UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q





(Mark 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, 2011





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





For the transition period from _____to _____





COMMISSION FILE NUMBER 000-53008





THERABIOGEN, INC.


(Exact name of registrant as specified in its charter)








NEVADA
98-0559606State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)120 Wall Street, Suite 2401
10005New York, NY(Address of principal executive offices)
(Zip Code)





866-284-9561


(Registrant's telephone number, including area code)








(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.





[x]Yes [ ] No





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§. 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





[ ] Yes   [ ] No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.











1








Large accelerated filer [ ]
Accelerated filer [ ]Non-accelerated filer [ ] (Do not check if a smaller reporting company)
Smaller reporting company [ x ]








Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).





[ ] Yes [x] No





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS DURING THE PRECEDING FIVE YEARS:





Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.





[ ] Yes [x] No





APPLICABLE ONLY TO CORPORATE ISSUERS:





Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:





As of September 23,  2011, we had 45,081,720 shares of common stock outstanding.








2








INDEX





Page No.PART I. FINANCIAL INFORMATIONItem 1.
Financial Statements
4Condensed Balance Sheets – at August 31, 2011 (unaudited) and February 28 2011
4Condensed Statements of Operations for the three months and six months ended August 31, 2011 and 2010 (unaudited)
5Condensed Statements of Cash Flows for the six months ended August 31, 2011 and 2010 (unaudited)
6Notes to the Condensed Financial Statements (unaudited)
7Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
13Item 3.
Quantitative and Qualitative Disclosures About Market Risk
16Item 4.
Controls and Procedures
16PART II. OTHER INFORMATIONItem 1.
Legal Proceedings
17Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
17Item 3.
Defaults Upon Senior Securities
17Item 4.
(Removed and Reserved)
17Item 5.
Other Information
17Item 6.
Exhibits
17Signatures

18







3




PART I.


ITEM 1. FINANCIAL INFORMATION











THERABIOGEN, INC.


CONDENSED BALANCE SHEETS





August 31, 2011


February 28,2011(unaudited)ASSETSCurrent assets:Cash and cash equivalents

$
19,658


$
-Deposits


82,500



35,231Gross Accounts receivable


300,168



154,230Less:Loan value of receivables sold with recourse


(183,461
)


-Due from affiliate


11,026



1,026Note and interest receivable – related party


-



12,252Inventory


133,980



149,394Prepaid expenses


3,262



-Total current assets


367,133



352,133Other assets:License, net of amortization of  $301,404 and $254,801


2,126,796



2,173,399Goodwill


101,183



101,183Total other assets


2,227,979



2,274,582Total assets

$
2,595,112


$
2,626,715LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilitiesCurrent liabilities:Accounts payable (including $2,500 and $5,000 payable to related party)

$
393,515


$
208,585Accrued interest


172,951



152,904Payroll taxes payable


1,950



2,888Notes payable-related parties


680,770



685,607Notes payable - net of discount of $0 and $47,469


641,536



422,040Total current liabilities


1,890,722



1,472,024Long term liabilities:Liability for unissued common stock


5,000



136,000Total Liabilities


1,895,722



1,608,024STOCKHOLDERS’ EQUITYCommon stock, $0.001 par value, 150,000,000 shares authorized, 44,167,610  and 38,784,500 issued at August 31, 2011 and February 28, 2011


44,168



38,785Additional paid-in capital


19,967,101



6,228,787Accumulated deficit


(19,311,879
)


(5,248,881
)Total stockholders’ equity


699,390



1,018,691Total liabilities and stockholders’ equity

$
2,595,112


$
2,626,715





The accompanying notes are an integral part of these financial statements








4








THERABIOGEN, INC.


CONDENSED STATEMENT OF OPERATIONS


(unaudited)





For the three months ended

August 31,


For the six months ended August 31,2011


2010


2011


2010SALES

$
204,910


$
-


$
209,122


$
-EXPENSESCost of goods sold


108,401



-



161,261



-Marketing and sales expense


121,446



194,993



1,826,151



209,018General and administrative


521,563



1,378,645



12,071,284



2,200,462Total expenses


751,410



1,573,638



14,058,696



2,409,480(LOSS) FROM OPERATIONS


(546,499
)


(1,573,638
)


(13,849,572
)


(2,409,480
)Other income (expense):Interest expense


(124,458
)


(65,594
)


(213,426
)


(91,914Total other income (expense)


(124,458
)


(65,594
)


(213,426
)


(91,914NET (LOSS) BEFORE INCOME TAX


(670,957
)


(1,639,232
)


(14,062,998
)


(2,501,394
)Provision for income tax


-



-



-



-NET (LOSS)

$
(670,957
)

$
1,639,232
)

$
(14,062,998
)

$
(2,501,394
)Net loss per share- basic and diluted

$
(0.02
)

$
(0.05
)

$
(0.34
)

$
(0.07
)Weighted average common shares outstandingBasic and diluted


42,206,354



35,223,523



41,478,425



34,018,216





The accompanying notes are an integral part of these financial statements








5





THERABIOGEN, INC.


