exchange Act after the distribution
of securities under a plan confirmed by a court.

Yes x No ¨

Transitional Small Business Disclosure Format (Check One):
Yes ¨ No x
 
 

Herborium Group, Inc.
Index To Form 10-QSB

Part I-Financial Information
  
     
Item 1.
Financial Statements
 1
 
 
  
 
Condensed Consolidated Balance Sheets as of August 31, 2008 (Unaudited) and November 30, 2007
1
 
 
  
 
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended August 31, 2008 and 2007 (Unaudited)
2
 
 
  
 
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended August 31, 2008 and 2007 (Unaudited)
3
 
 
  
 
Condensed Consolidated Statement of Stockholders’ Deficiency for the Nine Months Ended August 31, 2008 (Unaudited)
4
 
 
  
 
Notes to Condensed Consolidated Financial Statements as of August 31, 2008 (Unaudited)
5
 
 
  
Item 2.
Management’s Discussion and Analysis or Plan of Operation
12
 
 
  
Item 3 A(T).
Controls and Procedures
17
 
 
  
Part II-Other Information
  
 
 
  
Item 1.
Legal Proceedings
18
 
 
  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
 
 
  
Item 3.
Defaults Upon Senior Securities
19
 
 
  
Item 4.
Submission of Matters to a Vote of Security Holders
19
 
 
  
Item 5.
Other Information
19
 
 
  
Item 6.
Exhibits
19

Signatures
In this report, the terms the “Company”, “we”, “our” and “us” refer to Herborium Group, Inc., a Nevada corporation, and its wholly-owned subsidiaries.

i

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in the "Management’s Discussion and Analysis or Plan of Operation" and elsewhere in this quarterly report constitute "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act")) relating to us and our business, which represent our current expectations or beliefs including, but not limited to, statements concerning our operations, performance, financial condition and growth. All statements, other than statements of historical facts, included in this quarterly report that address activities, events or developments that we expect or anticipate will or may occur in the future, including such matters as our projections, future capital expenditures, business strategy, competitive strengths, goals, expansion, market and industry developments and the growth of our businesses and operations are forward-looking statements. Without limiting the generality of the foregoing, words such as "may,” “believes,” ”expects,” "anticipates,” "could,” "estimates,” “grow,” “plan,” "continue," “will,” “seek,” “scheduled,” “goal” or “future” or the negative or other comparable terminology are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, our ability to continue our growth strategy and competition, certain of which are beyond our control. Any or all of our forward-looking statements may turn out to be wrong. They may be affected by inaccurate assumptions that we might make or by known or unknown risks or uncertainties. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.
 
Because of the risks and uncertainties associated with forward-looking statements, you should not place undo reliance on them. Additional factors that could affect future results are discussed in the section titled "Description of Business" (Item 1) -"Risks Related to Our Business" of our Annual Report on Form 10-KSB for the year ended November 30, 2007 and in the section titled “Risk Factors” of this Quarterly Report on Form 10-QSB. We caution investors that the forward-looking statements contained in this Quarterly Report must be interpreted and understood in light of conditions and circumstances that exist as of the date of this Quarterly Report. We expressly disclaim any obligation or undertaking to update or revise forward-looking statements to reflect any changes in management's expectations resulting from future events or changes in the conditions or circumstances upon which such expectations are based.

ii

Herborium Group, Inc. And Subsidiaries
Condensed Consolidated Balance Sheets
 
   
August 31,
2008
  
November 30,
2007
  
   
(Unaudited)
  
(Note 1)
  
ASSETS
              
Current assets:
              
Cash
  
$
3,850
  
$
2,077
  
Accounts receivable
    
2,876
    
4,772
  
Inventory
    
38,308
    
31,181
  
Prepaid expenses and other current assets
    
7,292
    
7,292
  
Total current assets
    
52,326
    
45,322
  
               
Property and equipment, net of accumulated depreciation of $23,284-2008; $20,954–2007
    
10,471
    
4,231
  
Deferred financing costs, net of accumulated amortization of $62,712-2008
    
76,542
    
—
  
Other assets, net of accumulated amortization of $11,227-2008; $9,214–2007
    
56,284
    
28,997
  
               
TOTAL ASSETS
  
$
195,623
  
$
78,550
  
               
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
              
               
Current liabilities:
              
Accounts payable and accrued expenses
  
$
800,822
  
$
640,403
  
Convertible notes payable
    
437,234
    
—
  
Credit cards payable
    
65,866
    
129,077
  
Lines of credit payable
    
158,353
    
166,372
  
Due to others
    
24,276
    
50,895
  
Due to related parties
    
20,000
    
35,000
  
Due to stockholders
    
226,757
    
201,056
  
Total current liabilities
    
1,733,308
    
1,222,803
  
               
Stockholders’ deficiency:
              
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued and outstanding
    
—
    
—
  
Common stock, $0.001 par value; 500,000,000 shares authorized, 125,067,080 shares issued and outstanding (115,567,080 – November 30, 2007)
    
36,500
    
27,000
  
Common stock subscribed; no shares issued and outstanding
    
188,500
    
188,500
  
Additional paid-in capital
    
801,497
    
500,500
  
Deferred consulting fees
    
(101,250
)
  
(106,250
)
Accumulated deficit
    
(2,462,932
)
  
(1,754,003
)
Total stockholders’ deficiency
    
(1,537,685
)
  
(1,144,253
)
               
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
  
$
195,623
  
$
78,550
  

1

Herborium Group, Inc. And Subsidiaries
Condensed Consolidated Statements Of Operations
(Unaudited)
 
 
  
For The Three Months Ended
  
For The Nine Months Ended
  
 
  
August 31,
  
August 31,
  
 
  
2008
  
2007
  
2008
  
2007
  
 
                  
NET SALES
  
$
101,142
  
$
158,363
  
$
317,146
  
$
571,041
  
COST OF SALES
    
48,320
   
90,660
   
153,339
   
268,385
 
GROSS PROFIT
   
52,822
   
67,703
    
163,807
   
302,656
 
 
                          
OPERATING EXPENSES
                          
Marketing and selling
    
58,305
   
63,287
   
121,908
   
212,000
 
General and administrative
   
211,523
   
155,667
   
625,485
   
457,453
 
TOTAL OPERATING EXPENSES
    
269,828
   
218,954
   
747,393
   
669,453
 
                           
LOSS FROM OPERATIONS
   
(217,006
)
  
(151,251
)
  
(583,586
)
  
(366,797
)
 
                          
Interest expense
   
(58,584
)
  
(11,753
)
  
(125,343
)
  
(33,259
)
                           
NET LOSS
  
$
(275,590
)
$
(163,004
)
$
(708,929
)
$
(400,056
)
 
