Forward-Looking Statements
Statements in the following discussion and throughout this report that are not historical in nature are "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements by the use of words such as the words "expect," "anticipate," "estimate," "may," "will," "should," "intend," "believe," and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A "Risk Factors." We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see "Special Note Regarding Forward Looking Statements" at the beginning of this report.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this report.
Overview
We are a company specializing in proprietary dissolving thin film nutraceutical products. Our thin film, which is similar in size, shape and thickness to a postage stamp, dissolves rapidly and utilizes a novel process and proprietary encapsulation compositions to mask the taste of the nutraceuticals contained within the film. We believe these qualities render our thin film easy to use and, consequently, will improve consumer compliance, providing a significant benefit to consumers and their healthcare institutions.
Our thin film delivery technology is currently used in the over-the-counter, or OTC, marketplace. We currently manufacture and distribute a number of nutraceuticals formulated to contain electrolytes, caffeine, and other supplements. These are marketed under such product names as SPORTSTRIPS, PEDIASTRIPS, FIX STRIPS, ENLYTEN(TM) ENERGY STRIPS, SURVIVAL STRIPS, ENLYTEN MELATONIN STRIPS, ENLYTEN ANTIOXIDANT STRIPS, ENLYTEN ELECTROLYTES PLUS STRIPS, ENLYTEN APPETITE SUPPRESSANT STRIPS, and ENLTEN CALORIE BURNER STRIPS. We distribute these products through two primary distributors. On March 11, 2008, we entered into a five-year distribution agreement with Unico Holdings, Inc. ("Unico"). Unico's customers include most of the largest retailers and distributors in the U.S. in each of these sales channels. The agreement calls for a minimum of $22 million of product purchases over a five-year term in order for Unico to maintain its exclusive distribution right. On September 11, 2008, the Company entered into a distribution agreement with T. Lynn Mitchell Companies, LLC ("T Lynn") for the production and sale of a variety of dietary supplement products, including Enlyten branded Antioxidant Strips, Electrolytes Plus Strips, Energy Strips and Melatonin Strips. National marketing of the products began in the first quarter of 2009. These sales are subject to a 5% commission.

We are in the process of developing thin film containing prescription drugs. We are seeking to work with pharmaceutical companies to use our thin film as a unique drug delivery system. We believe our thin film delivery technology has several material benefits over existing drug delivery forms and should enjoy strong physician, patient and consumer acceptance. Our thin film improves convenience and ease of use through discretion and portability and precludes the need for water or liquids. Our thin film may also improve dosing accuracy relative to liquid formulations thereby ensuring proper dosing for the pediatric, geriatric and mentally ill patients where proper administration is often difficult. In addition, our thin film provides ease of dosing for patients with conditions that make it difficult to swallow other solid dosage forms such as tablets or capsules.
Our proprietary thin film drug delivery technology is supported by a significant portfolio of intellectual property, which we believe differentiates us from our competitors. We believe this technology will enable pharmaceutical companies to better manage the life cycle of their products. By combining our thin film delivery technology with existing drugs, we believe our thin film can strategically differentiate existing or soon-to-be generic drugs from potential generic competitors and can help protect branded prescription products against existing or new generic entries by providing additional patent protection or exclusivity in the marketplace. Additionally, we believe our thin film drug delivery technology can also be used to create new drug products with improved efficacy.
Recent Developments
Revenues for the second quarter declined to $563,841 from $1.6 million in the first quarter of 2009. The decline in revenues was attributable to weaker than expected demand for our products. The Company sells substantially all products through two customers-Unico and T. Lynn. The Company believes that the lower sales are the result of the current difficult retail environment and some seasonality in the consumption of its products. In response to the decline in revenues the Company took steps to reduce headcount and other operating expenses during the quarter. For its business and revenue development, the Company is focused on identifying national and internationally recognized nutritional supplement companies and pharmaceutical companies, who can benefit from the Company's technology as a new distribution mechanism for their supplements or drugs.
The Company expects to continue incurring net losses from operations for at least the remainder of 2009. Accordingly, management expects to require additional capital through the sale of debt or equity securities. Subsequent to the end of the second quarter, on August 13, 2009, the Company's Innozen subsidiary entered into a Manufacturing License Agreement (the "Manufacturing Agreement") with SMI. Under the terms of the Manufacturing Agreement, the Company has granted SMI a non-exclusive license to manufacture certain of the Company's proprietary edible film-strip products. SMI is granted a right of first negotiation for the manufacture of Products, the pricing and terms of which will be established on a product by product basis. Both parties have granted the other a right of first negotiation in the event either contemplates a change in control transaction. In addition, the Manufacturing Agreement contained a subscription agreement pursuant to which SMI has agreed to purchase an aggregate of 4,255,320 shares of the Company's common stock at a purchase price of $1 million or $0.235 per share. Payment of the purchase price is to be made on the basis of $150,000 on signing the Manufacturing Agreement, $150,000 on each of September 15, October 15 and November 15, 2009 and the remaining $400,000 is to be paid on or before December 31, 2009. Except for the Agreement with SMI, there are no arrangements or agreements in place for such capital at this time and no assurances can be given as to the terms upon which the Company will be able to raise capital, if at all. See "Liquidity, Capital Resources and Going Concern" below and "Risk Factors" in Part II, Item 1A below.

