10QSB 1 v033211_10qsb.txt U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2005 OR |_| 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 000-23506 IGIA, INC. (Exact name of registrant as specified in its charter) Delaware 33-0601498 (State or jurisdiction of (IRS Employer Identification No.) incorporation or organization) 521 Fifth Avenue, 20th Floor, New York, New York 10175 ------------------------------------------------------ (Address of Principal Executive Offices) Registrant's telephone number: (212) 575-0500 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) 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 January 13, 2005, the Registrant had 20,082,933 shares of common stock issued and outstanding. Transitional Small Business Disclosure Format (check one): Yes |_| No |X| ------------------ Quarterly Report on Form 10-QSB for the Quarterly Period Ended November 30, 2005 Table of Contents Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheet as of November 30, 2005: 1 Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended November 30, 2005: 2 Condensed Consolidated Statement of Changes in Deficiency in Stockholders' Equity for the Twenty One Months Ended November 30, 2005: 3 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2005 and 2004: 4 Notes to Condensed Consolidated Financial Statements November 30, 2005: 5-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-27 Item 3. Controls and Procedures 27-29 PART II. OTHER INFORMATION Item 1. Legal Proceedings 29-30 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30 Item 3. Defaults upon Senior Securities 30 Item 4. Submission of matters to a vote of security holders 30 Item 5. Other information 30 Item 6. Exhibits 30-38 Signatures CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 PART I. FINANCIAL INFORMATION Item 1. Financial Statements The following unaudited Condensed Consolidated Financial Statements as of November 30, 2005 and for the three and nine months ended November 30, 2005 and 2004 have been prepared by IGIA, Inc., a Delaware corporation. IGIA, INC. (Formerly Tactica International, Inc.) CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) November 30, 2005 ------------ ASSETS CURRENT ASSETS: Cash $ 27,422 Accounts receivable, net of allowance for doubtful accounts of $2,521,333 3,078,398 Inventories 910,111 Prepaid advertising 1,198,722 Other current assets 307,954 ------------ Total current assets 5,522,607 Property and equipment, net of accumulated depreciation of $399,388 119,223 Other asset 35,054 ------------ Total Assets $ 5,676,884 ============ LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Pre-petition liabilities $ 12,924,250 Accounts payable 2,833,493 Accounts payable - related party 2,434,190 Accrued expenses 2,420,478 Customer advances 1,711,466 Note payable 300,000 ------------ Total current liabilities 22,623,877 ------------ Callable Secured Convertible Notes Payable, net of discount of $1,508,046 491,954 ------------ DEFICIENCY IN STOCKHOLDERS' EQUITY: Preferred stock, Series E, par value $0.001 per share; 261,574 shares authorized, issued and outstanding 262 Preferred stock, Series G, par value $0.001 per share; 50,000 shares authorized, issued and outstanding 50 Common stock, par value $ 0.001 per share; 1,000,000,000 shares authorized, 18,002,933 shares issued and outstanding 18,003 Additional paid -in- capital 15,944,360 Accumulated deficit (33,401,622) ------------ Total Deficiency in Stockholders' Equity (17,438,947) ------------ Total Liabilities and Deficiency in Stockholders' Equity $ 5,676,884 ============ See accompanying footnotes to the unaudited condensed consolidated financial statements 1 IGIA, INC. (Formerly Tactica International, Inc.) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
Three Months Ended November 30, Nine Months Ended November 30, 2005 2004 2005 2004 -------------- -------------- ------------- ------------- REVENUES: Net sales $ 7,921,688 $ 1,526,539 $ 20,658,723 $ 10,098,522 Cost of sales 2,101,019 5,353,248 5,821,376 10,332,292 -------------- -------------- ------------- ------------- Gross profit (loss) 5,820,669 (3,826,709) 14,837,347 (233,770) -------------- -------------- ------------- ------------- OPERATING EXPENSES: Media advertising 2,962,797 64,012 7,398,226 515,800 Other selling, general and administrative 4,329,996 2,840,043 10,481,756 8,568,345 Financial advisory fee -- -- -- 3,275,000 -------------- -------------- ------------- ------------- Total operating expenses 7,292,793 2,904,055 17,879,982 12,359,145 -------------- -------------- ------------- ------------- LOSS FROM OPERATIONS (1,472,124) (6,730,764) (3,042,635) (12,592,915) -------------- -------------- ------------- ------------- OTHER INCOME (EXPENSES): Interest expense, net (197,356) (18,570) (677,880) (136,923) Other 35 37,784 13,169 170,209 -------------- -------------- ------------- ------------- (197,321) 19,214 (664,711) 33,286 -------------- -------------- ------------- ------------- LOSS BEFORE REORGANIZATION ITEMS AND INCOME TAXES (1,669,445) (6,711,550) (3,707,346) (12,559,629) -------------- -------------- ------------- ------------- REORGANIZATION ITEMS: Professional fees (469,762) -- (1,477,896) -- -------------- -------------- ------------- ------------- (469,762) -- (1,477,896) -- -------------- -------------- ------------- ------------- LOSS BEFORE INCOME TAXES (2,139,207) (6,711,550) (5,185,242) (12,559,629) Income taxes benefit -- -- -- -------------- -------------- ------------- ------------- NET LOSS $ (2,139,207) $ (6,711,550) $ (5,185,242) $ (12,559,629) ============== ============== ============= ============= Net loss per common share - basic $ (0.12) $ (0.37) $ (0.29) $ (0.70) ============== ============== ============= ============= Net loss per common share - fully diluted $ (0.12) $ (0.37) $ (0.29) $ (0.70) ============== ============== ============= ============= Weighted average common shares outstanding - basic 18,002,933 18,002,933 18,002,933 18,002,933 ============== ============== ============= ============= Weighted average common shares outstanding - fully diluted 18,002,933 18,002,933 18,002,933 18,002,933 ============== ============== ============= =============
See accompanying footnotes to the unaudited condensed consolidated financial statements 2 IGIA, INC. (Formerly Tactica International, Inc.) CONDENSED CONSOLIDATED STATEMENT OF DEFICIENCY IN STOCKHOLDERS' EQUITY (UNAUDITED)
Series E Series G Preferred Stock Preferred Stock Common Stock ----------------------- --------------------- ------------------------- Shares Amount Shares Amount Shares Amount Balance at March 1, 2004 -- $ -- -- $ -- 1,000 $ 77,000 Exchange of net assets and liabilities, with previous majority shareholder of Tactica, for 100% of previous owners' equity interest Cancellation of Tactica International, Inc. shares (1,000) (77,000) Issuance of shares in connection with merger with Diva Entertainment, Inc. 9,400,000 9,400 Receipt and subsequent cancellation of shares received in exchange for distribution of wholly-owned subsidiary to shareholder (3,725,000) (3,725) Cancellation of shares previously issued in connection with merger with Diva Entertainment, Inc. (1,209,000) (1,209) Issuance of shares in exchange for previously issued and outstanding shares held by Diva Entertainment, Inc. preferred shareholders 6,693,340 6,693 Issuance of shares in exchange for previously issued and outstanding shares held by Diva Entertainment, Inc. common shareholders 5,593,593 5,594 Issuance of preferred shares in connection with merger with Diva Entertainment, Inc. 261,000 261 Issuance of shares in exchange for services rendered 1,250,000 1,250 Issuance of shares in exchange for services rendered 1,750,000 1,750 Cancellation of previously issued shares in connection with services rendered (1,750,000) (1,750) Issuance of preferred shares in exchange for previously incurred debt 574 1 Net loss ------- ------------ ------------ ------------ ---------- ------------ Balance at March 1, 2005 261,574 $ 262 -- $ -- 18,002,933 $ 18,003 Issuance of stock warrants in connection with callable secured convertible notes Cost of beneficial conversion feature on notes Issuance of preferred shares 50,000 50 Net loss ------- ------------ ------------ ------------ ---------- ------------ Balance at November 30, 2005 261,574 $ 262 50,000 $ 50 18,002,933 $ 18,003 ======= ============ ====== ============ ========== ============ Total Additional Deficiency in Paid In Accumulated Stockholders' Capital Deficit Equity ------------ ------------ ------------ Balance at March 1, 2004 $ 756,480 $(12,019,016) $(11,185,536) Exchange of net assets and liabilities, with previous majority shareholder of Tactica, for 100% of previous owners' equity interest 6,198,587 6,198,587 Cancellation of Tactica International, Inc. shares 77,000 -- Issuance of shares in connection with merger with Diva Entertainment, Inc. 9,400 Receipt and subsequent cancellation of shares received in exchange for distribution of wholly-owned subsidiary to shareholder 3,725 -- Cancellation of shares previously issued in connection with merger with Diva Entertainment, Inc. 1,209 -- Issuance of shares in exchange for previously issued and outstanding shares held by Diva Entertainment, Inc. preferred shareholders 6,693 Issuance of shares in exchange for previously issued and outstanding shares held by Diva Entertainment, Inc. common shareholders 5,594 Issuance of preferred shares in connection with merger with Diva Entertainment, Inc. 261 Issuance of shares in exchange for services rendered 3,273,750 3,275,000 Issuance of shares in exchange for services rendered 4,583,250 4,585,000 Cancellation of previously issued shares in connection with services rendered (4,583,250) (4,585,000) Issuance of preferred shares in exchange for previously incurred debt 3,632,159 3,632,160 Net loss (16,197,364) (16,197,364) ------------ ------------ ------------ Balance at March 1, 2005 $ 13,942,910 $(28,216,380) $(14,255,205) Issuance of stock warrants in connection with callable secured convertible notes 64,429 64,429 Cost of beneficial conversion feature on notes 1,935,571 1,935,571 Issuance of preferred shares 1,450 1,500 Net loss (5,185,242) (5,185,242) ------------ ------------ ------------ Balance at November 30, 2005 $ 15,944,360 $(33,401,622) $(17,438,947) ============ ============ ============