                          
Net loss per share - basic and diluted
  
$
0.00
  
$
0.00
  
$
(0.01
) 
$
0.00
  
Weighted average number of shares outstanding during the period - basic and diluted
    
124,817,080
   
114,067,080
    
121,066,989
   
112,898,582
 

2

Herborium Group, Inc. And Subsidiaries
Condensed Consolidated Statements Of Cash Flows
(Unaudited)

   
Nine months ended
  
   
August 31,
  
August 31,
  
   
2008
  
2007
  
CASH FLOWS USED IN OPERATING ACTIVITIES:
              
Net loss
  
$
(708,929
)
$
(400,056
)
Adjustments to reconcile net loss to net cash used in operating activities:
              
Depreciation and amortization
    
76,744
    
3,236
  
Stock-based professional and consulting fees
    
195,000
    
150,000
  
Changes in assets (increase) decrease:
              
Accounts receivable
    
1,896
    
603
  
Inventory
    
(7,127
)
  
19,991
  
Prepaid expenses and other current assets
    
—
    
442
  
Changes in liabilities increase:
              
Accounts payable and accrued expenses
    
160,419
    
178,100
  
Net cash used in operating activities
    
(281,997
)
  
(47,684
)
CASH FLOWS USED IN INVESTING ACTIVITIES:
              
Purchase of equipment
    
(8,570
)
  
—
  
Purchase of other assets
    
(10,050
)
  
(3,270
)
Net cash used in investing activities
    
(18,620
)
  
(3,270
)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
              
Issuance of convertible notes payable
    
450,000
    
—
  
Deferred financing costs
    
(60,462
)
  
—
  
Repayment of lines of credit, net
    
(8,019
)
  
(6,010
)
Decrease in credit card payable, net
    
(63,211
)
  
(4,714
)
Increase (decrease) in due to others
   
(26,619
)
  
12,841
  
Increase (decrease) in due to related parties
    
(15,000
)
  
13,000
  
Increase in due to stockholders
    
25,701
    
33,784
  
Net cash provided by financing activities
    
302,390
    
48,901
  
NET INCREASE (DECREASE) IN CASH
    
1,773
    
(2,053
)
CASH, BEGINNING OF PERIOD
    
2,077
    
4,649
 
               
CASH, END OF PERIOD
  
$
3,850
  
$
2,596
  

3

Herborium Group, Inc. And Subsidiaries
Condensed Consolidated Statement Of Stockholders’ Deficiency
For The Nine Months Ended August 31, 2008
(Unaudited)

   
Common Stock
  
Common Stock Subscribed
  
Additional
  
Deferred
Consulting
  
Accumulated
      
   
Shares
  
Amount
  
Shares
  
Amount
  
Paid-in Capital
  
Fees
  
Deficit
  
Total
  
                                                              
BALANCE, December 1, 2007
    
115,567,080
  
$
27,000
    
—
  
$
188,500
  
$
500,500
  
$
(106,250
)
$
(1,754,003
)
$
(1,144,253
)
                                                   
Common stock issued in connection with an asset acquisition
    
3,500,000
    
3,500
    
—
    
—
    
15,750
    
—
    
—
    
19,250
  
                                                   
Common stock issued to consultants for services
    
4,250,000
    
4,250
    
—
    
—
    
185,750
    
(190,000
)
  
—
    
—
  
                                                   
Common stock issued to note purchasers in connection with the issuance of Convertible Notes
    
450,000
    
450
    
—
    
—
    
22,005
    
—
    
—
    
22,455
  
                                                   
Common stock issued to advisor in connection with the issuance of Convertible Notes
    
1,300,000
    
1,300
    
—
    
—
    
19,892
    
—
    
—
    
21,192
  
                                                   
Warrants issued to advisor in connection with the issuance of Convertible Notes
    
—
    
—
    
—
    
—
    
57,600
    
—
    
—
    
57,600
  
                                                   
Amortization of deferred consulting fees
    
—
    
—
    
—
    
—
    
—
    
195,000
    
—
    
195,000
  
                                                   
Net loss for the period
    
—
    
—
    
—
    
—
    
—
    
—
    
(708,929
)
  
(708,929
)
                                                   
BALANCE, August 31, 2008
    
125,067,080
  
$
36,500
    
-
  
$
188,500
  
$
801,497
  
$
(101,250
)
$
(2,462,932
)
$
(1,537,685
)

4

Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)

NOTE 1. INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments which management believes necessary (which include only normal recurring adjustments) to present fairly the financial position, results of operations, and cash flows of the Company. These statements, however, do not include all information and footnotes necessary for a complete presentation of the Company’s consolidated financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. The interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto, included in the Company’s audited financial statements for the fiscal year ended November 30, 2007 included in its Annual Report on Form 10-KSB, and are not necessarily indicative of the results to be expected for the full year ending November 30, 2008. The consolidated balance sheet at November 30, 2007 has been derived from the audited financial statements for fiscal 2007.

NOTE 2. ORGANIZATION AND NATURE OF BUSINESS

The Company provides unique, natural and complementary healthcare related products to consumers and healthcare professionals seeking alternative answers to the management of healthcare issues not currently met by standard Western medicine. Its products are botanical supplements comprised of unique herbal formulations, referred to as botanical therapeutics, that have a record of clinical efficacy and safety established in China; however, these products have not been evaluated according to standards of clinical efficacy and safety applicable to pharmaceutical products sold in the United States and other countries, and because these products are herbal-based, they are not recognized as pharmaceuticals by the Food and Drug Administration (the "FDA"). The Company’s business model is based on (i) owning and/or marketing unique products with established clinical history in their country of origin, and (ii) a proactive approach to meeting the regulatory changes and challenges of the new healthcare marketplace. Historically, substantially all of the Company’s revenue has been derived from the sale of AcnEase through its corporate website.

Herborium, Inc., was incorporated in the State of Delaware on June 4, 2002, and was the surviving entity following a merger of G.O. International, Inc., a New Jersey corporation, with and into the Company effective June 6, 2002. On September 18, 2006, the Company was acquired by Pacific Magtron International Corporation, Inc. (“PMIC”), a publicly traded Nevada Corporation, pursuant to a Merger Agreement and PMIC’s plan of reorganization in bankruptcy. The transaction was accomplished by the merger of a PMIC subsidiary into the Company, with the Company as the surviving corporation (the “Merger”). Under the provisions of the Merger Agreement and the plan of reorganization, the stockholders of the Company exchanged 100% of their common stock of the Company for 85% of the post-Merger PMIC common stock. The previously outstanding common shares of PMIC were cancelled under the plan of reorganization, and one new share of the Company was issued in exchange for each cancelled shares held by all PMIC shareholders, other than its majority shareholder, Advanced Communications Technologies, Inc (“ACT”). A total of 11,454,300 shares were issued to the shareholders of ACT in exchange for the cancellation of the PMIC shares and ACT’s contribution of $50,000 to the bankruptcy. Shares of our common stock have been distributed to PMIC shareholders. Following this distribution, as well as certain other distributions that are included in the plan of reorganization, an aggregate of 108,567,080 shares of common stock of Herborium Group was issued and outstanding as a result of the merger.