CONDENSED STATEMENT OF CASH FLOWS


(unaudited)








Six months endedAugust 31,2011


2010CASH FLOWS FROM OPERATING ACTIVITIESNet loss

$
(14,062,998
)

$
(2,501,394
)Adjustments to reconcile to net cash used by operating activities:Amortization expense


46,603



46,404Stock issued for services


2,254,042



-Warrants and options issued for services


11,128,800



1,803,000Amortization of debt discount


37,658



31,250Changes in assets and liabilities:Accounts receivable


(145,938
)


-Inventory


42,941



(188,853
)Accrued interest receivable


-



(312
)Deposits


35,231



-Prepaid expenses


(3,262
)


-Accounts payable and accrued expenses


184,930



109,683Accrued interest payable


90,128



-Payroll taxes payable


(938
)


-Net cash used by operating activities


(392,803
)


(700,222
)CASH FLOWS FROM INVESTING ACTIVITIESNote and interest receivable


12,252



-Advance to affiliate


(10,000
)


-Net cash provided by investing activities


2,252



-CASH FLOWS FROM FINANCING ACTIVITIESProceeds from issuance of common stock


83,000



342,751Proceeds from notes payable


277,416



365,000Erxercise of stock warrants


-



400Payment of notes payable


(15,000
)


-Payment of note payable - related party


(5,000
)


-Proceeds from notes payable - related parties


69,793



38,107Net cash provided by financing activities


410,209



746,258Net increase in cash


19,658



46,036Cash and cash equivalents, beginning of period


-



4,137Cash and cash equivalents, end of period

$
19,658


$
50,173SUPPLEMENTAL CASH FLOW INFORMATIONNoncash transactions:Debt discount credited to equity

$
39,105


$
-Issue shares to satisfy liability for shares

$
131,000


$
-Conversion of debt to equity

$
107,750


$
-Extinguishment of debt

$
-


$
125,000Inventory and deposits financed through materials requisition agreement

$
110,027


$
-Amounts advanced for materials requisition from factor

$
183,461


$
-Accrued interest capitalized to notes payable

$
50,514


$
-





The accompanying notes are an integral part of these financial statements





6








THERABIOGEN, INC.


NOTES TO CONDENSED FINANCIAL STATEMENTS


(unaudited)





NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION





Nature of Operations





TheraBiogen, Inc. (formerly Kushi Resources, Inc. (“Kushi”)) (the “Company”) was incorporated on October 3, 2005, under the laws of the State of Nevada.





In November, 2009, the Company entered into an Agreement and Plan of Merger with TheraBiogen, Inc. (“Former TheraBiogen”), a Nevada corporation, which was incorporated in April 2000.  The merger closed on January 5, 2010, and as a result of the transaction, the Company changed its name to TheraBiogen, Inc.





In July 2008, Former TheraBiogen entered into an exclusive licensing agreement with Nasal Therapeutics, Inc., to develop, manufacture, market and sell four homeopathic nasal sprays, THERA MAX®    Cold and Flu Relief, THERA MAX®  Allergy Relief and THERA MAX®  Migraine Relief, on an exclusive basis in North America and, and as a result of a subsequent transaction, in July 2009, the Company has the rights for all areas of the world for twenty-five years. The principal of Nasal Therapeutics, Inc., Dr. Charles Hensley had also developed the ZICAM homeopathic nasal product.





The Company’s principal business activity prior to the merger was the acquisition and exploration of mineral resources in northern British Columbia, Canada.  The Company has determined that it will no longer pursue the mineral resources business and has written off all assets associated with that activity.





Basis of Presentation and Going Concern





The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern.  This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.  The Company has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within its first few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its operations. While the Company has funded its initial operations with private placements and secured loans principally from related parties, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company.   The Company’s ability to continue as a going concern is also dependent on many events outside of its direct control, including, among other things improvement in the economic climate.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.





Interim financial statements are prepared in accordance with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X, as appropriate. In the opinion of management, all adjustments, which are of a normal recurring nature, considered necessary for the fair presentation of financial statements for the interim period, have been included.





Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year.





The condensed balance sheet at February 28, 2011 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.