In addition to operating issues, the Company made a number of governance changes during the second quarter. On May 21, 2009, the Board of Directors appointed two additional members to its Board; Mr. Jeffrey Wattenberg and Mr. Anthony Seaber. Mr. Wattenberg brings significant experience as an investor and consultant to emerging companies. Mr. Seaber is a sports medicine researcher at Duke University. On June 25, 2009, the Board of Directors elected Jeffrey Wattenberg as President.
Comparison of the Three Months Ended June 30, 2009 to the Three Months Ended June 30, 2008
Revenues
During the three months ended June 30, 2009, we had product sales of $545,091 and revenues from license fees, royalties and services of $18,750, a total of $563,841. There were product sales of $134,652 and revenue from license fees, royalties and services of $18,750, a total of $153,402 in the corresponding 2008 period. While revenues have increased substantially in the second quarter of 2009 as compared to the same 2008 period, revenues in the second quarter of 2009 are only 34% of revenues recorded in the first quarter of 2009 and are due to substantial declines in revenues from our two primary customers. Costs and Expenses
Costs and expenses are as follows for the three months ended June 30, 2009 and 2008:

                                                        2009            2008

      Cost of product sold and manufacturing costs   $   695,527     $   147,811
      General and administrative expense                 463,357         784,486
      Marketing and selling expense                       52,646         218,736
      Non-cash compensation expense                      191,080         627,773
      Depreciation and amortization expense              335,634         392,868
      Asset impairment                                 4,000,000         648,600
      Inventory obsolesence                               75,000         274,840
      Research and development expense                     8,083          67,533

                                                     $ 5,821,327     $ 3,162,647

Cost of product sold and manufacturing costs amounted to 127% of product sales in 2009 and 110% of product sales in 2008. The Company had under-absorbed manufacturing costs of approximately $401,822 in the 2009 quarter as compared to $138,423 in the 2008 quarter. Sales will need to increase substantially to absorb all of the manufacturing costs at the current level of manufacturing operation. The under-absorbed overhead was higher in 2009 than 2008, primarily due to having two sites of operation in 2009 as compared to one operating site in 2008.
General and administrative expenses ("G&A") decreased to $463,357 in the three months ended June 30, 2009, from $784,486 in the 2008 period. The decrease of $321,129 (41%) in G&A is the result of decreases at all levels of the Company, including corporate overhead, consulting fees and the G&A costs at the former PMG manufacturing operation.