See accompanying footnotes to the unaudited condensed consolidated financial statements 3 IGIA, INC. (Formerly Tactica International, Inc.) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Nine Months Ended November 30, 2005 2004 ------------ ------------ Net cash used in operating activities $ (1,735,453) $ (827,999) Net cash used in investing activities (29,294) (3,078) Net cash provided by financing activities 1,790,009 653,046 ------------ ------------ Net increase (decrease) in cash 25,262 (178,031) Cash and cash equivalents at beginning of period 2,160 185,244 ------------ ------------ Cash and cash equivalents at end of period $ 27,422 $ 7,213 ============ ============ See accompanying footnotes to the unaudited condensed consolidated financial statements 4 IGIA, INC. (formerly Tactica International, Inc.) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS November 30, 2005 (UNAUDITED) NOTE A - SUMMARY OF ACCOUNTING POLICIES General IGIA, Inc., (the "Company", "Registrant" or "IGIA"), is incorporated under the laws of the State of Delaware. The Company designs, develops, imports, and distributes personal care and household products to major retailers and through direct marketing. We purchase our products from unaffiliated manufacturers most of which are located in the People's Republic of China and the United States. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-QSB. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the three-month and nine-month period ended November 30, 2005 are not necessarily indicative of the results that may be expected for the year ending February 28, 2006. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated February 28, 2005 audited financial statements and footnotes thereto. The consolidated financial statements include the accounts of the Registrant and its wholly-owned subsidiaries, Tactica International, Inc. ("Tactica") and Shopflash, Inc. All significant inter-company transactions and balances have been eliminated in consolidation. Chapter 11 Reorganization On October 21, 2004, Tactica, which accounted for all of the operations of the Company, filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). IGIA is not seeking bankruptcy protection. Tactica remains in possession of its assets and the management of its property as a debtor in possession under Sections 1107 and 1108 of the Bankruptcy Code. On January 12, 2006, the Bankruptcy Court entered a confirmation order approving the consensual plan of reorganization. According to the plan terms, upon the plan's effective date Tactica would distribute to unsecured creditors a lump sum cash payment of $775,000 and a number of freely tradable shares of IGIA's common stock equal to 10% of the then outstanding common stock, as well as rights to certain legal claims. The effective date is expected to occur prior to the end of the Company's fiscal year on February 28, 2006. 5 Going Concern The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The bankruptcy petition, losses, negative working capital and net worth raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to obtain additional financing depends on the availability of its borrowing capacity, the success of its growth strategy and its future performance, each of which is subject to general economic, financial, competitive, legislative, regulatory, and other factors beyond the Company's control. The inability to obtain financing when required would have a material adverse effect on the Company and the implementation of its business plan. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Reclassification Certain reclassifications have been made to conform prior periods' data to the current presentation. These reclassifications had no effect on reported losses. NOTE B - ACCOUNTS RECEIVABLE As of November 30, 2005, the Company has $2,969,911 in credit card holdbacks by the merchant banks that process payments due for product sales. Such holdback accounts are based on the dollar amount of sales and are designed to allow the Company to receive the holdback cash, including interest for the Company, after customer refunds and chargebacks are cleared. In addition, the Company's accounts receivable include $108,487 in accounts due from retailers and wholesalers, which are net of a $2,521,333 allowance for doubtful accounts. NOTE C - INVENTORY Inventories consist primarily of finished products held in public warehouses that are stated at the lower of cost or market, determined on a FIFO (first-in, first-out) basis. A product's cost is comprised of the amount that we pay our manufacturer for product, tariffs and duties associated with transporting product across national borders and freight costs associated with transporting the product from our manufacturers to our warehouse locations. NOTE D - PRE-PETITION LIABILITIES Under the Bankruptcy Code, Tactica's liabilities as of the October 21, 2004 filing date are deemed pre-petition liabilities that are subject to a Court supervised and approved resolution. The Company carries pre-petition liabilities on the condensed consolidated balance sheet until such time as they are liquidated through the bankruptcy proceedings, which are ongoing. Pre-petition liabilities are subject to compromise and consist of the following: 6 Accounts payable $ 6,885,266 Accrued expenses 4,948,627 Prepayments received from customers 438,928 Advances under factoring facility 531,307 Note payable 120,122 ---------------- $ 12,924,250 ================ NOTE E- CALLABLE SECURED CONVERTIBLE NOTES To obtain funding for the purpose of providing a loan to Tactica, in the form of debtor in possession financing and exit financing in the context of Tactica's chapter 11 proceedings, the Company entered into a Securities Purchase Agreement with four accredited investors ("Investors" or "Selling Stockholders") on March 23, 2005 for the sale of (i) $3,000,000 in Callable Secured Convertible Notes and (ii) warrants to buy 6,000,000 shares of common stock. The Company sold to third party investors $1,000,000 in Callable Secured Convertible Notes on March 24, 2005 and, following the filing of the Company's registration statement on April 14, 2005, an additional $1,000,000 on April 20, 2005 and an additional $1,000,000 on December 22, 2005 upon the Company's registration statement being declared effective. Accordingly, as of November 30, 2005, the Company received net proceeds from the sales of $1,795,588, net of $204,412 of expenses and prepaid interest pursuant to the Securities Purchase Agreement, which the Company capitalized and amortized over the maturity period (three years) of the Callable Secured Convertible Notes. The Callable Secured Convertible Notes bear interest at 8% and are convertible into the Company's common stock, at the Investors' option, at the lower of (i) $0.04 or (ii) 50% of the average of the three lowest intra-day trading prices for the common stock on a principal market for the 20 trading days before, but not including, the conversion date. Interest is due and payable quarterly, except in any month in which the Company's trading price, as defined, is greater than $.03125. In the three month period ended November 30, 2005, no interest expense was incurred as the trading price of the Company was greater than $.03125. The full principal amount of the Callable Secured Convertible Notes is due upon default. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.03 per share. In addition, the conversion price of the Callable Secured Convertible Notes and the exercise price of the warrants will be adjusted in the event that the Company issues common stock at a price below the fixed conversion price, below market price, with the exception of any securities issued in connection with the Securities Purchase Agreement. The conversion price of the Callable Secured Convertible Notes and the exercise price of the warrants may be adjusted in certain circumstances such as if the Company pays a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the Selling Stockholders' position. The Selling Stockholders have contractually agreed to restrict their ability to convert or exercise their warrants and receive shares of the Company's common stock such that the number of shares of common stock held by the Investors and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. In addition, the Company has granted the Investors registration rights and a security interest in substantially all of the Company's assets and a security interest in its intellectual property. 7 A summary of Callable Secured Convertible Notes at November 30, 2005 is as follows:
November 30, 2005 ----------------- Callable Secured Convertible Notes; 8% per annum; due three years from the dates of issuance; Noteholder has the option to convert unpaid note principal of the Company's common stock at the lower of (i) $0.04 or (ii) 50% of the average of the three lowest intra-day trading prices for the common stock on a principal market for the 20 trading days before, but not including, the conversion date. The Company granted the noteholder a security interest in substantially all of the Company's assets and intellectual property and $ 2,000,000 registration rights. Debt Discount - beneficial conversion feature, net of accumulated amortization of $427,525 at November 30, 2005. (1,508,046) Total $ 491,954 Less: current portion -- ----------- $ 491,954 ===========
In accordance with Emerging Issues Task Force Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios ("EITF 98-5"), the Company recognized an imbedded beneficial conversion feature present in the Callable Secured Convertible Notes. The Company allocated a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. The Company recognized and measured an aggregate of $1,935,571 of the proceeds, which is equal to the intrinsic value of the imbedded beneficial conversion feature, to additional paid-in capital and a discount against the Callable Secured Convertible Notes. The debt discount attributed to the beneficial conversion feature is amortized over the maturity period (three years) as interest expense. In connection with the placement of the Callable Secured Convertible Notes through November 30, 2005, the Company issued warrants granting the holders the right to acquire 4,000,000 shares of the Company's common stock at $0.03 per share. The warrants expire five years from their issuance. In accordance with Emerging Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments ("EITF - 0027"), the Company recognized the value attributable to the warrants in the amount of $64,429 to additional paid-in capital and a discount against the Callable Secured Convertible Notes. The Company valued the warrants in accordance with EITF 00-27 using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 4.00%, a dividend yield of 0%, and volatility of 71%. The debt discount of $64,429 attributed to the value of the warrants issued was charged to interest expense. 8 In connection with assistance provided to the Company in arranging and concluding the funding, on December 22, 2005, the Company issued 1,000,000 shares of its common stock to a third party upon the effectiveness of the registration statement. NOTE F- CAPITAL STOCK We are authorized to issue 1,000,000,000 shares of common stock and 1,000,000 shares of preferred stock, of which 261,574 have been designated Series E convertible preferred stock and 50,000 have been designated Series G preferred stock. As of November 30, 2005, we had issued and outstanding 18,002,933 shares of common stock, 261,574 shares of Series E convertible preferred stock and 50,000 shares of Series G preferred stock. Preferred Stock Series G Preferred Stock On March 31, 2005, we issued 25,000 shares of Series G preferred stock to each of Avi Sivan, the Chief Executive Officer of the Company, and Prem Ramchandani, the President of the Company. The Series G preferred stock was issued to Mr. Sivan and Mr. Ramchandani in consideration of the fact that in connection with the recent financing obtained by the Company, Mr. Sivan and Mr. Ramchandani agreed to pledge all of their equity ownership in the Company to secure the obligations of the Company. Without such pledge of equity, including a pledge of the Series G preferred stock by Mr. Sivan and Mr. Ramchandani, the transaction would not have been consummated. The stated value of the Series G preferred stock at the time of issuance was $0.03 per share. As of November 30, 2005, there were 50,000 shares of Series G preferred stock issued and outstanding. Current holders of Series G preferred stock (i) have general ratable rights to dividends from funds legally available therefrom, when, as and if declared by the Board of Directors; (ii) are entitled to share ratably in all assets available for distribution to stockholders upon liquidation, dissolution or winding up of our affairs; (iii) do not have preemptive, subscription or conversion rights, nor are there any redemption or sinking fund provisions applicable thereto; and (iv) are entitled to 10,000 votes per share on all matters on which stockholders may vote at all stockholder meetings. The preferred stock does not have cumulative voting rights. Warrants As of November 30, 2005, there were outstanding warrants to purchase 100,000 shares of common stock at $1.00 per share that are exercisable within a five-year period ending August 2, 2009 and 4,000,000 shares of common stock at $.03 per share that are exercisable within a five-year period ending March 23, 2010 through April 19, 2010. 9 Non-Employee Warrants The following table summarizes the changes in warrants outstanding and the related prices for the shares of the Company's common stock issued to non-employees of the Company as of November 30, 2005:
Warrants Outstanding Warrants Exercisable ------------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Exercise Number Remaining Contractual Exercise Number Exercise Prices Outstanding Life (Years) Price Exercisable Price ------ ----------- ------------ ------- ----------- -------- $ 0.03 4,000,000 4.35 $ 0.03 4,000,000 $ 0.03 $ 1.00 100,000 3.68 1.00 100,000 1.00 ----------- 4,100,000 4.33 $ 0.05 4,100,000 $ 0.05 ========= ===========
Transactions involving warrants issued to non-employees are summarized as follows: Weighted Average Number of Price Per Shares Share --------- ---------- Outstanding at March 1, 2005 100,000 $ 1.00 Granted 4,000,000 .03 Canceled or expired -- -- Exercised -- -- --------- Outstanding at November 30, 2005 4,100,000 $ .05 ========= Warrants issued to non-employees did not result in any charge to operations. The significant assumptions used to determine the fair values, using a Black-Scholes option pricing model are as follows: Significant assumptions (weighted-average): Risk-free interest rate at grant date 4.00% Expected stock price volatility 71% Expected dividend payout -- Expected option life-years (a) 5.00 (a) The expected option life is based on contractual expiration dates. NOTE G- CASH FLOWS The following are non-cash transactions for the nine months ended November 30, 2005: On March 31, 2005, we issued 25,000 shares of Series G preferred stock to each of Avi Sivan, the Chief Executive Officer of the Company, and Prem Ramchandani, the President of the Company. The Series G Preferred Stock was issued to Mr. Sivan and Mr. Ramchandani in consideration of the fact that in connection with the recent financing obtained by the Company, Mr. Sivan and Mr. Ramchandani agreed to pledge all of their equity ownership in the Company to secure the obligations of the Company. Without such pledge of equity, including a pledge of the Series G Preferred Stock by Mr. Sivan and Mr. Ramchandani, the transaction would not have been consummated. The stated value of the Series G preferred stock at the time of issuance was $0.03 per share. In connection with the sale of the Callable Secured Convertible Notes described in Note E, approximately $204,000 was withheld from the $2,000,000 proceeds to pay certain expenses and to pre-pay interest. Further, a discount of $64,429 was attributable to the Callable Secured Convertible Notes and assigned to the value of the warrants. 10 NOTE H- RELATED PARTY TRANSACTIONS Mr. Sivan and Mr. Ramchandani, stockholders of the Company, have an ownership interest in Prime Time Media, a company which has a pre-petition accounts payable from the Company in the amount of $455,734. Mr. Sivan and Mr. Ramchandani have an ownership interest in Brass Logistics LLC, a company which has a post-petition accounts payable in the amount of $2,434,190. The Company purchased $3,800,203 in services from Brass Logistics, LLC in the nine months ended November 30, 2005. Included in accrued expenses is $25,000 owed to Mr. Sivan for expenses he paid on the Company's behalf. On December 8, 2004, Tactica entered into a Credit Agreement with Tactica Funding 1, LLC ("Tactica Funding"), under which Tactica Funding agreed to provide Tactica with a secured loan of up to an aggregate principal amount of $300,000 (the "Loan"), to provide funds for Tactica's continued ordinary course of operations and working capital needs, as evidenced by a promissory note. The Loan bears interest at a rate of 9% per annum and is payable monthly. Notwithstanding the foregoing, the Loan bears a default rate of interest of 12% per annum. As of November 30, 2005, the Company owed $300,000 of note principal. As Security for the Loan, Tactica granted to Tactica Funding a first priority security interest in substantially all of the assets of Tactica, except as to permitted liens for which the Tactica Funding security interest is junior and subordinate, including the Callable Secured Convertible Notes and certain carve out expenses that Tactica incurs for professional fees and other bankruptcy case matters. 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED NOVEMBER 30, 2005 Statements in this Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this document are statements which are not historical or current fact and constitute "forward-looking statements" within the meaning of such term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual financial or operating results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such forward looking statements are based on our best estimates of future results, performance or achievements, based on current conditions and the most recent results of the Company. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms "may", "will", "potential", "opportunity", "believes", "belief", "expects", "intends", "estimates", "anticipates" or "plans" to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company's reports and registration statements filed with the Securities and Exchange Commission. Comparison of the Three and Nine Months Ended November 30, 2005 to the Three and Nine Months Ended November 30, 2004 Results of Operations Revenue We sell a variety of consumer products and houseware products directly to individual customers and to retailers. We use direct response television advertising extensively to promote sales. Our net sales for the three months ended November 30, 2005 were $7,921,688, an increase of $6,395,149, or 418.9%, compared to net sales of $1,526,539 for the three months ended November 30, 2004. Our net sales for the nine months ended November 30, 2005 were $20,658,723, an increase of $10,560,201, or 104.6%, compared to net sales of $10,098,522 for the nine months ended November 30, 2004. We are currently focusing on generating revenue by selling our products directly to consumers through their responses to our television advertising. We are advertising our products that have indicated encouraging levels of consumer acceptance. Our direct response sales operation requires that we use cash to purchase, up to two weeks in advance, television advertising time to run our infomercials and to purchase, up to eight weeks in advance, products that we sell. We used cash realized in the nine months ended November 30, 2005 from sales of our $2,000,000 in Callable Secured Convertible Notes to, among other things, significantly increase our purchases of television advertising time and product needed to fulfill customer orders. The increase in net sales for the three and nine month periods ended November 30, 2005 as compared to November 30, 2004 reflects the significant increases in our direct response television advertising and availability of product as well as uninterrupted fulfillment services. Although our net sales increased as a result of our sale of $2,000,000 in Callable Secured Convertible Notes during the nine months ended November 2005, a substantial amount of cash from sales has been held back by the credit card merchant banks to establish rolling reserves for the customer payment processing they do for us. As a result, we did not have sufficient cash to obtain all of the products needed to fulfill customer orders on hand, especially for our floor care product line. 12 Our sales for the nine months ended November 30, 2005 consisted primarily of direct response sales of our floor care products generated by responses to our infomercials that feature an innovative vacuum cleaner of our own design. We sold a vacuum cleaner under the Singer Lazer Storm brand name according to an April 2003 license agreement with The Singer Company, B.V. that was mutually terminated on September 29, 2005. We also sell vacuum cleaners using our infomercials and other non-licensed brands with comparable sales results. We expect to continue selling floor care products using our infomercials and we may benefit from a reduction in royalty payments. Using our direct response sales operation capabilities, we also plan to increase sales of other products using licensed and non-licensed brands. Gross Profit Our gross profit was $5,820,669 for the three months ended November 30, 2005 versus our gross loss of ($3,826,709) for the three months ended November 30, 2004, an increase of $9,647,378. Our gross profit was $14,837,347 for the nine months ended November 30, 2005 versus our gross loss of ($233,770) for the nine months ended November 30, 2004, an increase of $15,071,117. The increase in gross profit for the three and nine month periods ended November 30, 2005 is primarily the result of increased revenue and gross profit margins of products sold. Our gross profit percentage for quarter ended November 30, 2005 was 73.5%, as compared to (250.7%) for the quarter ended November 30, 2004. Our gross profit percentage for the nine months ended November 30, 2005 was 71.8%, as compared to (2.3%) for the nine months ended November 30, 2004. Gross profit percentages for the three and nine month periods ended November 30, 2005 were higher due to the relatively higher gross profit percentages we realized on our direct response sales that have comprised the majority of our net sales this fiscal year. For the comparable periods in the prior fiscal year, we realized low gross margins from sales of our excess inventory to specialty retailers at reduced prices, including sales of products at below our cost. In addition, our gross profits in those periods were reduced for the write down of inventory to estimated market value, when such value was below cost. Operating expenses Operating expenses for the three months ended November 30, 2005 were $7,292,793, an increase of $4,388,738 from $2,904,055, or 151.1% as compared to the three months ended November 30, 2004. Operating expenses for the nine months ended November 30, 2005 were $17,879,982, an increase of $5,520,837 from $12,359,145, or 44.7% as compared to the three months ended November 30, 2004. For the three months ended November 30, 2005, operating expenses were 92.1% of net sales as compared to 190.2% for the comparable period in 2004. For the nine months ended November 30, 2005, selling, general and administrative expense was 86.5% as compared to 122.4% for the nine months ended November 30, 2004. The increase in operating expenses is primarily the result of increased media advertising and increased selling, general and administrative expense, partially offset by a one-time $3,275,000 charge for a financial advisory fee in the prior fiscal year. We increased in our media advertising spending in the three and nine month periods ended November 30, 2005 by $2,898,785 and $6,882,426, respectively, as compared to similar periods in the prior fiscal year. We air our television infomercials to sell our products directly to consumers and to increase awareness of the products we sell to retailers. Media advertising requires us to make upfront purchases that we were able to significantly increase this fiscal year by using proceeds from sales of our $2,000,000 in Callable Secured Convertible Notes. 