These interim condensed financial statements should be read in conjunction with the Company’s audited financial statements and notes for the period ended February 28, 2011 filed with the Securities and Exchange Commission on Form 10-K/A on July 1, 2011.




7





NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Revenue Recognition





The Company recognizes revenue from product sales when the risks and rewards of ownership have transferred to the customer. Transfer of risks and rewards is considered to have occurred upon shipment of the finished product to retailers. Sales incentives, promotional allowances and returns are estimated and recognized as a reduction from revenue at the date of shipment based upon current agreements with customers and as the Company develops more revenues historical activity will also be utilized.  The allowance for sales incentives, promotional allowances and returns will reflect our historical experience and will be reviewed regularly to ensure that it reflects potential chargebacks from customers. The allowance as of August 31, 2011 is based upon our experience through August 31, 2011.  We review the need for a return provision at least quarterly and adjust the reserve amounts if actual chargebacks differ materially from our reserve percentage once established.





Inventory





Inventory consists of finished goods and components purchased from suppliers and delivered to the Company’s contract manufacturer of the THERA MAX® products.  Inventory is carried at the lower of cost or market on a first in, first out basis.





License Agreement





The Company recorded as an intangible asset the cost of the license agreement entered into with Nasal Therapeutics, Inc. based on the consideration paid.  The intangible asset is amortized on a straight-line basis over the 25 year life of the agreement.  The amortization charge is included in cost of goods sold. Prior to the initiation of sales during the third quarter of 2010 amortization expense had been charged to general and administrative expense.  The Company evaluates for impairment when events and circumstances warrant in accordance with FASB ASC Topic 350-30, and an impairment loss will be recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its fair value. After an impairment loss is recognized, the adjusted carrying amount of the intangible asset will be its new accounting basis.





Goodwill





The Company recorded goodwill as the excess of the consideration paid over the estimated fair values of the assets acquired and liabilities assumed in a business combination.  The goodwill is not amortized, but is subject to an annual impairment test in accordance with FASB ASC Topic 350-20.  The two step test first determines whether the carrying amount of the reporting unit exceeds the fair value of the reporting unit.  If so, the next step is to measure the impairment loss as the difference between the implied fair value of the good will and the carrying amount of the reporting unit.





Fair Value of Financial Instruments





The carrying amounts reported in the accompanying balance sheets of all financial instruments approximates their fair values because of the immediate or short-term maturity of these financial instruments or comparable interest rates of similar instruments. The Company follows newly issued accounting guidance relating to fair value measurements. This guidance establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:





Level 1 -- quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the measurement date.





Level 2 -- inputs  other than quoted  prices included  within Level  1 that are  directly  observable  for the asset or liability or  indirectly observable through corroboration  with observable  market data.





Level 3 -- unobservable inputs for the asset or liability only used when there is little, if any, market activity for the asset or liability at the measurement date.





The asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the unobservable inputs.




8





Concentration of Credit Risk





Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash deposits in bank accounts insured by the FDIC.  As part of its cash management process, the Company performs periodic evaluations of the relative credit standing of this financial institution. The Company has not experienced any losses in cash balances and does not believe it is exposed to any significant credit risk on its cash.





Accounting Estimates





The preparation of these unaudited financial statements in conformity with accounting principles generally accepted in the United States of America 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 these unaudited financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Per Share Information





Basic earnings per share are calculated using the weighted average number of common shares outstanding for the period presented. Diluted loss per share is the same as basic loss per share, as the effect of potentially dilutive securities are anti-dilutive.





Income Taxes





The Company accounts for income taxes in accordance with ASC 740, Income Taxes.  Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  A valuation allowance is recorded and deducted from deferred tax assets when the deferred tax assets are not expected to be realized based on currently available evidence.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.





Management has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. Additionally, management believes that no accruals for tax liabilities are necessary. Therefore, no reserves for uncertain tax positions have been recorded.





Stock-Based Compensation





Compensation costs attributable to stock options or similar equity instruments granted are measured at the fair value at the grant date, and expensed over the expected vesting period.




Concentrations




There is a concentration of risk in the volume of sales to certain customers as their support exceeded 10% of the Company’s total revenues. The Company received virtually 100% of its revenue from two customers during the six and three month periods ended August 31, 2011.




Reclassifications





Certain reclassifications have been made to the prior year’s financial statements to be consistent with the August 31, 2011 presentation.




Recently Issued Accounting Standards




In September 2011, the FASB issued an amendment to Topic 350, Intangibles—Goodwill and Other, which simplifies how entities test goodwill for impairment. Previous guidance under Topic 350 required an entity to test goodwill for impairment using a two-step process on at least an annual basis. First, the fair value of a reporting unit was calculated and compared to its carrying amount, including goodwill. Second, if the fair value of a reporting unit was less than its carrying amount, the amount of impairment loss, if any, was required to be measured. Under the amendments in this update, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 and 350-20-35-9 under Topic 350. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company is currently evaluating whether early adoption is necessary.