Selling and marketing costs ("SMC") were $52,646 in the three months ended June 30, 2009, as compared to $218,736 in the 2008 period, a decrease of $166,090. The SMC reduction is primarily due to the elimination of endorsements and sponsorship fees as a result of re-directing our marketing efforts toward distributors rather than direct sales to customers and the elimination of the New York office. Distribution center expenses and marketing and promotion expenses for products also decreased in this period.
Non-cash compensation expense was $191,080 in 2009 and $627,773 in 2008 and includes the amortization of stock grants and amortization of the intrinsic value of stock options to employees, consultants and spokespersons over the relevant service periods. The decline is primarily the result of expensing the balance of expired options in the 2008 period.
Depreciation and amortization expense decreased from $392,868 in 2008 to $335,634 in 2009, primarily due to the impairment of the client list in June of 2008. The client list amortization was included in the 2008 period, but not in the 2009 period.
Asset impairment of $4,000,000 in 2009 was for the impairment of goodwill. Asset impairment of $648,600 in 2008 was for the impairment of the client list. Inventory obsolescence of $274,840 in 2008 was to write off inventory costs for a discontinued product. During the second quarter the Company recorded $75,000 for an inventory obsolescence reserve.
Research and development ("R&D") costs amounted to $8,083 in 2009 and $67,533 in 2008. These include contract services, supplies, materials and analytical testing costs incurred for new products to be developed by the Company. The substantial decrease is a result of limited available funding. Other Income (Expense)
Interest expense increased from $17,011 in 2008 to $50,009 in 2009 as a result of the increase in debt incurred after the end of the June 2008 quarter. During the second quarter of 2009 the Company was able to settle a debt with a former customer which resulted in a gain of $440,331.
Comparison of the Six Months Ended June 30, 2009 to the Six Months Ended June 30, 2008
Revenues
During the six months ended June 30, 2009, we had product sales of $2,153,250 and revenues from license fees, royalties and services of $77,500, a total of $2,230,750. There were product sales of $232,093 and revenue from license fees, royalties and services of $37,500, a total of $269,593 in the corresponding 2008 period. Revenues have increased substantially from the prior year as a result of the actions discussed in the Notes to the condensed consolidated financial statements. See above regarding the decline in the second quarter of 2009 from the first quarter of 2009.

Costs and Expenses
Costs and expenses are as follows for the six months ended June 30, 2009 and
2008:

                                                        2009            2008

      Cost of product sold and manufacturing costs   $ 1,869,939     $   577,555
      General and administrative expense                 903,178       1,600,303
      Marketing and selling expense                      210,148         690,601
      Non-cash compensation expense                      367,911       1,681,578
      Depreciation and amortization expense              669,083         758,331
      Asset impairment                                 4,000,000         648,600
      Inventory obsolesence                              150,000         274,840
      Research and development expense                    44,210         139,112

                                                     $ 8,214,469     $ 6,370,920

Cost of product sold and manufacturing costs amounted to 87% of product sales in 2009 and 249% of product sales in 2008. The Company had under-absorbed manufacturing costs of approximately $708,398 in the 2009 period as compared to $452,760 in the 2008 period. Sales will need to increase substantially to absorb all of the manufacturing costs at the current level of manufacturing operation. G&A decreased to $903,178 in the six months ended June 30, 2009, from $1,600,303 in the 2008 period. The decrease of $697,125 (44%) in G&A is the result of decreases at all levels of the Company, including corporate overhead, consulting fees, payroll, insurance and the G&A costs at the former PMG manufacturing operation.
SMC were $210,148 in the six months ended June 30, 2009, as compared to $690,601 in the 2008 period, a decrease of $480,453. SMC costs are down from the year earlier period, primarily due to the elimination of endorsements and sponsorship fees as a result of re-directing our marketing efforts toward distributors rather than direct sales to customers and the elimination of the New York office. Product promotion expenses decreased by $306,000 from 2008 to 2009. Non-cash compensation expense was $367,911 in 2009 and $1,681,578 in 2008 and includes the amortization of stock grants and amortization of the intrinsic value of stock options to employees, consultants and spokespersons over the relevant service periods. The decline is primarily the result of expensing the balance of expired options in the 2008 period.
Depreciation and amortization expense decreased from $758,331 in 2008 to $669,083 in 2009, primarily due to the impairment of the client list in June of 2008. The client list amortization was included in the 2008 period, but not in the 2009 period.
Asset impairment of $4,000,000 in 2009 was for the impairment of goodwill. Asset impairment of $648,600 in 2008 was for the impairment of the client list. Inventory obsolescence of $274,840 in 2008 was to write off inventory costs for a discontinued product. In the first and second quarters of 2009 the Company recorded a $75,000 inventory obsolescence reserve.
R&D costs amounted to $44,210 in 2009 and $139,112 in 2008. These include contract services, supplies, materials and analytical testing costs incurred for new products to be developed by the Company. R&D costs have declined due to a limitation of available funding.