The Company’s merger with PMIC is treated as a recapitalization with no purchase price allocation. In connection with the merger, PMIC changed its name to Herborium Group, Inc. and adopted the fiscal year of Herborium Group, Inc. which is November 30.

5
 
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)
 
NOTE 3. BASIS OF ACCOUNTING AND SIGNIFICANT ACCOUNTING POLICIES

a.
Basis of Accounting

The Company's condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company incurred a net loss of $709,000 for the nine months ended August 31, 2008 and net losses of $643,000 and $340,000 for the years ended November 30, 2007 and 2006, respectively. The Company had an excess of current liabilities over current assets of $1,681,000 and $1,177,000 as of August 31, 2008 and November 30, 2007, respectively. Management is pursuing additional capital and debt financing and the acquisition of the AcnEase formula (See Notes 4 and 5). However, there is no assurance that these efforts will be successful.

Our ability to generate sufficient profits and obtain additional funding and pay off our obligations will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

b.
Principles of consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Herborium, Inc. and Herborium.com, Inc. All significant intercompany accounts and transactions are eliminated in consolidation.

c.
Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 
d.
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.

 
e.
Revenue
 
The Company recognizes revenue when inventory is shipped to its customers.

 
f.
Loss per share
 
Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities which could share in the earnings of an entity as determined by using the treasury stock method. During the Nine month period ended August 31, 2008, the Company had securities convertible into common stock which have been excluded from the calculation of diluted loss per share as their effect, because of the net loss, would have been anti-dilutive. At August 31, 2008 and 2007, potentially dilutive securities totaled 61,950,000 and -0-, respectively.

At August 31, 2008, the Company had an obligation to issue common stock pursuant to subscription agreements, as well as an obligation to grant warrants to purchase shares of common stock. Such shares, had the number thereof been determinable, would have been excluded from the calculation of diluted loss per share as their effect would have been anti-dilutive.
 
6
 
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)
 
 
g.
Allowance for doubtful accounts

The Company makes judgments as to its ability to collect outstanding trade receivables and provides allowances, if deemed necessary, for the portion of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices.

h.
Deferred Financing Costs
 
Costs associated with the Company’s debt obligations are capitalized and amortized over the life of the related debt obligation using the interest method. Interest expense includes $63,000 and $0 of amortization of deferred financing costs for the nine months ended August 31, 2008 and 2007, respectively.

i.
Reclassification

Certain amounts in the statement of operations for the three and nine months ended August 31, 2007 have been reclassified to conform to the August 31, 2008 presentation.

j.
Recent accounting pronouncements
 
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (“GAAP”), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. Management does not believe that the adoption of this pronouncement will have a material impact on the Company’s financial position or results of operations.
 
In June 2006, the FASB issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of SFAS 109. FIN No. 48 provides a comprehensive model for the recognition, measurement and disclosure in the financial statements of uncertain tax positions taken or expected to be taken on a tax return. The Company adopted FIN No. 48 effective beginning on December 1, 2007. The adoption of this interpretation did not have an impact on the Company’s financial statements.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115.” This Standard allows entities to voluntarily choose, at specified election dates, to measure many financial assets and financial liabilities (as well as certain non-financial instruments that are similar to financial instruments) at fair value. The election is made on an instrument-by-instrument basis and is irrevocable. If the fair value option is elected for an instrument, the Statement specifies that all subsequent changes in fair value for that instrument shall be reported in earnings. SFAS No. 159 is effective beginning on December 1, 2008. We are currently evaluating the impact this new Standard could have on our financial position and results of operations.
 
The FASB has issued Statement No. 141 (R), “Business Combinations”. This statement retains the fundamental requirements in Statement No. 141 that the acquisition method of accounting (which Statement No. 141 called the “purchase method”) be used, and applies to all business entities, including mutual entities that previously used the pooling of interest method of accounting for some business combinations. The statement is effective for transactions within the annual reporting period beginning on or after December 15, 2008. We are currently evaluating the impact this new Standard could have on our financial position and results of operations.
 
The FASB has issued Statement No. 160, “Non-controlling Interests in Consolidated Financial Statements”. This statement changes the way the consolidated income statement is presented when non-controlling interests are present. It requires consolidated net income to be reported at amounts that include the amounts attributable to both the parent and the non-controlling interest, and is effective for periods beginning on or after December 15, 2008. We are currently evaluating the impact this new Standard could have on our financial position and results of operations.

7
 
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)
 
In April 2008, the FASB issued Final FASB Staff Position (FSP) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets”. The guidance is intended to improve the consistency between the useful life of a recognized intangible asset under Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and Other Intangible Assets”, and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141(R), Business Combinations, and other guidance under accounting principles generally accepted in the United States of America. FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those years. Early adoption is prohibited. Paragraph 11(d) of SFAS No. 142 requires entities to base assumptions for determining the useful life of a recognized intangible asset on the legal, regulatory, or contractual provisions that permit extending the asset’s useful life without appreciably adding to its cost. FSP No. FAS 142-3, requires that an entity must consider its own experience with similar arrangements in developing its assumptions. If an entity has had no similar arrangements, then it should consider the assumptions other market participants use. We are currently evaluating the impact this new Standard could have on our financial position and results of operations.
 
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (”SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s financial position.
 
On June 16, 2008, the FASB issued final Staff Position ("FSP") No. EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities", to address the question of whether instruments granted in share-based payment transactions are participating securities prior to vesting. The FSP determined that unvested share-based payment awards that contain rights to dividend payments should be included in earnings per share calculations. The guidance will be effective for fiscal years beginning after December 15, 2008. Management is currently evaluating the impact this new standard could have on the Company’s financial position and results of operations.

NOTE 4. MAJOR SUPPLIER

For the three and nine month periods ended August 31, 2008, the Company purchased all of its inventory from AH USA, a China-based business entity owned by the individual who is the inventor and sole owner of AcnEase, an acne product. The Company is party to a licensing agreement with AH USA under which the Company, as licensee, is the exclusive worldwide distributor of AcnEase.