9





NOTE 3 – MERGER





On November 13, 2009, the Company entered into a merger agreement with the Former TheraBiogen, which was approved unanimously by the Company's shareholders and by a majority of the shareholders of the Former TheraBiogen. The merger transaction closed on January 5, 2010.





As a result of the merger and the corporate name change of the Company to TheraBiogen, the common shares of the Company remain listed for trading on the OTC Bulletin Board under a new trading symbol TRAB.





NOTE 4 – LICENSE AGREEMENT





In September 2008, the Company acquired licensing rights to the THERA MAX® products for a cash payment of $150,000 and the issuance of 15,300,000 shares of common stock.  In July 31, 2009, the Company renegotiated the terms of the license agreement, extending the territory to the entire world and the term to 25 years from July 31, 2009, and also received a transfer of all trademark rights to the THERA MAX® name in exchange for $75,000. Amortization expense related to the license is charged to cost of sales in the accompanying statement of operations and amounted to approximately $23,000 for the three months ended August 31, 2011 and $47,000 for the six months ended August 31, 2011.





NOTE 5 – ACCOUNTS RECEIVABLE





Pursuant to an agreement dated July 25, 2011, the Company transfers some of its accounts receivable to a financial institution with full recourse.  The financial institution retains  15% of the proceeds from the receivable transfer as reserves, which are released to the Company as the receivables are collected.   Through an intercreditor agreement with the finance company providing the material acquisition and purchase order financing (see Note 7), the financial institution disburses funds for transferred receivables, less reserves and applicable fees, directly to the purchase order lender as long as there is an outstanding balance on that facility.  The maximum commitment under this facility is $1,000,000.  The facility bears interest at 3.75% over the Wall Street Journal Prime Rate and is secured by a first priority security interest in the personal property and fixtures of the Company.  At August 31, 2011, the balance outstanding under the recourse contracts was $183,461.  As the Company has only recently begun significant product shipments, it does not have a history of collections.  Based upon the quality of its customers, the Company has not yet determined a need for a reserve for bad debt.





NOTE 6 – DEFERRED TAX ASSETS





As of August 31, 2011, the Company had net operating loss (NOL) carry-forwards and deductible temporary differences available to offset future taxable income of approximately $19.1 million including approximately $104,000 from Kushi Resources, Inc. at date of merger. The utilization of the NOL carry-forwards and deductible temporary differences is dependent upon the tax laws in effect at the time they can be utilized. As of August 31, 2011, a valuation allowance of $3.5 million has been recorded against the deferred tax assets due to the uncertainty surrounding their realization caused by the Company’s recurring losses.  The change in the valuation allowance during the six months ended August 31, 2011 was $1.8 million.  The NOL carry-forwards will expire from 2020 through 2031.





NOTE 7 – NOTES PAYABLE





The Company has entered into notes payable agreements with a related party and one of its affiliates totaling $680,770 as of August 31, 2011 with interest due under the notes aggregating $167,364.   During March 2011 the related party lender converted $20,000 of notes into common stock at $0.10 per share.  During the three months ended August 31, 2011, the related party lender converted $68,183 of notes into 2,035,714 shares of common stock at prices from $0.03 to $0.06 per share. As of August 31, 2011, $381,317 of notes had matured.  On October 6, 2011, the lender signed a retroactive amendment to modify the due dates of all notes to the later of one year from the date of the agreement or the stated due date (see Note 10- Subsequent Events).  These convertible notes are payable at maturity, bear interest at 12% per year and have a minimum conversion price of $0.10 per share.





In December 2010, the Company entered into a master materials acquisition and purchase order assignment agreement with a finance company under which the Company can request the finance company to acquire materials necessary to manufacture inventory in order to fulfill the Company’s orders from customers.  The finance company charges 5% of the material purchase order amount per month for each transaction, plus its expenses related to the transaction.  The initial funding limit and term of the agreement is $225,000 and 90 days, each of these terms increase upon satisfactory repayment of advances.  In connection with the agreement, the Company issued  250,000 shares of the Company’s common stock and 200,000 warrants to purchase additional shares of the Company’s common stock for $0.50 per share and as an additional consideration for funding limit increases, the Company may issue up to an additional 500,000 shares of common stock and up to 600,000 warrants to purchase additional shares of common stock.  At August 31, 2011 there was $446,986 outstanding under this agreement.