Other Income (Expense)
Interest expense increased from $20,165 in 2008 to $119,279 in 2009 as a result of the increase in debt after the end of the June 2008 quarter.
During the second quarter of 2009 the Company was able to settle a debt with a former customer which resulted in a gain of $440,331. Liquidity, Capital Resources and Going Concern At June 30, 2009, our overall working capital position had improved, but still remained negative. At June 30, 2009, we had negative working capital of $2.5 million compared to working capital deficit of $2.7 million at December 31, 2008. However, our liquidity had substantially decreased. At June 30, 2009, we had cash and cash equivalents of $58,870 compared to $433,573 at December 31, 2008. In addition, at June 30, 2009, accounts receivable were $110,426, compared to $486,967 at December 31, 2008. In addition, the Company has $1,175,000 of convertible promissory notes due by September 2009.
For the six months ended June 30, 2009, operating activities consumed $691,435 of cash. This was primarily the result of a net loss for the period of $5.6 million, offset by non-cash compensation expenses of $295,578, depreciation of $669,083 during the quarter and asset impairment of $4,000,000.
Investment activities used an additional $143,950 of cash during the six months ended June 30, 2009, primarily as a result of payments for patent costs and property and equipment. As of June 30, 2009, we did not have any significant commitments for capital expenditures.
Financing activities provided $460,682 of cash during the six months ended June 30, 2009, primarily as the result of a sale of common stock and the proceeds of a loan.
We are not currently generating sufficient income or cash flow to fund current operations. Sales of product amounted to $1,608,158 during the first quarter of 2009. Sales of product amounted to $545,091 during the second quarter of 2009, which is a substantial decrease from the first quarter of 2009. The Company is continually analyzing its current costs and is attempting to make additional cost reductions where possible. However, in order to support the Company's current level of operations, substantial additional sales will be required. We expect that we will continue incurring losses from operations through the remainder of 2009. In order to fund the Company's current business plan, we expect to need an additional $2 million to $4 million of capital, which we hope to secure through the sale of debt or equity securities to investors or strategic partners.
Other than cash and cash equivalents and cash flow provided by operations, our primary source of working capital has been financing activities through the sale of debt or equity securities. We have no available unused sources of credit presently available to us. We intend to secure additional working capital through the sale of debt or equity securities. On August 13, 2009, Innozen entered into the Manufacturing Agreement with SMI which contained a subscription agreement pursuant to which SMI has agreed to purchase an aggregate of 4,255,320 shares of the Company's common stock at a purchase price of $1 million or $0.235 per share. Payment of the purchase price is to be made on the basis of $150,000 on signing the Manufacturing Agreement, $150,000 on each of September 15, October 15 and November 15, 2009 and the remaining $400,000 is to be paid on or before December 31, 2009. No other arrangements or commitments for any such financing are in place at this time, and we cannot give any assurances about the availability or terms of any future financing. We believe the recent worldwide financial crisis has significantly decreased the market for private financing. The number of investment funds committing capital to microcap issuers has decreased, and costs for financing both debt and equity have increased.

Because of our history of net losses and our negative working capital position, our independent auditors, in their report on our financial statements for the year ended December 31, 2008, expressed substantial doubt about our ability to continue as a going concern.
Recent Accounting Pronouncements
Please see the section entitled "Recent Accounting Pronouncements" contained in "Note 1 - Basis of Presentation" to our financial statements included in Part I-Item 1. Financial Statements of this report. Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1933.