On January 10, 2008, the Company and the individual owning the intellectual property rights related to AcnEase (the “Seller”) entered into a Purchase Agreement (“Agreement”) for the acquisition of all rights related to AcnEase, including the formulation thereof, all sourcing information, extraction procedures, manufacturing and packaging information as well as all related clinical and testing information and trade secrets. Consideration will consist of aggregate cash payments of $500,000 and issuances of 5,428,354 shares of common stock. In accordance with the Agreement, 3,500,000 shares of the Company’s common stock having a value of $19,250 were issued to Seller following the Agreement’s signing. Upon obtaining sufficient financing to complete the purchase of the rights related to AcnEase, and provide sufficient working capital to expand the business following such purchase, the Company will make an initial payment of $450,000 to the Seller in return for all the aforementioned information regarding the acne product. There is no date by which time the Company is required to obtain financing; however, the Agreement expires January 10, 2009. The remaining portions of the purchase price, $50,000 cash and 1,928,354 shares of common stock, will be held in escrow and released when certain conditions are met, principally the successful manufacturing of the acne product on a commercial scale. The aforementioned shares of common stock to be held in escrow have not been issued as of October 20, 2008, nor has the cash been escrowed.

The Agreement also requires the Company to purchase on an as-needed basis at a negotiated price any inventory of the acne product in the possession of the Seller at the time that the Company has the ability to manufacture the product. The value of the common stock issued in connection with this potential acquisition, or $19,250, is included in other assets as of August 31, 2008.

8
 
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)
NOTE 5. CONVERTIBLE NOTES PAYABLE

Pursuant to a private offering (the “Offering”), through August 31, 2008, the Company sold Units of its securities consisting of an aggregate $450,000 in principal amount of its Convertible Notes (the “Notes”), 450,000 shares of its common stock and warrants (the “Warrants”) exercisable for 900,000 shares of common stock. In accordance with ETIF 00-27: Application of Issue No. 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments”, the Company allocated certain amounts to the fair value of the shares of common stock and warrants to purchase common stock included in each Unit, as well as the 20% conversion discount applicable in certain circumstances. Based on this allocation, the indicated fair value of each Note (face value - $50,000) amounts to $47,505. The resulting discount of $2,495 is attributable to a warrant value of $1,662 and a common stock value of $833.
 
The Warrants are exercisable for a period of five years from issuance. 50% of the Warrants are exercisable at $.025 per share and 50% are exercisable at $.05 per share, subject to certain adjustments, including, but not limited to, adjustments for stock splits, stock dividends, mergers and consolidations.
 
The Notes are convertible, beginning six months after issuance or, if earlier, the closing of a qualified financing or an acquisition of the Company, into shares of common stock in whole or in part from time to time at the option of the investors at a Conversion Price equal to $.025 or 80% of the issuance price in a qualified financing or in connection with an acquisition of the Company. The Notes define a qualified financing as the date upon which the Company completes the sale of common stock (or like security) for aggregate gross proceeds of at least $1.5 million. The Conversion Price is subject to certain customary adjustments, including, but not limited to, adjustments for stock splits, stock dividends, mergers and consolidation.
 
The Notes bear interest at the rate of 10% per annum, payable semi-annually in shares of the Company’s common stock valued at $.025 per share (currently trading at $.01 per share).
 
Unless converted to Common Stock, the principal balance of each Note is payable upon demand made any time after the first anniversary of the issuance of the Note, or upon a qualified financing or acquisition of the Company. In addition, the Company is required to escrow in a separate bank account 5% of its gross revenues for redemption of the principal amount of the Notes. The escrowed revenues are to be distributed to the Note holders semi-annually, pro rata in accordance with the outstanding principal balance of each Note. As of October 20, 2008, none of the gross revenues have been escrowed as required. 
 
Pursuant to a Registration Rights Agreement, the Company has agreed to include the shares of common stock issuable upon conversion of the Notes and exercise of the Warrants, as well as the shares of common stock issued to the investors, in any registration statement filed by the Company under the Securities Act of 1933 with respect to the Company’s equity securities to be sold by the Company or any other stockholder.
 
The Company’s Board of Directors authorized the sale of up to an additional $125,000 principal amount of the Notes as part of the Offering, in Units together with 125,000 shares of common stock and Warrants exercisable for 250,000 shares of common stock. The Company’s Board of Directors has authorized two extensions for the closing date of the Offering, which is currently October 31, 2008. In the quarter ended August 31, 2008, the Company sold additional Units of its securities consisting of an aggregate $75,000 in principal amount of its Convertible Notes, 75,000 shares of its common stock and warrants exercisable for 150,000 shares of the common stock.

Southridge Investment Group LLC (“Southridge”) is serving as the Company’s placement agent in connection with the offer and sale of the Notes, common stock and Warrants. In its capacity as placement agent, Southridge is paid a cash fee equal to 10% of the gross proceeds received by the Company, as well as an expense allowance equal to 2% of the gross proceeds. In addition, Southridge was issued Warrants exercisable for a number of shares of common stock equal to 10% of the aggregate shares issued by the Company in the private placement, assuming conversion and exercise of all of the Notes and Warrants. This amounts to Warrants exercisable for approximately 5.8 million shares of common stock valued at $58,000 based on the Black-Scholes Option Pricing Model and has been classified as a deferred financing cost and is being amortized over the life of the related debt. The placement agent warrants will be exercisable for 5 years at a price of $.03 per share.

In its capacity as the Company’s financial advisor, Southridge is entitled to a retainer fee of 750,000 shares of the Company’s common stock, and one share for each $1 received by the Company in the private placement As of August 31, 2008, 1,300,000 shares of common stock have been issued to Southridge at a value of $21,192 and has been classified as a deferred financing cost and is being amortized over the term of the related debt.
 
9
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)

NOTE 6. LINES OF CREDIT AND CREDIT CARDS PAYABLE

The Company has entered into four revolving line of credit agreements with commercial banks. The credit agreements provide for aggregate borrowings of up to $187,500 and are payable on demand with no maturity dates set forth in the loan agreements. Borrowings under these facilities bear interest at rates ranging from prime plus 1.25% to 14%.
 
The Company also has entered into a number of standard credit card agreements that it uses for business expenses. Borrowings under these agreements, which have no set maturity dates, bear interest at rates ranging from approximately 11% to 40%.

NOTE 7. DUE TO STOCKHOLDERS

Due to stockholders consists of unsecured non-interest bearing demand loans to the Company with no specified terms, including the payment of interest, and, accordingly, this liability is included in current liabilities and no interest expense has been accrued. Substantial repayments of amounts owed are not expected until such time as the Company has adequate funds available.

NOTE 8. KEY EMPLOYEES

The Company relies extensively on the services of Drs. Agnes P. Olszewski and James P. Gilligan, its co-founders, who play key roles in all aspects of operations and management and the loss of their services would materially and adversely affect the Company’s prospects. Until the Company raises substantial financing, neither of these key individuals will be able to receive cash compensation.