As of August 31, 2011, the Company is obligated under outstanding promissory notes totaling $194,550 to unrelated parties.  The notes bear interest at 6 to 12 percent per annum, with interest and principal payable at maturity. In April 2011 the holder of the note for $80,000 agreed to extend the maturity of its note to July 18, 2011.  In consideration for this extension the Company issued the holder 150,000 shares of common stock and a three year warrant to purchase 150,000 shares of common stock at $0.35 per share.  The cost of the common stock was expensed at fair value during the period as financing expense.  The fair value of the warrant, $37,358 was recorded as a debt discount and has been amortized over the remaining life of the note.  On October 6, 2011 the note holder agreed to exchange his note for a convertible debenture bearing 10% per annum interest and maturing in one year (see Note 10- Subsequent Events).  The debenture and accrued interest is convertible into common stock at the greater of 75% of the average closing price of the common stock for the 15 days prior to conversion or $0.10 per share.





Notes of the Company for $100,000 matured on June 23, 2011.  On October 6, 2011, the lenders agreed to exchange all outstanding obligations under the note for 3,000,000 shares of common stock (see Note 10- Subsequent Events).




10




NOTE 8 – COMMON STOCK, OPTIONS AND WARRANTS





During the three months ended August 31, 2011, the Company authorized the issuance of 932,556 shares of common stock as stock grants to consultants for services, charging $80,328 to marketing expense and $5,000 to consulting expense included in general and administrative expenses based upon the fair value of the shares on date of grant.  During the six months ended August 31, 2011, the Company issued 2,529,396 shares of common stock for services valued at $2,164,289 based upon the stock price on date of grant.   The Company also issued 150,000 shares of common stock to a note holder in consideration of the extension of the due date of a note, charging $96,000 to general and administrative expense.





On March 23, 2011, a related party converted $20,000 of convertible debt into 200,000 shares of common stock at $0.10 per share.  During the three months ended August 31, 2011 a related party converted $68,183 of convertible debt into 2,035,714 shares of common stock at prices between $0.03 and $0.06 per share.  400,000 warrants held by a related party expired on August 31, 2011 and 150,000 warrants held by related parties were cancelled.





The Company issued 166,000 shares of common stock as result of a private placement of units consisting of 2 shares of common stock and a five year warrant to purchase a share at $1.25 per share during the six months ended August 31, 2011.  Additionally the Company recorded as issued 302,000 shares of common stock from the private placement that had previously been classified as liability for unissued common stock.  The Company is awaiting documentation to issue shares to one stockholder who purchased $5,000 in private placement units, resulting in a liability for unissued common stock of $5,000.





During the sixth months ended August 31, 2011 the Company awarded 9,288,000 warrants and stock options to directors and consultants.  These warrants and options vested upon grant and the Company charged $9,798,300 to general and administrative expenses and $1,330,500 to sales and marketing expenses based upon the fair value of the warrants and options on date of grant.





The following table summarizes the warrants and options outstanding at August 31, 2011:





Options and Warrants


Weighted Average Exercise PriceOutstanding at February 28, 2011


4,503,000


$
.62Granted


10,788,000


$
1.08Cancelled/forfeited


(150,000
)

$
.01Expired


(400,000
)

$
.01Exercised


-



-Outstanding at August 31, 2011


14,741,000


$
.95




11




NOTE 9 – RELATED PARTY TRANSACTIONS





The Company’s indebtedness to related parties is $848,134, including interest, as of August 31, 2011.





The Company rents office space from a shareholder on a month-to-month basis at $2,000 per month.  Rental expense totaled $6,000 through August 31, 2011.





NOTE 10 - SUBSEQUENT EVENTS





In October 2011, the Company amended the following loan agreements:





The Company amended its material acquisition and purchase order assignment agreement with a finance company to provide a total of $1 million in purchase order and inventory financing and a line of credit of $250,000 for working capital.  The financing is secured by all assets of the Company and bears interest at 5% per month.  In consideration for making the amendment, the finance company received 2,558,535 shares of common stock and a non-dilutable warrant to purchase 3,017,170 shares of common stock at $0.05 per share.  Additionally the Company has granted a sublicense to the finance company that allows it or its assignee to develop and implement a direct television marketing program for the Company’s products.





A related party of the Company and its affiliate amended its convertible debentures in the amount of $645,770 plus accrued interest to extend the maturity of all debentures maturing before October 1, 2012 to October 1, 2012 and setting a floor of $0.10 per share for the conversion of debentures and accrued interest to common stock.





Holders of notes in the amount of $100,000 agreed to convert their debt into 3 million shares of common stock.