13 We spent $1,489,953 or 52.5% more on other selling, general and administrative expenses in the three months ended November 30, 2005 as compared to the three months ended November 30, 2004 and $1,913,411 more or 22.3% in the nine months ended November 30, 2005 as compared to the nine months ended November 30, 2004. The increased spending is primarily attributable to increased sales. Other selling, general and administrative expense declined as percentage of sales. For the three months ended November 30, 2005, other selling, general and administrative expense was 54.7% of net sales as compared to 186.0% for the comparable period in 2004. For the nine months ended November 30, 2005, other selling, general and administrative expense was 50.7% as compared to 84.8% for the nine months ended November 30, 2004. We have implemented a lower operating cost structure as part of our business restructuring that has led to reduced personnel, warehouse operations costs, and other general and administrative expenses. Operating expenses for the three and nine month periods ended September 30, 2004 included a one-time expense of $3,275,000 for financial advisory fees that were incurred in connection with the June 2004 reverse merge transaction. The fees consisted of 1,250,000 shares of IGIA Common Stock issued and paid to our financial advisor upon closing of the June 11, 2004 reverse merger transaction. Interest expense and other income / expense We incurred net interest expense of $197,356 and $18,570 in three months ended November 30, 2005 and 2004, respectively, an increase of $178,786. We incurred net interest expense of $677,780 and $136,923 in nine months ended November 30, 2005 and 2004, respectively, an increase of $540,957. Interest expense for the three month period ended November 30, 2005 consisted primarily of amortization of the discount related to the beneficial conversion feature of $163,090, and amortization of the related issue costs of $25,066. Interest expense for the nine month period ended November 30, 2005 consisted primarily of coupon interest on the Callable Secured Convertible Notes of $49,972, the amortization of the discount related to the beneficial conversion feature of $427,525, amortization of the discount attributable to the value of the warrants of $64,429 and amortization of the related issue costs of $55,918. The Notes were issued on March 24, 2005 and April 14, 2005. Interest expense for the three and nine month periods ended November 30, 2004 consisted primarily of Tactica's line of credit with Helen of Troy which was eliminated on April 29, 2004. Reorganization items In the three and nine month periods ended November 30, 2005, Tactica incurred professional fees of $469,762 and $1,477,896, respectively, in connection with its business restructuring and reorganization under chapter 11. Net Loss Our net loss for the three months ended November 30, 2005 was $2,139,207 in contrast to a net loss of $6,711,550 for the three months ended November 30, 2004. Our net loss for the nine months ended November 30, 2005 was $5,185,242 in contrast to a net loss of $12,559,629 for the nine months ended November 30, 2004. We reduced the net loss in the nine months ended November 30, 2005 primarily by increasing our revenues and gross profit as described above. The net losses for the three and nine month periods ended November 30, 2005 include $469,762 and $1,477,896 of net expenses incurred in connection with Tactica's business restructuring and reorganization under chapter 11. The net loss for the nine month periods ended November 30, 2004 includes a one-time $3,275,000 charge for a financial advisory fee. 14 Our net loss per common share (basic and diluted) was ($0.12) and for the three months ended November 30, 2005 as compared to our ($0.37) net loss per common share for the three months ended November 30, 2004. Our net loss per common share (basic and diluted) was ($0.29) and for the nine months ended November 30, 2005 as compared to our ($0.70) net loss per common share for the nine months ended November 30, 2004. The weighted average number of outstanding shares was 18,002,933, for both the three and nine month periods ended November 30, 2005 and 2004. Liquidity and Capital Resources Overview As of November 30, 2005, we had a $17.1 million working capital deficit and negative net worth of $17.4 million. Excluding pre-petition liabilities, the working capital deficit was approximately $4.1 million as of November 30, 2005. As of February 28, 2005, we had a $14.4 million working capital deficit and negative net worth of $14.3 million. Excluding pre-petition liabilities, net working capital was approximately $1.2 million as of February 28, 2005. Our cash position at November 30, 2005 was $27,422 as compared to $2,160 as of February 28, 2005. For the nine months ended November 30, 2005 we generated a net cash flow deficit from operating activities of $1,735,453 consisting primarily of a net loss of $5,185,242, and increases of $2,984,765 in accounts receivable, $620,818 in inventory and $1,102,560 in prepayments, adjusted primarily for a $1,539,104 increase in customer pre-payments, a $6,078,451 increase in accounts payable and accrued expenses. Our accounts receivable is comprised primarily of $2,969,911 in funds held aside by the credit card processor we use for processing customer payments of direct response sales. We used cash to increase our inventory to support higher sales volume and to purchase of television media, which requires prepayment. There was $29,294 of investing activities during the nine months ended November 30, 2005 that consisted primarily of office equipment purchases. We expect capital expenditures to continue to be nominal for fiscal 2006. These anticipated expenditures are for continued investments in property and equipment used in our business. Cash provided by financing activities totaled $1,790,009 consisting mainly of proceeds from the sales of our Callable Secured Convertible Notes and common stock warrants further described below. We generated an additional $1,000,000 in cash from further such sales on December 22, 2005 following the effectiveness of our registration. Acquisition of Tactica The June 11, 2004 reverse merger between us and Tactica gave us access to public markets for financing and enabled Tactica to convert approximately $3.6 million of accounts payable into Series E Convertible Preferred Stock. Despite the transaction with Helen of Troy and the reverse merger, we were not yet able to raise sufficient additional working capital. As a result of the foregoing factors, Tactica did not have an available source of working capital to satisfy a demand by Innotrac that Tactica immediately pay all amounts allegedly due to Innotrac and continue its normal operation of business. Tactica's Chapter 11 Reorganization On October 21, 2004, Tactica, which accounted for all of the operations of the Company, filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). IGIA is not seeking bankruptcy protection. Tactica remains in possession of its assets and the management of its property as a debtor in possession under Sections 1107 and 1108 of the Bankruptcy Code. On June 23, 2005, the Bankruptcy Court issued a final order approving a settlement and compromise, under which Innotrac took certain inventory that it held in exchange for full satisfaction of Tactica's liability to Innotrac that was fixed at $3,000,000. 15 On January 12, 2006, the Bankruptcy Court issued a confirmation order approving the consensual plan of reorganization. According to the plan terms, upon the plan's effective Tactica would distribute to unsecured creditors a lump sum cash payment and a number of freely tradable shares of IGIA's common stock equal to 10% of the then outstanding common stock, as well as rights to certain legal claims. The effective date is expected to occur prior to the end of the Company's fiscal year on February 28, 2006. Shortly after the Chapter 11 filing, management shifted its focus away from selling the Innotrac inventory, which had low gross margins and insufficient contribution to current liquidity, and began increasing our direct response sales efforts. We have been selling newly manufactured products directly to consumers through responses to our television advertising. We are fulfilling our direct response orders through other fulfillment companies, including Brass Logistics LLC, a related party, and other fulfillment service providers. We expect to also use other fulfillment companies that could expand our capabilities. In addition, for those corporate customers that pre-pay their orders or establish letters of credit securing payment, we expect to continue selling newly-manufactured products that we direct ship to them from third party manufacturers. We are seeking Tactica's emergence from bankruptcy and a return to profitability through increased sales of our products to consumers through response to our television advertising of select products that have demonstrated encouraging levels of consumer acceptance. We plan to use proceeds from these direct response sales to increase purchases of the goods from manufacturers, buy additional television airtime to run our advertisements, pay for fulfillment services and fund Tactica's plan of reorganization and exit from bankruptcy. We reduced operating costs by moving to less costly office space, by decreasing staff levels, and by restructuring sales compensation plans. In addition, our sales to retail customers are reduced by our limited working capital and their adverse response to our bankruptcy, which has enabled us to reduce operations that were not generating liquidity. Tactica's ability to emerge from bankruptcy and return to profitability is dependent on several factors, including but not limited to, its ability to: generate liquidity from operations; satisfy its ongoing operating costs on a timely basis; make the requisite distributions to Tactica's pre-petition creditors needed for the Court to declare the plan effective and pay all administrative costs incurred in bankruptcy prior to emergence. If we are unable to service financial obligations as they become due, we will be required to adopt alternative strategies, which may include, but are not limited to, actions such as further reducing management and employee headcount and compensation, attempting to further restructure financial obligations and/or seeking a strategic merger, acquisition or a sale of assets. There can be no assurance that any of these strategies could be affected on satisfactory terms. By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition. 