NOTE 9. CONSULTING AGREEMENTS

On January 19, 2007, the Board of Directors of the Company approved the Herborium Group, Inc. 2007 Stock Plan (“Plan”) which provides for a maximum aggregate of 20 million shares of common stock to be issued upon grants of restricted stock or upon exercise of options granted under the Plan, as compensation and incentive to eligible employees, directors, consultants and advisors. On January 26, 2007, the Company filed a Registration Statement on Form S-8 with the Securities and Exchange Commission in connection with the consultant’s shares.
 
On January 1, 2007, the Company entered into a two-year Consulting Agreement with an individual and in consideration of the services to be provided pursuant to the Financial Consulting Agreement, the Company agreed to initially issue up to 9 million shares of the Company’s common stock pursuant and subject to the Plan, and when so issued, such shares shall be validly issued, fully paid and non-assessable, of which 7.5 million shares vested immediately, with 5.5 million of such shares being issued immediately. The remaining shares will vest over the term of the Consulting Agreement, and, in the event the Company acquires the AcnEase formula, up to an additional 3 million shares could be issued per terms of the Consulting Agreement. An additional 2,750,000 shares were issued in April 2008. The shares issued and yet to be issued have been valued at $.05 per share based on the market value on the date granted for an aggregate cost of $450,000, which cost is being expensed over the period of the agreement. Accordingly, consulting expense in the amount of approximately $168,000 and $150,000 was recorded in general and administrative expense during each of the nine month periods ended August 31, 2008 and 2007, respectively.
 
On February 14, 2007, the Company entered into a two-year consulting agreement with a consulting firm and, in consideration of the services to be provided pursuant to that agreement, the Company agreed to issue up to 3 million shares of the Company’s common stock pursuant and subject to the Plan, and when so issued, such shares shall be validly issued, fully paid and non-assessable, of which 500,000 shares vested and were issuable immediately. Of the remaining shares, 500,000 will vest upon the occurrence of one or more transactions, as defined, and the remaining 2,000,000 will vest ratably on the sixth, ninth, twelfth and eighteenth month anniversaries of this agreement. 1,500,000 of such shares were issued as of November 30, 2007, with the remaining 1,500,000 shares issued during the period ended May 31, 2008, valued at $.035 per share based on the market value on the date granted for an aggregate cost of $105,000, which cost is being expensed over the period of the agreement. Accordingly, consulting expense in the amount of approximately $27,000 and $0 was recorded in general and administrative expense during the nine months ended August 31, 2008 and 2007, respectively.
 
10
 
Herborium Group, Inc. And Subsidiaries
Notes To Condensed Consolidated Financial Statements
As of August 31, 2008
(Unaudited)

In September 2008, the Company’s Board of Directors has authorized two additional consulting agreements and, in consideration of the services to be provided pursuant to such agreements, the Company agreed to issue an aggregate of approximately 1.7 million shares of the Company’s common stock pursuant and subject to the Plan, and when so issued, such shares shall be validly issued, fully paid and non-assessable, and shall vest immediately.

NOTE 10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The following are the payments made during the nine months ended August 31, 2008 and 2007 for income taxes and interest:
 
   
2008
  
2007
  
           
Income taxes
  
$
—
  
$
—
  
               
Interest
  
$
64,518
  
$
31,817
  

Noncash investing and financing activities:

 
During the nine months ended August 31, 2008 the Company issued:
 
(i) 3,500,000 shares of common stock valued at $19,250 for intellectual property rights.
 
(ii) 450,000 shares of common stock and 750,000 Warrants valued at $22,455 to investors in connection with the issuance of Convertible Notes
 
(iii) 1,300,000 shares of common stock valued at $21,192 to an advisor in connection with the issuance of Convertible Notes
 
(iv) 5,800,000 Warrants valued at $.01 per share, or $58,000, to an advisor in connection with the issuance of Convertible Notes
 
(v) 4,250,000 shares of common stock valued at $190,000 to consultants for professional services
 
 
During the nine months ended August 31, 2007 the Company issued 5,500,000 shares of common stock valued at $275,000 to consultants for professional services
 
 

11

Item 2. Management's Discussion And Analysis Or Plan Of Operation

The following is management's discussion and analysis of certain significant factors that will or have affected our financial condition and results of operations. The discussion should be read in conjunction with our financial statements and the related notes and the other financial information appearing elsewhere in this report and included in the Company’s Annual Report on Form 10-KSB for the year ended November 30, 2007. In addition to historical information, the following discussion and other parts of this quarterly report contain words such as “may,” "estimates," "expects," "anticipates," "believes," “plan,” "grow," "will," “could,” "seek," “continue,” “future,” “goal,” “scheduled” and other similar expressions that are intended to identify forward-looking information that involves risks and uncertainties. In addition, any statements that refer to expectations or other characterizations of future events or circumstances are forward-looking statements. Actual results and outcomes could differ materially as a result of important factors including, among other things, general economic conditions, the Company's ability to renew or replace key supply and credit agreements, fluctuations in operating results, committed backlog, public market and trading issues, risks associated with dependence on key personnel, and competitive market conditions in the Company's existing lines of business, as well as other risks and uncertainties. See “Risk Related To Our Business” and “Risks Related To Our Stock” below.
 
GENERAL
 
We provide unique, natural and complementary healthcare related products to consumers and healthcare professionals seeking alternative answers to the management of healthcare issues not currently met by standard Western medicine. Our products are botanical supplements comprised of unique herbal formulations. We select products that have a record of clinical efficacy and safety established in China; however, these products have not been evaluated according to standards of clinical efficacy and safety applicable to pharmaceutical products sold in the United States and other countries, and because these products are herbal-based, they are not recognized as pharmaceuticals by the Food and Drug Administration (the "FDA").

Our business model is based on:

Ÿ
owning and/or marketing unique products with established clinical history in their country of origin, and

Ÿ
a proactive approach to meeting the regulatory changes and challenges of the new healthcare marketplace.
 
FINANCIAL CONDITION

We had net losses of $709,000 and $643,000 for the nine months ended August 31, 2008 and the year ended November 30, 2007, respectively. As of August 31, 2008, we had cash and current assets of $4,000 and $52,000, respectively, and current liabilities of $1,733,000, with obligations aggregating $801,000 for trade creditors and accrued expenses, $66,000 for credit card obligations, $158,000 payable for line of credit obligations, $24,000 for amounts due to others, $20,000 for amounts due to related parties, $227,000 for amounts due to stockholders and $437,000 of Convertible Notes. We have been operating at a loss since inception and have been funding these losses in a number of ways, including lines of credit, credit card debt, advances from stockholders and others and entering into subscription agreements with “friends and family” for investment funds. As described in Note 5 to the accompanying consolidated financial statements, we obtained $450,000 of debt financing ($390,000 net of financing costs) during the nine month period ended August 31, 2008. We continue to actively seek additional substantial equity or debt financing; however, we have received no commitments for such financing. Our working capital at August 31, 2008, despite the aforementioned financing, is not sufficient to meet our working capital needs for the next twelve-month period and we will need to obtain additional financing from one or more sources.