A holder of a note in the amount of $80,000 agreed to convert his debt into a convertible debenture due October 5, 2012 bearing interest at 10% per annum and convertible into common stock at the greater of 75% of the 15 day average price of common stock prior to conversion or $0.10.




12





ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS





You should read the following discussion and analysis of our financial condition and results of operations together with our condensed financial statements and related notes appearing elsewhere in this quarterly report on Form 10-Q.  This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions.  The actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to those set forth under “Risk Factors” in our annual report on Form 10-K/A, filed with the SEC July 1, 2011.





OVERVIEW





We were incorporated on October 3, 2005 under the laws of the State of Nevada as Kushi Resources, Inc. On January 5, 2010, we merged with TheraBiogen, Inc. (the “Former TheraBiogen”).  We are the surviving entity in the merger and we changed our name to TheraBiogen, Inc.  All references in this Report to TheraBiogen or Company mean TheraBiogen, Inc., a Nevada corporation, formerly Kushi Resources Inc., unless otherwise indicated.





Under an exclusive world-wide licensing agreement with Nasal Therapeutics, Inc. (“NTI”), we have the right to develop, manufacture, market and sell four homeopathic nasal sprays, THERA MAX® Cold and Flu Relief, THERA MAX® Allergy Relief and THERA MAX® Migraine Relief. The principal of NTI, Dr. Charles Hensley also developed the homeopathic nasal product ZICAM.





In our opinion, THERA MAX® Cold & Flu Relief homeopathic nasal spray can be considered the next generation of cold and flu relief as compared to ZICAM’s cold remedy product. THERA MAX® Allergy Relief is also a nasal spray that employs a unique homeopathic approach in the treatment of allergic rhinitis (runny nose).





In September 2010 we launched two homeopathic nasal sprays into the United States over-the-counter market principally through sales to Rite Aid Pharmacy.  Our first two offerings in the launch were THERA MAX® Cold and Flu Relief and THERA MAX® Allergy Relief.  A number of additional national and regional retailers are now selling THERA MAX® products.




Going Concern





The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern.  This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of liabilities in the normal course of business.  The Company has not as yet attained a level of operations which allows it to meet its current overhead and may not attain profitable operations within its first few business operating cycles, nor is there any assurance that such an operating level can ever be achieved. The Company is dependent upon obtaining additional financing adequate to fund its operations. While the Company has funded its initial operations with private placements and secured loans principally from related parties, there can be no assurance that adequate financing will continue to be available to the Company and, if available, on terms that are favorable to the Company.  The report of our auditors on our financial statements for the year ended February 28, 2011 includes a reference to going concern risks. The Company’s ability to continue as a going concern is also dependent on many events outside of its direct control, including, among other things improvement in the economic climate.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.





Results of operations




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Three months ended August 31, 2011 versus three months ended August 31, 2010





We generated sales during the three months ended August 31, 2011 of $205,000.  Gross sales were $209,000 reduced by discounts and allowances of $4,000.  The allowance for sales incentives, promotional allowances, discounts and returns will reflect our historical experience and will be reviewed regularly to ensure that it reflects potential chargeback backs from customers.  The allowance as of August 31, 2011 is based upon our experience through September 30, 2011.   As it is industry practice, we will offer additional allowances as we develop new retailers, which will reduce our revenue in the short term.   There were no sales in the three months ended August 31, 2010.   During the quarter we received initial orders from a major drug retailer.  We believe that these are part of a larger purchase planned for the fall cold and flu season.  However, there can be no assurances that we will be successful in obtaining these orders.





Costs of goods sold for the three months ended August 31, 2011 were $108,000.  $23,000 of this amount was the amortization of the license for the product.   We charge various charges, such as shelving fees, against cost of goods as they are received.





Marketing and sales expenses were $121,000 versus $195,000 in the prior year period.  The decrease is the result of high amounts of expense being paid with equity compensation in the prior year.  $80,000 of the marketing and sales expenses for the current six month period was in the form of equity compensation.   We expect to increase our sales and marketing activities in the near future to promote our products.





General and administrative expenses for the three months ended August 31, 2011 were $522,000 compared to $1,379,000 in the prior year period.  $322,000 of the $522,000 expense was in the form of equity compensation.  The decrease is the result of our efforts to control expenses while funding is limited.  General and administrative costs are expected to increase in the future as our sales activity increases.





Interest expense for the three months ended August 31, 2011 was $124,000 versus $66,000 in the prior year.   Notes payable increased to $1.3 million on August 31, 2011 versus $925,000 in the prior year resulting in increased interest expense.