16 Financing To obtain initial debtor in possession financing following Tactica's bankruptcy filing, on December 8, 2004, Tactica entered into a Credit Agreement with Tactica Funding 1, LLC ("Tactica Funding"), under which Tactica Funding agreed to provide Tactica with a secured loan of up to an aggregate principal amount of $300,000 (the "Loan"), to provide funds for Tactica's continued ordinary course of operations and working capital needs, as evidenced by a promissory note. The Loan bears interest at a rate of 9% per annum and is payable monthly. Notwithstanding the foregoing, the Loan bears a default rate of interest of 12% per annum. The entire principal was due and payable on February 28, 2005. As security for the Loan, Tactica granted to Tactica Funding a first priority security interest in substantially all of the assets of Tactica, except as to permitted liens for which the Tactica Funding security interest is junior and subordinate, including Innotrac and certain carve out expenses that Tactica incurs for professional fees and other bankruptcy case matters. Pursuant to the Credit Agreement, Tactica's default of the Stipulation was an event of default on the Loan. Tactica Funding agreed not to take action on the default and to further subordinate the Loan to subsequent financing. To obtain additional funding for the purpose of providing a loan to Tactica, in the form of debtor in possession financing and exit financing in the context of Tactica's chapter 11 proceedings, we entered into a Securities Purchase Agreement with New Millennium Capital Partners II, LLC, AJW Qualified Partners, LLC, AJW Offshore, Ltd. and AJW Partners, LLC on March 23, 2005 for the sale of (i) $3,000,000 in Callable Secured Convertible Notes and (ii) warrants to buy 6,000,000 shares of our common stock. These shares are the subject of our registration statement that is currently on file. Provided that the terms and conditions of the Securities Purchase Agreement are satisfied, the investors are obligated to provide us with an aggregate of $3,000,000 as follows: o $1,000,000 was disbursed on March 24, 2005; o $1,000,000 was disbursed on April 20, 2005 following the filing of our registration statement on April 14, 2005; and o $1,000,000 was disbursed on December 22, 2005 following the effectiveness of our registration statement that we filed on April 14, 2005. Accordingly, as of November 30, 2005, we have received to date a total of $1,798,588 in net proceeds after deducting $204,412 of expenses and prepaid interest pursuant to the Securities Purchase Agreement. The funds from the sale of the Callable Secured Convertible Notes have been and will be used to provide a loan to Tactica and for business development purposes, business acquisitions, working capital needs, pre-payment of interest, and payment of consulting, accounting and legal fees. The Callable Secured Convertible Notes bear interest at 8%, mature three years from the date of issuance, and are convertible into our common stock, at the investors' option, at the lower of (i) $0.04 or (ii) 50% of the average of the three lowest intraday trading prices for the common stock on a principal market for the 20 trading days before, but not including, the conversion date. The full principal amount of the Callable Secured Convertible Notes is due upon default under their terms. The warrants are exercisable until five years from the date of issuance at a purchase price of $0.03 per share. In addition, the conversion price of the Callable Secured Convertible Notes and the exercise price of the warrants will be adjusted in the event that we issue common stock at a price below the fixed conversion price, below market price, with the exception of any securities issued in connection with the Securities Purchase Agreement. The conversion price of the Callable Secured Convertible Notes and the exercise price of the warrants may be adjusted in certain circumstances such as if we pay a stock dividend, subdivide or combine outstanding shares of common stock into a greater or lesser number of shares, or take such other actions as would otherwise result in dilution of the selling stockholder's position. The selling stockholders have contractually agreed to restrict their ability to convert or exercise their warrants and receive shares of our common stock such that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. In addition, we have granted the investors a security interest in substantially all of our assets and intellectual property and registration rights. 17 Since the conversion price was less than the market price of the common stock at the time the Callable Secured Convertible Notes are issued, we recognized a $1,935,571 charge relating to the beneficial conversion feature of the Callable Secured Convertible Notes during the nine months ended November 30, 2005 when $2,000,000 of Callable Secured Convertible Notes were issued. In addition, in connection with services provided to us in arranging and concluding the funding, we issued 1,000,000 shares of our common stock to a third party upon the effectiveness of our registration statement on December 21, 2005. The shares were valued at $0.12 per share which represents the fair value of the services received. We will still need additional investments in order to continue operations and to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations again. The independent auditor's report on our February 28, 2005 financial statements included in our Form 10-KSB states that our recurring losses raise substantial doubts about our ability to continue as a going concern. The effect of inflation on our revenue and operating results was not significant. Our operations are located in North America and there are no seasonal aspects that would have a material effect on our financial condition or results of operations. Off-Balance Sheet Arrangements The Company does not have any off-balance sheet arrangements Trends, Risks and Uncertainties We have sought to identify what we believe to be the most significant risks to our business, but we cannot predict whether, or to what extent, any of such risks may be realized nor can we guarantee that we have identified all possible risks that might arise. Investors should carefully consider all of such risk factors before making an investment decision with respect to our Common Stock. 18 Risks Relating to Our Business: The Chapter 11 Reorganization Plan Was Approved But May Not Become Effective. The Bankruptcy Has Had A Material Negative Effect on Our Business, Financial Condition And Results of Operations. In October 2004, Tactica, our operating subsidiary filed to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Tactica did not have sufficient working capital to operate its business and was unable to obtain financing. As described under "Liquidity and Capital Resources" there are numerous reasons why Tactica may be unable to emerge from bankruptcy. There is no assurance that the plan confirmed by the Bankruptcy Court on January 12, 2006 will become effective. In such event, we would seek to find a strategic merger, acquisition or sale of assets or otherwise be forced to discontinue operations. Auditors Have Expressed Substantial Doubt About Our Ability To Continue As A Going Concern. In their report dated June 15, 2005, Russell Bedford Stefanou Mirchandani LLP stated that the financial statements of IGIA for the year ended February 28, 2005 were prepared assuming that IGIA would continue as a going concern. Our ability to continue as a going concern is an issue raised as a result of Tactica having filed for bankruptcy protection on October 21, 2004, its recurring losses from operations and our net capital deficiency. We have experienced net operating losses. Our ability to continue as a going concern is subject to our ability to maintain and enhance our profitability. Operating Tactica within the constraints of its bankruptcy reorganization and our working capital and stockholders' deficits increase the difficulty in meeting such goals and there can be no assurances that we can maintain or increase operating profits. IGIA Faces Potential Fluctations in Quarterly Operating Results. IGIA's quarterly operating results may fluctuate significantly in the future as a result of a variety of factors, most of which are outside IGIA's control, including: IGIA's quarterly results may also be significantly impacted by the accounting treatment of acquisitions, financing transactions or other matters. Due to the foregoing factors, among others, it is likely that IGIA's operating results will fall below the expectations of IGIA or investors in some future period. Our Common Stock Trades In A Limited Public Market, The NASD OTC Electronic Bulletin Board; Accordingly, Investors Face Possible Volatility Of Share Price. Our common stock is currently quoted on the NASD OTC Bulletin Board under the ticker symbol IGAI.OB. As of January 13, 2006, there were approximately 20,082,933 shares of Common Stock outstanding. There can be no assurance that a trading market will be sustained in the future. Factors such as, but not limited to, technological innovations, new products, acquisitions or strategic alliances entered into by us or our competitors, government regulatory action, patent or proprietary rights developments, and market conditions for penny stocks in general could have a material effect on the liquidity of our common stock and volatility of our stock price. Our Future Operations Are Contingent On Our Ability To Recruit Employees. In the event we are able to expand our business, we expect to experience growth in the number of employees and the scope of our operations. In particular, we may hire additional sales, marketing and administrative personnel. Additionally, acquisitions could result in an increase in employee headcount and business activity. Such activities could result in increased responsibilities for management. We believe that our ability to increase our customer support capability and to attract, train, and retain qualified technical, sales, marketing, and management personnel, will be a critical factor to our future success. 