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| HEPI > SEC Filings for HEPI > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding:
• our ability to raise the funds we need to continue our operations;
• our goal to increase our revenues and become profitable;
• regulation of our product;
• market acceptance of our product and derivatives thereof;
• the results of current and future testing of our product;
• the anticipated performance and benefits of our product;
• the ability to generate licensing fees; and
• our financial condition or results of operations.
Critical Accounting Policies
The accompanying discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and all available information. However, future events are subject to change, and the best estimates and judgments routinely require adjustment. US GAAP requires us to make estimates and judgments in several areas, including those related to recording various accruals, income taxes, the useful lives of long-lived assets, such as property and equipment and intangible assets, and potential losses from contingencies and litigation. We believe the policies discussed below are the most critical to our financial statements because they are affected significantly by management's judgments, assumptions and estimates.
Results of Operations for the three months ended March 31, 2012 and 2011.
Net Sales. We had no sales during the current quarter compared to net sales of
$32,579 for the three months ended March 31, 2011. Prior period sales reflect
principally revenues from the distribution of our ProAlgaZyme® product. In the
fourth quarter of 2010 we received an initial licensing fee payment of $255,000
under the terms of this exclusive distributorship agreement. We recognized
$3,750 in revenue from this licensing fee during the first quarter of 2011.
Around January 9, 2012, we notified Zus Health's purported assignee that the
distributor was in breach of contract and directed that they immediately cease
any and all activities with respect to the sale or distribution of HEPI
products. We subsequently notified the distributor that the agreement was
subject to termination due to these breaches. As a result, we do not expect to
recognize any further sales revenue under this Agreement.
We have implemented a new business model under which we expect to derive future
income from licensing and selling natural bioactive ingredients derived from our
algae cultures to much larger, better-financed food, dietary supplement and
medical food manufacturers. The anticipated income streams are to be generated
from a) royalties and advances for licensed natural bioactive ingredients, and
b) bulk sales of such ingredients. We expect that these bulk ingredients will be
made by contracted ingredient manufacturers and then sold by us to food, dietary
supplement and medical food processors and/or name-brand marketers.
Cost of Sales. We had no cost of sales during the current quarter, compared to cost of sales of $39,529 for the three months ended March 31, 2011. Cost of Sales represented primarily costs related to raw materials, labor and the laboratory and controlled production environment necessary for the growing of the algae cultures that constitute the source of the biological activity of the ProAlgaZyme® product, and for conducting the necessary harvesting and production operations in preparing the product for sale. As noted above, we have implemented a new business model under which we expect to derive future income from licensing and selling natural bioactive ingredients derived from its algae cultures to much larger, better-financed food, dietary supplement and medical food manufacturers. Consequently, there were no costs of sales for the period ending March 31, 2012. All costs relating to the continued activity associated with the controlled production environment for growing the algae cultures are included in research and development expenses.
Research and Development Expenses. For the three months ended March 31, 2012, we incurred $123,050 on research and development expenses, as compared to $106,911 for the comparable period in 2011. These expenses are mainly comprised of costs associated with external research. Our research and development costs will grow as we work to complete the research begun in the first quarter of 2012. This research was initiated to further explore ProAlgaZyme®'s potential efficacy on the management of cholesterol levels. We have identified several potential bioactive compounds, but further research aimed at isolating the compound further is expected to be completed during the second half of 2012.
Selling and Marketing Expenses. Selling and marketing expenses were $5,112 for the three months ended March 31, 2011.
As noted above, we have implemented a new business model under which we expect to derive future income from licensing and selling natural bioactive ingredients derived from its algae cultures to much larger, better-financed food, dietary supplement and medical food manufacturers. As such, there were no Selling and Marketing Expenses for the period ending March 31, 2012.
General and Administrative Expenses. General and administrative expenses were $153,485 for the three months ended March 31, 2012, as compared to $113,257 for the comparable prior period. The increase in general and administrative expense during 2012 is due primarily to the hiring of a new CEO and CFO.