Six months ended August 31, 2011 versus six months ended August 31, 2010





We generated sales during the six months ended August 31, 2011 of $209,000.  Gross sales were $214,000 reduced by $5,000 in discounts and allowances.  The allowance for sales incentives, promotional allowances, discounts and returns will reflect our historical experience and will be reviewed regularly to ensure that it reflects potential chargeback backs from customers.  The allowance as of August 31, 2011 is based upon our experience through September 30, 2011.   As it is industry practice, we will offer additional allowances as we develop new retailers, which will reduce our revenue in the short term.   There were no sales in the six months ended August 31, 2010.   Based upon our experience and understanding of our market, we believe that our customers place orders for the fall cold and flu season during the summer for shipment in the early fall.  Consequently we should expect lower sales during the late winter and early spring, which includes our first two fiscal quarters.  As we expand our retail distribution we will gain more knowledge about our customer’s ordering patterns. During the first six months we received indications from a number of retailers that they intend to sell our THERA MAX® products for the 2012 cold and flu season.  However, there are no assurances that these retailers will carry our products.





Costs of goods sold for the six months ended August 31, 2011 were $162,000.  $47,000 of this amount was the amortization of the license for the product.   We charge various charges, such as shelving fees, against cost of goods as they are received.





Marketing and sales expenses were $1.8 million versus $209,000 in the prior year period.  $1.7 million of the expense was related to non-cash equity compensation from the grants of common stock, warrants and options to consultants and vendors.  Excluding the non-cash equity compensation, marketing and sales expense for the six months ended August 31, 2011 were $87,000 versus $20,000 for the same period in the previous year.  The increase is the result of additional activity as we continue to introduce our products to new customers.  In order to increase our marketing and sales activities during the retail introduction of our products, a number of our consultants and vendors have agreed to accept common stock, warrants or options instead of cash compensation.  Due to the high risk associated with accepting equity in place of cash, we have had to offer higher compensation than would otherwise be required.   Non-cash compensation is valued at the fair value of the common stock, warrants or options on the date of grant.  While the price of common stock varied from a high of $1.55 to $0.05 per share during the period, the majority of equity compensation was granted at a price of $1.38 per share.   To the extent that we use equity to compensate our marketing and sales expenses, these expenses will be higher than if we had paid cash. These expenses will vary with the price of common stock when grants are made.





General and administrative expenses for the six months ended August 31, 2011 were $12.0 million compared to $2.2 million in the prior year period.  Expenses for the six months ended August 31, 2011 included $11.2 million of non-cash compensation.    As discussed above, we have compensated our directors and many of our consultants with common stock and stock options in lieu of cash.   The cost of non-cash compensation is significantly higher than if we had used cash.    As we continue to develop new customers and increase our overall activity, we expect our general and administrative expenses to continue to increase.  The extent to which we use cash rather than equity to pay for expenses could result in a decrease in total expense while the actual level of activity increases.




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Liquidity and Capital Resources





As of August 31, 2011, we had a cash balance of $20,000 and negative working capital of $1.5 million.   Our primary sources of liquidity are funds generated from our equity financings, which are primarily the sale of units of two shares of our common stock and a warrant for $1 per unit, debt financings, and a financing arrangement to fund inventory purchases. We have not as yet attained a level of operations which allows us to meet our current overhead and may not attain profitable operations within the next few business operating cycles, nor is there any assurance that such an operating level can ever be achieved.  The report of our auditors on our 2011 financial statements includes a reference to going concern risks. While we have funded our initial operations with private placements, and secured loans as well as entering into a financing arrangement, there can be no assurance that adequate financing will continue to be available and, if available, on terms that are favorable to us.  Our ability to continue as a going concern is also dependent on many events outside of our direct control, including, among other things, our ability to achieve our business goals and objectives, as well as improvement in the economic climate.





As mentioned in Note 10 to our financial statements, Subsequent Events, in October 2011 we amended a number of our financing and loan agreements to increase borrowing limits, extend maturities and convert certain notes into convertible debentures and stock.   While these amendments provide additional funding and insure our current compliance with the terms of all outstanding debt, we believe that additional funding would allow us to grow more rapidly.  We continue our efforts to obtain such funding.





Cash Flows





Our cash on hand at August 31, 2011 and February 28, 2011 was $19,658 and $0, respectively.





Operating cash flows:  Our operating source of cash was from our sales of THERA MAX® products.





Net cash used in operating activities for the six months ended August 31, 2011 was $393,000 as compared to $700,000 in the prior year period. The decrease in the cash used in operating activities in the current period was principally the result of an increase of $184,000 in accounts payable, accrued interest of $90,000 and accounts receivable of $146,000.   We also used a significant amount of non-cash compensation in the form of common stock, warrants and options in lieu of cash.