19 We May Not Be Able To Manage Our Growth Effectively. Our future success will be highly dependent upon our ability to successfully manage the expansion of our operations. Our ability to manage and support our growth effectively will be substantially dependent on our ability: to implement adequate improvements to financial and management controls, reporting and order entry systems, and other procedures and to hire sufficient numbers of financial, accounting, administrative, and management personnel. Our expansion and the resulting growth in the number of our employees would result in increased responsibility for both existing and new management personnel. We are in the process of establishing and upgrading our financial accounting and procedures. We may not be able to identify, attract, and retain experienced accounting and financial personnel. Our future operating results will depend on the ability of our management and other key employees to implement and improve our systems for operations, financial control, and information management, and to recruit, train, and manage its employee base. We may not be able to achieve or manage any such growth successfully or to implement and maintain adequate financial and management controls and procedures, and any inability to do so would have a material adverse effect on its business, results of operations, and financial condition. Our Success Is Dependent On Our Ability To Address Market Opportunities. Our future success depends upon our ability to address potential market opportunities while managing our expenses to match our ability to finance our operations. This need to manage our expenses will place a significant strain on our management and operational resources. If we are unable to manage our expenses effectively, we may be unable to finance our operations. By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition and would prevent us from being able to utilize potential market opportunities. We May Be Required To Seek Additional Means Of Financing. In financing our operations since filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code, we have relied mostly on advances from debtor in possession loans. Therefore, we will need additional capital to continue our operations and will endeavor to raise funds through the sale of equity shares and revenues from operations. On March 23, 2005, we entered into a Securities Purchase Agreement for the sale of an aggregate of $3,000,000 principal amount of Callable Secured Convertible Notes. However, there can be no assurance that we will generate adequate revenues from operations. Failure to generate such operating revenues would have an adverse impact on our financial position and results of operations and ability to continue as a going concern. Our operating and capital requirements during the next fiscal year and thereafter will vary based on a number of factors, including the level of sales and marketing activities for our products. Accordingly, we may be required to obtain additional private or public financing including debt or equity financing and there can be no assurance that such financing will be available as needed or, if available, on terms favorable to us. Any additional equity financing may be dilutive to stockholders and such additional equity securities may have rights, preferences or privileges that are senior to those of our existing common stock. 20 Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on our operating flexibility. Our failure to successfully obtain additional future funding may jeopardize our ability to continue our business and operations. If we raise additional funds by issuing equity securities, existing stockholders may experience a dilution in their ownership. In addition, as a condition to giving additional funds to us, future investors may demand, and may be granted, rights superior to those of existing stockholders. The Sales Of Our Products Have Been Very Volatile And Our Results Of Operations Could Fluctuate Materially. The sales of certain of our products rely on television advertising and direct response marketing campaigns. In addition, some of our products have short life cycles. This leads to volatility in our revenues and results of operations. For example, our net sales for the fiscal year ended February 28, 2005 decreased by approximately 71.4% as compared with the fiscal year ended February 29, 2004 and we incurred a $16,197,364 loss for the fiscal year ended February 28, 2005. This was primarily caused by substantially reduced sales. In addition, as part of our April 2004 purchase agreement with Helen of Troy, or HoT, HoT acquired the right to market and sell Epil-Stop, one of our most popular products, in the United States and assumed the liabilities associated with United States sales of the Epil-Stop product. We therefore expect that our sales could decline or be volatile and as a result, our financial position could be adversely affected. Changes In Foreign Policy, International Law Or The Internal Laws Of The Countries Where Our Manufacturers Are Located Could Have A Material Negative Effect On Our Business, Financial Condition And Results Of Operations. All of our products are manufactured by unaffiliated companies, some of which are in the Far East. Risks associated with such foreign manufacturing include: changing international political relations; changes in laws, including tax laws, regulations and treaties; changes in labor laws, regulations, and policies; changes in customs duties and other trade barriers; changes in shipping costs; interruptions and delays at port facilities; currency exchange fluctuations; local political unrest; and the availability and cost of raw materials and merchandise. To date, these factors have not significantly affected our production capability. However, any change that impairs our ability to obtain products from such manufacturers, or to obtain products at marketable rates, would have a material negative effect on our business, financial condition and results of operations. Our Business Will Suffer If We Do Not Develop And Competitively Market Products That Appeal To Consumers. We sell products in the "As Seen on TV" market. These markets are very competitive. Maintaining and gaining market share depends heavily upon price, quality, brand name recognition, patents, innovative designs of new products and replacement models, and marketing and distribution approaches. We compete with domestic and international companies, some of which have substantially greater financial and other resources than we have. We believe that our ability to produce reliable products that incorporate developments in technology and to satisfy consumer tastes with respect to style and design, as well as our ability to market a broad offering of products in each applicable category at competitive prices, are keys to our future success. 21 Our Business, Financial Condition And Results Of Operations Could Be Materially Adversely Affected If We Are Unable To Sell Products Under Our Licensed Trademarks. A portion of our sales revenue is derived from sales of products under licensed trademarks. Actions taken by licensors and other third parties with respect to products we license from them could greatly diminish the value of any of our licensed trademarks. If we are unable to develop and sell non-licensed products or products under existing or newly acquired licensed trademarks, the effect on our business, financial condition and results of operations could be materially adversely affected. Many Of Our Competitors Are Larger And Have Greater Financial And Other Resources Than We Do And Those Advantages Could Make It Difficult For Us To Compete With Them. Many of our current and potential competitors may have substantial competitive advantages relative to us, including: longer operating histories; significantly greater financial, technical and marketing resources; greater brand name recognition; larger existing customer bases; and more popular products. These competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements and devote greater resources to develop, promote and sell their products or services than we can. We Are Dependent On Our Management Team And The Loss Of Any Key Member Of This Team May Prevent Us From Implementing Our Business Plan In A Timely Manner. Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Avi Sivan, our Chief Executive Officer, and Prem Ramchandani, our President. We have entered into employment agreements with Mr. Sivan and Mr. Ramchandani. We obtained key person life insurance policies on Mr. Sivan and Mr. Ramchandani in accordance with terms of the March 23, 2005 Securities Purchase Agreement. The loss of Mr. Sivan or Mr. Ramchandani services would be expected to have a material adverse effect on our operations. Our Business, Financial Condition And Results Of Operations Will Suffer If We Do Not Accurately Forecast Customers' Demands. Because of our reliance on manufacturers in the Far East, our production lead times are relatively long. Therefore, we must commit to production well in advance of customer orders. If we fail to forecast consumer demand accurately, we may encounter difficulties in filling customer orders or in liquidating excess inventories, or may find that customers are canceling orders or returning products. Our relatively long production lead time may increase the amount of inventory and the cost of storing inventory. Additionally, changes in retailer inventory management strategies could make inventory management more difficult. Any of these results could have a material adverse effect on our business, financial condition and results of operations. Our Products And Business Practices May Be Subject To Review By Third Party Regulators And Consumer Affairs Monitors And Actions Resulting From Such Reviews, Including But Not Limited To, Cease And Desist Orders, Fines And Recalls. 22 Although our products are generally not regulated by the U.S. Food and Drug Administration (FDA), we have in the past and on occasion may in the future sell products that are subject to FDA regulations. Our advertising is subject to review by the National Advertising Council (NAC) and our advertisements could be and have been subject to NAC recommendations for modification. The U.S. Federal Trade Commission (FTC) and state and local consumer affairs bodies oversee various aspects of our sales and marketing activities and customer handling processes. If any of these agencies, or other agencies that have a right to regulate our products, engage in reviews of our products or marketing procedures we may be subject to various enforcement actions from such agencies. If such reviews take place, as they have in the past, our executives may be forced to spend time on the regulatory proceedings as opposed to running our business. In addition to fines, adverse actions from an agency could result in our being unable to market certain products the way we would like or at all, or prevent us from selling certain products entirely. We Purchase Essential Services And Products From Third Parties, Which If Interrupted, Could Have A Material Impact On Our Ability To Operate. We currently outsource significant portions of our business functions, including, but not limited to, warehousing, customer service, inbound call center functions and payment processing for all direct response sales, customer order fulfillment, and product returns processing and shipping. From time to time we have experienced interruptions in these essential services for varying periods of time and future interruptions can and will occur. If such interruptions occur for extended periods of time, our operations may be materially adversely affected. Many of our products are produced in South China. Should we experience any interruption or interference with the operations of the third party suppliers of goods and services, we might experience a shortage of inventory. This type of shortage could have a material adverse effect on our financial position, results of operations, and cash flow. Our Direct Response Sales Operation Is Dependent On Having Adequate Credit Card