Professional and Consulting Expenses. Professional and consulting expenses were $230,684 for the three months ended March 31, 2012, as compared to $199,406 for the comparable prior period. The increase in professional and consulting expense during 2012 is due primarily to negotiations relating to the convertible debt transactions.
Liquidity and Capital Resources
The unaudited condensed consolidated financial statements contained in this
Quarterly Report have been prepared on a "going concern" basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. We have a near term need for additional capital.
For the reasons discussed herein, there is a significant risk that we will be
unable to continue as a going concern, in which case, you would suffer a total
loss of your investment in our company.
As of May 8, 2012, we had a cash balance of approximately $225,000. We have incurred significant net losses since inception, including a net loss of $1,058,721 for the quarter ended March 31, 2012. We have, since inception, consistently incurred negative cash flow from operations. During the quarter ended March 31, 2012, we incurred negative cash flows from operations of $534,209. As of March 31, 2012, we had a working capital deficiency of $1,872,828 and a stockholders' deficiency of $2,454,217. Although we recently raised a limited amount of capital, we have a near term need for additional capital.
During the three months ended March 31, 2012, our operating activities used $534,209 in cash, an increase of $213,491 from the comparable prior period. The approximate $213,000 increase in cash used by operating activities was primarily attributable to the following (all of which are approximated): a $591,000 increase in net loss, a $64,000 change (decrease) in accounts payable, a $45,000 change (decrease) in deferred rent, a $32,000 change (increase) in prepaid expense, partially offset by a $293,000 increase in finance costs paid in stock and warrants (a non-cash expense), a $114,000 increase in fair value adjustment of derivative liability (a non-cash expense), a $25,000 change (increase) in customer deposits, and a $75,000 change (increase) in amortization of bond discount liability (a non-cash expense).
Our financing activities generated $440,960, a $132,031 increase from the comparable prior period. The increase in cash provided by financing activities was due primarily to a $370,000 increase in proceeds from the issuance of convertible debentures, a $57,000 increase in loans payable - other, partially offset by $40,000 payment of deferred finance costs and a $230,000 decrease in proceeds from the sale of common stock.
Although we raised a limited amount of capital during 2011 and the first quarter of 2012, we continue to experience a shortage of capital, which is materially and adversely affecting our ability to run our business. As noted above, we have been largely dependent upon external sources for funding. We have in the past had great difficulty in raising capital from external sources. We will still be reliant upon external financing for the continuation of our research program.
We estimate that we will require approximately $1,800,000 in cash over the next 12 months in order to fund our normal operations and research and development activities. HEP Investments, LLC, our senior secured lender has committed an aggregate of $2,000,000, $1,025,000 of which we have already drawn down, leaving $975,000 which is available to be drawn down. Based on this cash requirement and availability from our senior secured lender, we have a near term need for substantial additional funding. Historically, we have had great difficulty raising funds from external sources; however, we recently were able to raise capital from outside sources. If we are unable to raise the required funding, we will have to curtail our research and development and other activities, in which case, there could be a material adverse effect on our business.
Significant elements of income or loss not arising from our continuing operations
We do not expect to experience any significant elements of income or loss other than those arising from our continuing operation. For the three months ended March 31, 2012, we recognized $113,555 in expense for financial statement purposes based on the change in fair value of derivative liabilities as of March 31, 2012. We may incur income or expense in future periods arising out of changes in the fair value of derivative liabilities.
Seasonality
Based on our business model implemented at the beginning of 2012, anticipated income streams are to be generated from a) royalties and advances for licensed natural bioactive ingredients, and b) bulk sales of such ingredients. We do not anticipate that these will be affected by seasonality.
Staffing
We have conducted all of our activities since inception with a minimum level of qualified staff. We currently do not expect a significant increase in staff.
Off-Balance Sheet arrangements
We have no off-balance sheet arrangements that would create contingent or other forms of liability.
Item 4
T. Controls and Procedures
Management's Report on Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, we recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and we necessarily were required to apply our judgment in evaluating the cost-benefit relationship of possible changes or additions to our controls and procedures.
As of March 31, 2012, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive/principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our principal executive/principal financial officer concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
Changes in Internal control Over Financial Reporting. There have been no changes in our internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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