Investing cash flows:  Net cash provided by investing activities of $2,000 was the result of the collection of a note and accrued interest and an advance to an affiliate.  No cash was provided or used by investing activities in the six months ended August 31, 2010.





Financing cash flows: Net cash provided by financing activities was $410,000 and $746,000 in 2011 and 2010, respectively.  We were able to secure capital from investors through sales of equity of $83,000 and $343,000 for the six months ended August 31, 2011 and 2010, principally consisting of units of 2 shares of common stock and a warrant to purchase an additional share.   Additionally we issued debt in the form of promissory and convertible notes to related parties of $54,000 in 2011 and 38,000 in 2010.   Further financing was provided by additional notes payable of $277,000 in 2011 and $365,000 in 2010.




15




OFF-BALANCE SHEET ARRANGEMENTS





As of August 31, 2011 we have no off-balance sheet arrangements.





Related Parties





Information concerning related party transactions is included in the financial statements and related notes, appearing elsewhere in this quarterly report on Form 10-Q.





Critical Accounting Policies





The preparation of financial statements in conformity with generally accepted accounting principles requires our management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain.





We have identified certain accounting policies, described below, that are most important to the portrayal of our current financial condition and results of operations. Our significant accounting policies are disclosed in the notes to our financial statements included in the Annual Report on Form 10-K/A for the year ended February 28, 2011.





ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





Not applicable





ITEM 4 – CONTROLS AND PROCEDURES





Evaluation of Disclosure Controls and Procedures





The Company is in the process of implementing disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’), that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports are recorded, processed, summarized, and reported within the time periods specified in rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to our Chief Executive Officer to allow timely decisions regarding required disclosure.





As of August 31, 2011, the Chief Executive Officer and Chief Financial Officer carried out an assessment, of the effectiveness of the design and operation of our disclosure controls and procedure and concluded that the Company’s disclosure controls and procedures were not effective as of August 31, 2011, because of the material weakness described below.





A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.





The material weakness identified during management's assessment was the lack of review over transactions due to the limited resources of the accounting and finance function. This control deficiency did not result in adjustments to the Company’s interim financial statements. However, this control deficiency could result in a material misstatement of significant accounts or disclosures that would result in a material misstatement to the Company’s interim or annual financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.





The Chief Executive Officer and Chief Financial Officer performed additional accounting and financial analyses and other post-closing procedures including detailed validation work with regard to balance sheet account balances, additional analysis on income statement amounts and managerial review of all significant account balances and disclosures in the Quarterly Report on Form 10-Q, to ensure that the Company’s Quarterly Report and the financial statements forming part thereof are in accordance with accounting principles generally accepted in the United States of America. Accordingly, management believes that the financial statements included in this Quarterly Report fairly present, in all material respects, the Company’s financial condition, results of operations, and cash flows for the periods presented.





Changes in Internal Control over Financial Reporting





During the three months ended August 31, 2011 there were no changes in our system of internal controls over financial reporting.




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PART II -   OTHER INFORMATION








ITEM 1   -   LEGAL PROCEEDINGS.





None.





ITEM 1A. RISK FACTORS.





In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I “Item 1A. Risk Factors” in our Annual Report on Form 10-K/A for the fiscal year ended February 28, 2011, which could materially affect our business, financial condition and/or operating results. The risks described in our Annual Report on Form 10-K/A are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or operating results.





ITEM 2   -   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.





During the six months ended August 31, 2011, the Company continued to conduct a private placement of its common stock units containing shares and warrants.  The offerings are exempt from registration pursuant to Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended, open to “accredited investors” as that term is defined in Rule 501 of Regulation D. The maximum to be raised is $6 million.  During the period, the Company had received $83,000 for fully paid subscriptions for units containing 166,000 shares and 83,000 warrants to purchase shares at $1.25 per share. Proceeds will be used for general corporate purposes.





ITEM 3   -   DEFAULTS UPON SENIOR SECURITIES





None





ITEM 4   -   (Removed and Reserved)





ITEM 5   -   OTHER INFORMATION





None





ITEM 6   -   EXHIBITS AND REPORTS ON FORM 8-K





(a) Exhibits





Exhibit

Description10.1

Amended and Restated Master Materials Acquisition and Purchase Order Assignment Agreement31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under Securities Exchange Act of 1934.32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C Section 1350.32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C Section 1350.








17








SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on October 17, 2011.




TheraBiogen, Inc.By:
/s/ Kelly T. HickelChief Executive OfficerBy:
/s/ Mark D. ShoomanChief Financial Officer