Activity Processing Capacity With The Major Credit Card Companies And A Credit Card Processor. A third party credit card processor regulates our daily credit card sales order volume and sets limits as to the maximum daily sales volume it will process. In addition, credit card companies, such as Visa and MasterCard, and credit card processors typically maintain a record of the level of customer requests to have charges for our products reversed (chargebacks). The credit card companies and processors may impose increased deposit requirements and fines for "high chargeback levels", may modify our daily sales volume limit, or even discontinue doing business with us. The direct response business is known for relatively high chargeback levels and we have experienced periods of higher than accepted levels of chargeback activity that has led to fines and disruptions in credit card processing of customer orders. We endeavor to maintain reasonable business practices and customer satisfaction which, in part, contribute to lower levels of chargeback activity. Nevertheless, excess chargeback activity could result in our being unable to have customers pay us using credit cards. Our Future Acquisitions, If Any, And New Products May Not Be Successful, Which Could Have A Material Adverse Effect On Our Financial Condition And Results Of Operations. We have in the past, and may in the future, decide to acquire new product lines and businesses. The acquisition of a business or of the rights to market specific products or use specific product names involves a significant financial commitment. In the case of an acquisition, such commitments are usually in the form of either cash or stock consideration. In the case of a new license, such commitments could take the form of license fees, prepaid royalties, and future minimum royalty and advertising payments. While our strategy is to acquire businesses and to develop products that will contribute positively to earnings, there is no guarantee that all or any of our acquisitions will be successful. Anticipated synergies may not materialize, cost savings may be less than expected, sales of products may not meet expectations and acquired businesses may carry unexpected liabilities. Each of these factors could result in a newly acquired business or product line having a material negative impact on our financial condition and results of operations. 23 Risks Relating to Our Current Financing Arrangement: There Are A Large Number Of Shares Underlying Our Callable Secured Convertible Notes And Warrants That May Be Available For Future Sale And The Sale Of These Shares May Depress The Market Price Of Our Common Stock. As of January 13, 2006, we had 20,082,933 shares of common stock issued and outstanding and Callable Secured Convertible Notes outstanding or an obligation to issue Callable Secured Convertible Notes that may be converted into an estimated 75,000,000 shares of common stock at current market prices, and outstanding warrants or an obligation to issue warrants to purchase 6,000,000 shares of common stock. In addition, the number of shares of common stock issuable upon conversion of the outstanding Callable Secured Convertible Notes may increase if the market price of our stock declines. All of the shares, including all of the shares issuable upon conversion of the notes and upon exercise of our warrants, may be sold without restriction. The sale of these shares may adversely affect the market price of our common stock. The Continuously Adjustable Conversion Price Feature of Our Callable Secured Convertible Notes Could Require Us To Issue A Substantially Greater Number Of Shares, Which Will Cause Dilution To Our Existing Stockholders. Our obligation to issue shares upon conversion of the Callable Secured Convertible Notes is essentially limitless. The following is an example of the amount of shares of our common stock that are issuable, upon conversion of the Callable Secured Convertible Notes (excluding accrued interest), based on market prices 25%, 50% and 75% below the current conversion price, as of January 11, 2006, of $0.04: Number % of %Below Price Per With Discount of Shares Outstanding Market Share at 50% Issuable Stock ------ ----- ------ -------- ----- 25% $.0325 $.0163 184,615,385 91.11% 50% $.0217 $.0108 276,923,077 93.90% 75% $.0108 $.0054 553,846,154 96.85% As illustrated, the number of shares of common stock issuable upon conversion of our Callable Secured Convertible Notes will increase if the market price of our stock declines, which will cause dilution to our existing stockholders. The Continuously Adjustable Conversion Price Feature Of Our Callable Secured Convertible Notes May Encourage Investors To Make Short Sales In Our Common Stock, Which Could Have A Depressive Effect On The Price Of Our Common Stock. The Callable Secured Convertible Notes are convertible into shares of our common stock at a 50% discount to the trading price of the common stock prior to the conversion. The significant downward pressure on the price of the common stock as the selling stockholder converts and sells material amounts of common stock could encourage short sales by investors. This could place further downward pressure on the price of the common stock. The selling stockholder could sell common stock into the market in anticipation of covering the short sale by converting their securities, which could cause the further downward pressure on the stock price. In addition, not only the sale of shares issued upon conversion or exercise of notes, warrants and options, but also the mere perception that these sales could occur, may adversely affect the market price of the common stock. 24 The Issuance Of Shares Upon Conversion Of The Callable Secured Convertible Notes And Exercise Of Outstanding Warrants May Cause Immediate And Substantial Dilution To Our Existing Stockholders. The issuance of shares upon conversion of the Callable Secured Convertible Notes and exercise of warrants may result in substantial dilution to the interests of other stockholders since the selling stockholders may ultimately convert and sell the full amount issuable on conversion. Although the selling stockholders may not convert their Callable Secured Convertible Notes and/or exercise their warrants if such conversion or exercise would cause them to own more than 4.99% of our outstanding common stock, this restriction does not prevent the selling stockholders from converting and/or exercising some of their holdings and then converting the rest of their holdings. In this way, the selling stockholders could sell more than this limit while never holding more than this limit. There is no upper limit on the number of shares that may be issued which will have the effect of further diluting the proportionate equity interest and voting power of holders of our common stock. In The Event That Our Stock Price Declines, The Shares Of Common Stock Allocated For Conversion Of The Callable Secured Convertible Notes, Registered Pursuant To A Registration Statement Filed on April 14, 2005, May Not Be Adequate And We May Be Required To File A Subsequent Registration Statement Covering Additional Shares. If The Shares We Have Allocated And Are Registering Herewith Are Not Adequate And We Are Required To File An Additional Registration Statement, We May Incur Substantial Costs In Connection Therewith. Based on our current market price and the potential decrease in our market price as a result of the issuance of shares upon conversion of the Callable Secured Convertible Notes, we have made a good faith estimate as to the amount of shares of common stock that we are required to register and allocate for conversion of the Callable Secured Convertible Notes. As we do not currently have the required amount of shares available, we may be required to file an additional registration statement after we have increased our authorized common stock. In the event that our stock price decreases, the shares of common stock we have allocated for conversion of the Callable Secured Convertible Notes and are registering hereunder may not be adequate. If the shares we have allocated to the registration statement are not adequate and we are required to file an additional registration statement, we may incur substantial costs in connection with the preparation and filing of such registration statement. If We Are Required For Any Reason To Repay Our Outstanding Callable Secured Convertible Notes, We Would Be Required To Deplete Our Working Capital, If Available, Or Raise Additional Funds. Our Failure to Repay the Callable Secured Convertible Notes, If Required, Could Result In Legal Action Against Us, Which Could Require The Sale Of Substantial Assets. On March 23, 2005, we entered into a Securities Purchase Agreement for the sale of an aggregate of $3,000,000 principal amount of Callable Secured Convertible Notes. The Callable Secured Convertible Notes are due and payable, with 8% interest, three years from the date of issuance, unless sooner converted into shares of our common stock. We currently have approximately $3,000,000 of Callable Secured Convertible Notes outstanding. In addition, any event of default such as our failure to repay the principal or interest when due, our failure to issue shares of common stock upon conversion by the holder, our failure to timely file a registration statement or have such registration statement declared effective, breach of any covenant, representation or warranty in the Securities Purchase Agreement or related convertible note, the assignment or appointment of a receiver to control a substantial part of our property or business, the filing of a money judgment, writ or similar process against us in excess of $50,000, the commencement of a bankruptcy, insolvency, reorganization or liquidation proceeding against us and the delisting of our common stock could require the early repayment of the Callable Secured Convertible Notes, including a default interest rate of 15% on the outstanding principal balance of the notes if the default is not cured within the specified grace period. We anticipate that the full amount of the Callable Secured Convertible Notes will be converted into shares of our common stock, in accordance with the terms of the Callable Secured Convertible Notes. If we are required to repay the Callable Secured Convertible Notes, we would be required to use our limited working capital and raise additional funds. If we were unable to repay the notes when required, the note holders could commence legal action against us and foreclose on all of our assets to recover the amounts due. Any such action would require us to curtail or cease operations. 