Our independent registered public accounting firm added an explanatory paragraph to their audit reports issued in connection with our fiscal 2007 and 2006 financial statements, which states that there is substantial doubt about our ability to continue as a going concern. Our ability to generate sufficient profits and obtain additional funding and pay off our obligations will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As described above, we merged into and with PMIC and became a publicly traded corporation; however, we have not closed, nor obtained a commitment for, the financing that was originally contemplated to close contemporaneously with the closing of the merger. As a result of this lack of funding, a condition unfavorably impacting us since inception, revenue and profitability have not increased as we believe would have otherwise been the case. Since we have not been able to obtain sufficient financing, we have not been able to (i) acquire ownership of several products, particularly the intellectual property rights to and formulation of, our principal product, AcnEase®, (ii) market and promote our products, (iii) conduct certain clinical trials that would further such marketing and promotional activities and (iv) hire additional employees.
 
12
 
RELATED PARTY TRANSACTIONS

During the nine months ended August 31, 2008, the Company's due to stockholders obligation increased by $26,000. During the nine months ended August 31, 2008, the Company's due to related parties obligation decreased by $15,000.

COMPARISON OF THE THREE MONTHS ENDED AUGUST 31, 2008 TO THE THREE MONTHS ENDED AUGUST 31, 2007

Summary Results of Operations

The following table sets forth certain selected financial data as a percentage of sales for the three months ended August 31, 2008 and 2007:

   
2008
  
2007
  
           
Net sales
    
100.0
%
  
100.0
%
Cost of sales
    
47.8
    
57.2
  
Gross profit
    
52.2
    
42.8
  
Operating expenses
    
266.8
    
138.3
  
Loss from operations
   
(214.6
)
  
(95.5
)
Interest expense
    
(57.9
)
  
(7.4
)
Net loss
    
(272.5
)%
  
(102.9
)%

Sales

Net sales for the three months ended August 31, 2008, were $101,000 compared to $158,000 for the three months ended August 31, 2007. The decrease of $57,000, or 36.1%, can be principally attributed to a decrease in internet sales in the United States resulting from changes in the Internet environment and the Company's on -going restructuring of its hosting and web-managing services. Together, those factors decreased internet visibility, traffic and conversion rate. These changes were undertaken to enhance the Company’s long-term ability to generate online sales volume, and management anticipates that the temporarily negative impact of the changes will begin to diminish in the quarter ending November 30, 2008.
 
Gross Profit

Gross profit decreased to $53,000 for the three months ended August 31, 2008 compared to $68,000 for the three months ended August 31, 2007, a decrease of $15,000 or 22.1%, with gross margin increasing to 52.2% from 42.8% for the prior period. The decrease in gross profit in the current period is principally attributable to the decrease in sales volume, partially offset by a higher realized gross margin. The lower gross margin in the earlier period was a result of higher product sales promotions in the period, as well as price incentives offered in response to certain delivery problems experienced in the period.

Operating Expenses

Total operating expenses increased by $51,000, or 23.2%, to $270,000 for the three months ended August 31, 2008, from $219,000 for the three months ended August 31, 2007. A $56,000 increase in general and administrative expenses was principally attributable to increases of $10,000 in noncash consulting expense principally related to the amortization of grants of common stock over the term of the related consulting agreements, $16,000 in accrued professional fees, $24,000 on web site development and programming fees and additional travel expense of $12,000 incurred in part due to the Company’s business development efforts and meetings in connection with additional financing.

Interest Expense

Interest expense increased to $59,000 from $12,000 for the three months ended August 31, 2008 as compared with the three months ended August 31, 2007, or $47,000, due to interest on the Convertible Notes including amortization of deferred financing costs and debt discount.
 
13
 
COMPARISON OF THE NINE MONTHS ENDED AUGUST 31, 2008 TO THE NINE MONTHS ENDED AUGUST 31, 2007

Summary Results of Operations

The following table sets forth certain selected financial data as a percentage of sales for the nine months ended August 31, 2008 and 2007:

   
2008
  
2007
  
           
Net sales
    
100.0
%
  
100.0
%
Cost of sales
    
48.3
    
47.0
  
Gross profit
    
51.7
    
53.0
  
Operating expenses
    
235.7
    
117.3
  
Loss from operations
   
(184.0
)
  
(64.3
)
Interest expense
    
(39.5
)
  
(5.8
)
Net loss
    
(223.5
)%
  
(70.1
)%

Sales

Net sales for the nine months ended August 31, 2008, were $317,000 compared to $571,000 for the nine months ended August 31, 2007. The decrease of $254,000, or 44.5%, can be principally attributed to a decrease in internet sales in the United States resulting from changes in the Internet environment and the Company's on-going restructuring of its hosting and web-managing services. Together, those factors decreased internet visibility, traffic and conversion rate. These changes were undertaken to enhance the Company’s long-term ability to generate online sales volume, and management anticipates that the temporarily negative impact of the changes will begin to diminish in the quarter ending November 30, 2008.
 
Gross Profit

Gross profit decreased to $164,000 for the nine months ended August 31, 2008 compared to $303,000 for the nine months ended August 31, 2007, a decrease of $139,000 or 45.9%, with gross margin decreasing to 51.7% from 53.0% for the prior period. The decrease in gross profit is principally attributable to the decrease in sales volume and, to a lesser extent, to the slightly lower gross margin realized in the current period.

Operating Expenses

Total operating expenses increased by $78,000, or 11.6%, to $747,000 for the nine months ended August 31, 2008, from $669,000 for the nine months ended August 31, 2007. A $90,000 decrease in marketing and selling expenses is principally due to a decrease in on-line advertising and promotion expense of $75,000 during the period of website design and programming described above since the effectiveness of such expenses would have been diminished, and a decrease of $15,000 in sales commissions. A $168,000 increase in general and administrative expenses was principally attributable to an increase of $62,000 in consulting expense principally related to the expense of grants of common stock over the term of the related consulting agreements, $19,000 in printing, transfer agent and other public company administrative fees, $27,000 on web site development and programming fees and additional travel expense of $35,000 incurred in part due to the Company’s business development efforts and meetings in connection with additional financing.

Interest Expense

Interest expense increased to $125,000 from $33,000 for the nine months ended August 31, 2008 as compared with the nine months ended August 31, 2007, or $92,000, due to interest on the Convertible Notes including amortization of deferred financing costs and debt discount.

Seasonality

There are no seasonality factors that affect the Company.
 
14
 
Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors, and the Company does not have any non-consolidated special purpose entities.

LIQUIDITY AND CAPITAL RESOURCES

As of August 31, 2008, we had a cash balance of $4,000 and a negative cash flow from operations of $282,000 for the nine-month period then ended. We have been operating at a loss since inception and have been funding these losses in a number of ways, including lines of credit, credit card debt, advances from stockholders and entering into subscription agreements with “friends and family” for investment funds. As described in Note 5 to the accompanying consolidated financial statements, we obtained $450,000 of debt financing ($390,000 net of financing costs) in the form of Convertible Notes during the nine month period ended August 31, 2008. We continue to actively seek additional substantial equity or debt financing; however, we have received no commitments for such financing. Our working capital at August 31, 2008, despite the aforementioned financing, is not sufficient to meet our working capital needs for the next twelve-month period and we will need to obtain additional financing from one or more sources.

Our independent registered public accounting firm added an explanatory paragraph to their audit reports issued in connection with our fiscal 2007 and 2006 financial statements, which states that there is substantial doubt about our ability to continue as a going concern. Our ability to generate profits and obtain additional funding and pay off our obligations will determine our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
Below is a discussion of our sources and uses of funds for the nine months ended August 31, 2008 and 2007.

Net Cash Used In Operating Activities

Net cash used in operating activities was $282,000 and $48,000 for the nine months ended August 31, 2008 and 2007, respectively. Cash used in operating activities for the nine months ended August 31, 2008 was principally the result of a net loss of $709,000, partially offset by noncash expenses of $272,000 and an increase in accounts payable and accrued expenses of $160,000. Net cash used in operating activities for the nine months ended August 31, 2007 was principally the result of a net loss of $400,000, offset by non-cash expenses of $153,000 and an increase in accounts payable and accrued expenses of $178,000.

Net Cash Used In Investing Activities

Net cash used in investing activities was $19,000 and $3,000 for the nine months ended August 31, 2008 and 2007, respectively. Cash used in investing activities for the nine months ended August 31, 2008 consisted of purchases of equipment of $9,000 and purchases of other assets, principally expenditures for trademarks, of $10,000. Cash used in investing activities for the nine months ended August 31, 2007 consisted of purchases of other assets, principally expenditures for trademarks, of $3,000.

Net Cash Provided By Financing Activities

Net cash provided by financing activities for the nine months ended August 31, 2008 and 2007 amounted to $302,000 and $49,000, respectively. Net cash provided by financing activities for the nine months ended August 31, 2008 was principally attributable to proceeds from the issuance of convertible notes in the principal amount of $450,000 ($390,000 net of financing costs), offset by decreases of $63,000 in credit card payable, $27,000 in due to others and $15,000 in due to related parties. Net cash provided by financing activities for the nine months ended August 31, 2007 was principally attributable to an increase of $33,000 in amount due to stockholders.

Stock Issuance and Stock Plan

On January 1, 2007, we entered into a two-year consulting agreement with an individual and, in consideration of the financial consulting services to be provided under the consulting agreement, we agreed to initially issue up to nine million shares of our common stock pursuant and subject to the Herborium Group, Inc. 2007 Stock Plan (the “Plan”). As of August 31, 2008, 8.25 million of these shares have vested and we have issued 7.25 million shares. The remaining 1,000,000 unvested shares will vest over the term of the consulting agreement. In addition, in the event certain transactions are consummated, up to an additional six million shares could be issued per terms of the agreement. The shares issued and yet to be issued have been valued at $.05 per share based on the market value on the date granted for an aggregate cost of $450,000, which cost is being expensed over the period of the agreement. Accordingly, we recorded as expense approximately $168,000 and $150,000 during the nine months ended August 31, 2008 and 2007.
 
15
 
On February 14, 2007, the Company entered into a two-year consulting agreement with a consulting firm and, in consideration of the services to be provided pursuant to that agreement, the Company agreed to issue up to 3 million shares of the Company’s common stock pursuant and subject to the Plan, and when so issued, such shares shall be validly issued, fully paid and non-assessable, of which 500,000 shares vested and were issuable immediately. Of the remaining shares, 500,000 will vest upon the occurrence of one or more transactions, as defined, and the remaining 2,000,000 will vest ratably on the sixth, ninth, twelfth and eighteenth month anniversaries of this agreement. The shares, 1,500,000 of which have been issued as of August 31, 2008, have been valued at $.035 per share based on the market value on the date granted for an aggregate cost of $105,000, which cost is being expensed over the period of the agreement. Accordingly, consulting expense in the amount of approximately $27,000 and $0 was recorded in general and administrative expense during the nine months ended August 31, 2008 and 2007.
 
In September 2008, the Company’s Board of Directors has authorized two additional consulting agreements and, in consideration of the services to be provided pursuant to such agreements, the Company agreed to issue an aggregate of approximately 1.7 million shares of the Company’s common stock pursuant and subject to the Plan, and when so issued, such shares shall be validly issued, fully paid and non-assessable, and shall vest immediately.
 
Our Board of Directors approved the Plan on January 19, 2007. The Plan provides for a maximum aggregate of 20 million shares of common stock to be issued upon grants of restricted stock or upon exercise of options granted under the Plan, as compensation and incentive to eligible employees, directors, consultants and advisors. On January 26, 2007, we filed a Registration Statement on Form S-8 with the Securities and Exchange Commission to in connection with the Plan.
 
RISK FACTORS
 
Our business and results of operations are subject to numerous risks, uncertainties and other factors that you should be aware of, some of which are described below and in the section entitled “Cautionary Statement Concerning Forward-Looking Statements.” . In addition to the other information included in this Quarterly Report on Form 10-QSB, you should carefully review and consider the factors discussed in the section titled "Description of Business" (Item 1) -"Risks Related to Our Business" of our Annual Report on Form 10-KSB for the year ended November 30, 2007, certain of which have been updated below. These factors materially affect our business, financial condition or future results of operations. The risks, uncertainties and other factors described in our Annual Report on Form 10-KSB and below are not the only ones facing our company. Additional risks, uncertainties and other factors not presently known to us or that we currently deem immaterial may also impair our business operations, financial condition or operating results. Any of the risks, uncertainties and other factors could cause the trading price of our common stock to decline substantially.
 
Risks Relating to Our Business

We have a history of losses, and will incur additional losses.