25 Risks Relating to Our Common Stock: If We Fail To Remain Current On Our Reporting Requirements, We Could Be Removed From The OTC Bulletin Board Which Would In Turn Trigger Default Provisions Under the Callable Secured Convertible Notes and Limit The Ability of Broker-Dealers To Sell Our Securities And The Ability Of Stockholders To Sell Their Securities In The Secondary Market. Companies trading on the OTC Bulletin Board, such as us, must be reporting issuers under Section 12 of the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board and, in turn, declared in default of the Callable Secured Convertible Notes. As a result, the market liquidity for our securities could be severely and adversely affected by limiting the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to cure the default, which may have an adverse material effect on our Company. Our Common Stock Is Subject To The "Penny Stock" Rules Of The SEC And The Trading Market In Our Securities Is Limited, Which Makes Transactions In Our Stock Cumbersome And May Reduce The Value Of An Investment In Our Stock. The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: o that a broker or dealer approve a person's account for transactions in penny stocks; and o the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person's account for transactions in penny stocks, the broker or dealer must: o obtain financial information and investment experience objectives of the person; and o make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form: 26 o sets forth the basis on which the broker or dealer made the suitability determination; and o that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock. Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading, about the commissions payable to both the broker-dealer and the registered representative, and current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. OFF BALANCE SHEET ARRANGEMENTS The Company does not maintain off-balance sheet arrangements nor does it participate in non-exchange traded contracts requiring fair value accounting treatment. ITEM 3. CONTROLS AND PROCEDURES Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure. Evaluation of Disclosure Controls and Procedures In connection with the preparation of our Annual Report on Form 10-KSB for fiscal year ended February 28, 2005 that we filed on June 20, 2005, our management carried out an evaluation, under the supervision of our Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(d) and 15d-15(d) under the Exchange Act. Management continued their evaluation in connection with the preparation of our Quarterly Report on Form 10-QSB for fiscal quarter ended August 31, 2005. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures need improvement and were not adequately effective as of February 28, 2005 and August 31, 2005 to ensure timely reporting with the Securities and Exchange Commission. Our management is in the process of identifying deficiencies with respect to our disclosure controls and procedures and implementing corrective measures, which includes the establishment of new internal policies related to financial reporting. 27 Changes in Internal Control over Financial Reporting As required by Rule 13a-15(d), our management, including the Chief Executive Officer and Chief Financial Officer, respectively also conducted an evaluation of our internal controls over financial reporting to determine whether any changes occurred during the second fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the preparation of our financial statements as of and for the period ended August 31, 2005, we concluded that the current system of disclosure controls and procedures was not effective because of the internal control weaknesses identified below. As a result of this conclusion, we initiated the changes in internal control also described below. It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Deficiencies and Corrective Actions Relating to Our Internal Controls over Financial Reporting and Disclosure Controls and Procedures During the course of the audit of our February 28, 2005 financial statements, our registered independent public accounting firm identified certain material weaknesses relating to our internal controls and procedures within the areas of revenue recognition, accounts payable, cash disbursements, inventory accounting and document retention. Certain of these internal control deficiencies may also constitute deficiencies in our disclosure controls. In order to review the financial condition and prepare the financial disclosures in this document, the Company's officers have been responding to recommendations from the Company's auditors to properly and accurately account for the financial information contained in this Form 10-QSB. Detailed validation work was done by internal personnel with respect to all consolidated balance sheet account balances to substantiate the financial information that is contained in this Form 10-QSB. Additional analysis was performed on consolidated income statement amounts and compared to prior period (both year over year and consecutive period) amounts for reasonableness. Management is in the process of implementing a more effective system of controls, procedures and other changes in the areas of revenue recognition, cash disbursements, account reconciliation and document control to insure that information required to be disclosed in this quarterly report on Form 10-QSB has been recorded, processed, summarized and reported accurately. Our management acknowledges the existence of this problem, and has developed procedures to address them to the extent possible given limitations in financial and manpower resources. Among the changes being implemented are: Revenue Recognition o Criteria and procedures established to reconcile invoicing and shipping records o Criteria and procedures established to reconcile direct response sales activity records o Control function established to review and monitor compliance to new procedures o Improved document control and file check out procedures Cash Disbursements and Liability Recognition o Document control system established and monitored for compliance o Cut off procedures formalized and consistently applied o Centralized departmental budgets and accountability established o Purchasing procedures have been formalized and implementation has begun Account Reconciliations o Procedures established and personnel assigned to reconcile key accounts on a timely basis o Control function added to review reconciliations 28 Our officers have been working with the Board of Directors to address recommendations from our registered independent public accounting firm regarding deficiencies in the disclosure controls and procedures. We are currently engaged in the implementation of new internal control procedures. Management expects that new associated procedures, once implemented, will correct the deficiencies and will result in disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act, which will timely alert the Chief Executive Officer and Chief Financial Officer to material information relating to our company required to be included in our Exchange Act filings. (a) Changes in internal controls During the quarter ended November 30, 2005, we continued implementing procedures to create additional management information reports, to perform reconciliations and analyze accounts. In addition, we began establishing a control function to review and monitor compliance with the new procedures and preparing operational budgets. PART II - OTHER INFORMATION Item 1. Legal Proceedings. In the ordinary course of business, the Registrant may be involved in legal proceedings from time to time. Although occasional adverse decisions or settlements may occur, management believes that the final disposition of such matters will not have a material adverse effect on its financial position, results of operations or liquidity. On October 21, 2004, Tactica, which accounted for all of the operations of the Company, filed a voluntary petition for relief under Chapter 11 of Title 11 of the Bankruptcy Code in the Bankruptcy Court. IGIA is not seeking bankruptcy protection. Tactica remains in possession of its assets and the management of its property as a debtor in possession under Sections 1107 and 1108 of the Bankruptcy Code. Tactica, the Official Committee of Tactica's unsecured creditors, IGIA and Helen of Troy Limited agreed on the terms of a consensual plan of reorganization. Tactica submitted its plan of reorganization to the general unsecured creditors for approval and as of the close of the voting period on December 14, 2005, Tactica received a sufficient number of votes in favor of the plan. According to the plan terms, which are subject to approval by Tactica's unsecured creditors and the Bankruptcy Court, upon its confirmation by the Bankruptcy Court, Tactica would distribute to unsecured creditors a lump sum cash payment and a number of shares of IGIA's common stock equal to 10% of the then outstanding common stock, as well as rights to certain legal claims. 29 On September 28, 2005, The Singer Company, B.V. filed an action in the Bankruptcy Court requesting termination of Tactica's license agreement for, among other things, the failure to meet minimum royalty payment targets. On September 29, 2005, the parties mutually agreed that Tactica would relinquish the license and immediately commence an orderly transition. A civil complaint was filed on December 2, 2005 in the United States District Court Southern District of New York by Hughes Holdings, LLC, Global Asset Management, LLC, Allied International Fund, Inc., Robert DePalo, Gary Schonwald and Susan Heineman as plaintiffs against Peter Zachariou, Fountainhead Investments, Inc., Accessible Development, Corp., Allan Carter, Chadel, Ltd., John D'Avanzo, Jason Fok, Tabacalera, Ltd., Terrence DeFranco, Altitude Group, LLC, Virginia Casadonte, Shai Bar Lavi and IGIA, Inc. and its officers and directors. The plaintiffs claim for $279,480.60 plus costs, interest and punitive damages is alleged to have resulted from their holdings of securities issued by Diva Entertainment, Inc. and, subsequent to the Company's June 2004 reverse merger, those of IGIA, Inc. We believe the complaint against the Company and its officers and directors is without merit and we are mounting a vigorous defense in cooperation with our insurance carrier. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None ISSUER PURCHASE OF EQUITY SECURITIES
(a) (b) (c) (d) Total Number of Maximum Number (or Approximate Total Number Average Price Shares (or Units) Dollar Value) of Shares of Shares Paid Purchased as Part (or Units) that (or Units) per Share of Publicly Announced May Yet Be Purchased Under Period Purchased (or Unit) Plans of Programs The Plans or Programs ------ --------- --------- --------------------- ------------------------- 09/01/05 - 09/30/05 - $ - - $ - 10/01/05 - 10/31/05 - - - - 11/01/05 - 11/30/05 - - - -
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. (a) Exhibits -------------------------------------------------------------------------------- 31.1 Certification of the Chief Executive Officer of IGIA, Inc. pursuant to Exchange Act Rule 15d-14(a) -------------------------------------------------------------------------------- 31.2 Certification of the Chief Financial Officer of IGIA, Inc. pursuant to Exchange Act Rule 15d-14(a) -------------------------------------------------------------------------------- 32.1 Certification of the Chief Executive Officer of IGIA, Inc. pursuant to 18 U.S.C. 1350 -------------------------------------------------------------------------------- 32.2 Certification of the Chief Financial Officer of IGIA, Inc. pursuant to 18 U.S.C. 1350 -------------------------------------------------------------------------------- 30 SIGNATURES In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IGIA, Inc. Date: January 13, 2006 /s/ Avi Sivan ---------------------------- Chief Executive Officer 31