We are a company with a limited history of operations, and do not expect to significantly increase ongoing revenues from operations in the immediately foreseeable future. To date, we have not been profitable. We had a net loss of $709,000 during the nine months ended August 31, 2008 and $643,000 for the year ended November 30, 2007. Our losses have resulted principally from costs incurred in product development, including product testing and selection, and from general and administrative costs associated with our operations. While we seek to attain profitability, we cannot be sure that we will ever achieve product and other revenue sufficient for us to attain this objective.

With the exception of AcnEase®, our product candidates are in research or various stages of development. For some of these products we will want to conduct additional research, development and clinical trials in order to improve our ability to advertise and differentiate these products from others in the market place. We cannot be sure that we will successfully research, develop, commercialize, manufacture and market any other product candidates. We expect that these activities, together with future general and administrative activities, will result in significant expenses for the foreseeable future.
 
16
 
Item 3 A(T). Controls And Procedures

(A) Evaluation Of Disclosure Controls And Procedures

Prior to the filing of this Report on Form 10-QSB, an evaluation was performed under the supervision of and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of August 31, 2008, our Chief Executive Officer and Chief Financial Officer has concluded that the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to the Company’s management, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

(B) Changes In Internal Controls

During the quarter ended August 31, 2008, there were no significant changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
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Part II-Other Information

Item 1. Legal Proceedings

None.

Item 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

Pursuant to a private offering, during the period from February 2008 through August 31, 2008, we sold Units of our securities consisting of an aggregate $450,000 in principal amount of our Convertible Notes (the “Notes”), 450,000 shares of our Common Stock and warrants (the “Warrants”) exercisable for 900,000 shares of our Common Stock.

The Warrants are exercisable for a period of five years from issuance. Half of the Warrants are exercisable at $.025 per share and half are exercisable at $.05 per share, subject to certain adjustments, including, but not limited to, adjustments for stock splits, stock dividends, mergers and consolidations.

The Notes are convertible, beginning six months after issuance or, if earlier, the closing of a qualified financing or an acquisition of the Company, into shares of Common Stock in whole or in part from time to time at the option of the investors at a Conversion Price equal to
 
 
·
$.025 or
 
·
80% of the issuance price in a qualified financing or in connection with an acquisition of the Company. The Notes define a qualified financing as the date upon which the Company completes the sale of Common Stock (or like security) for aggregate gross proceeds of at least $1.5 million.

The Conversion Price is subject to certain customary adjustments, including, but not limited to, adjustments for stock splits, stock dividends, mergers and consolidation.

The Notes bear interest at the rate of 10% per annum, payable semi-annually in shares of the Company’s common stock valued at $.025 per share (currently trading at $.01 per share).

Unless converted to Common Stock, the principal balance of the each Note is payable upon demand made any time after the first anniversary of the issuance of the Note, or upon a qualified financing or acquisition of the Company. In addition, we are required to set aside 5% of gross revenue for redemption of the principal amount of the Notes. None of the aforementioned cash has been set aside as of October 20, 2008. The set-aside revenue will be distributed to the Note holders semi-annually, pro rata in accordance with the outstanding principal balance of each Note.

Pursuant to a Registration Rights Agreement, we have agreed to include the shares of Common Stock issuable upon conversion of the Notes and exercise of the Warrants, as well as the shares of Common Stock issued to the investors, in any registration statement filed by the Company under the Securities Act of 1933 with respect to our equity securities to be sold by us or any other stockholder.

Our Board of Directors has authorized the sale of up to an additional $125,000 principal amount of the Notes, in Units together with 125,000 shares of Common Stock and Warrants exercisable for 250,000 shares of Common Stock.

Southridge Investment Group is serving as the placement agent in connection with the offer and sale of the Notes, Common Stock and Warrants. In its capacity as placement agent, Southridge will be paid a cash fee equal to 10% of the gross proceeds received by the Company, as well as an expense allowance equal to 2% of the gross proceeds. In addition, Southridge will be issued Warrants exercisable for a number of shares of Common Stock equal to 10% of the aggregate shares issued by the Company in the private placement, assuming conversion and exercise of all of the Notes and Warrants. This amounts to Warrants exercisable for approximately 5.8 million shares of common stock. The placement agent warrants will be exercisable for 5 years at a price of $.03 per share. In its capacity as the Company’s financial advisor, Southridge is entitled to and received a retainer fee of 750,000 shares of our Common Stock, and one share for each $1 received by the Company in the private placement. As of August 31, 2008, 1,300,000 shares of common stock have been issued to Southridge.
 
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The offer and sale of the Notes, Common Stock and Warrants, and the Common Stock into which the Notes may be converted and for which the Warrants may be exercised (collectively, the “Securities”) by the Company to the investors was exempt from registration under the Securities Act in reliance upon Section 4(2) thereof and Rule 506 of Regulation D promulgated thereunder. Each of the investors represented and warranted to us that it was an “accredited investor” as that term is defined in Rule 501(a) of Regulation D. Each of the investors further represented and warranted that it was purchasing the Securities for its own account and not with a present view towards the public sale or distribution thereof, except pursuant to sales registered or exempted from registration under the Securities Act. Any certificates issued representing the Notes, Common Stock or Warrants will be legended to indicate that they are restricted. No sale of the Securities involved the use of underwriters.
 
Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission Of Matters To A Vote Of Security Holders 

None.

Item 5. Other Information

None.

Item 6. Exhibits
 
Exhibits are incorporated herein by reference or are filed with this Quarterly Report as set forth in the Exhibit Index beginning on page 22 hereof.

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Signatures

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Herborium Group, Inc.

By:
/s/Agnes Olszewski.
Name: Agnes Olszewski.
Title:  President and Chief Executive Officer (Principal Executive Officer) and
Chief Financial Officer (Principal Accounting Officer)
   
Date: October 20, 2008

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Exhibit Index
Herborium Group, Inc.
Form 10-QSB for Quarter Ended August 31, 2008

Exhibit No.
 
Description(1)
2.1
  
Fourth Amended Plans of Reorganization for Pacific Magtron International Corp. and LiveWarehouse, Inc. (incorporated by reference to Exhibit 2.1 to Pacific Magtron International Corp.’s Current Report on Form 8-K filed on August 16, 2006).
     
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)
     
4.1
  
Form of Convertible Note (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on February 25, 2008)
     
4.2
  
Form of Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on February 25, 2008)
     
4.3
  
Form of Registration Rights Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on February 25, 2008)
     
10.1
  
Form of Subscription Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on February 25, 2008)
     
31
  
Rule 13a-14(a) Certification of Chief Executive Officer and Chief Financial Officer
     
32
  
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) In the case of incorporation by reference to documents filed by the registrant under the Securities Exchange Act of 1934, as amended, the registrant’s file number under the Exchange Act is 000-25277.

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