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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB/A
Amendment No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
December 31, 2002 0-32565
NUTRACEA
(Name of Small Business Issuer in Its Charter)
California 87-0673375
(State or Other Jurisdiction of IRS Employer
Incorporation or Organization) Identification No.)
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 95762
(Address of Principal Executive Offices) (Zip Code)
(916) 933-7000
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No
[ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $1,536,153.
As of June 30, 2004, 2004, the aggregate value of the voting stock held by
non-affiliates of the registrant, computed by reference to the average of the
bid and ask price on such date was approximately $16,665,348.
ISSUER INVOLVED IN BANKRUPTCY PROCEEDING
DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court. Yes [X] No [ ]
As of June 30, 2004, the registrant had outstanding 26,101,048 shares of
common stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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EXPLANATORY NOTE
This Amended Annual Report on Form 10-KSB/A is filed for the purpose of
amending and replacing the Financial Statements and Management's Discussion and
Analysis and Plan of Operations filed on March report is filed with the
Securities Exchange Commission on April 15, 2003. Pursuant to Rule 12b-15 only
the following items in Form 10-KSB have been included in this amendment:
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATIONS.
ITEM 7. FINANCIAL STATEMENTS.
ITEM 8A. CONTROLS AND PROCEDURES.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
For more detailed financial information, please refer to the audited December
31, 2002 Financial Statements included in this Form 10-KSB.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-KSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred.
For example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We do not undertake to update the information
in this Form 10-KSB if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of the Company's
business are discussed throughout this Form 10-KSB and should be considered
carefully.
PLAN OF OPERATION FOR THE NEXT TWELVE MONTHS
NTI was formed on February 4, 2000 and became the wholly-owned subsidiary of
NutraStar on December 14, 2001. To date, NutraStar has focused on its
relationship with the producer of its raw materials, RiceX, and on its strategic
alliances. NutraStar has commenced the limited distribution of its stabilized
rice bran and rice bran products on the Internet and through direct-to-consumer
response advertising campaigns. In the very near future, NutraStar intends to
commence the full distribution of its products as private label brands through
strategic distributors on the occurrence of certain events, including the
raising of additional capital required to implement its business plan.
NutraStar's fiscal year is the calendar year.
NutraStar anticipates that in the next 12 to 24 months, it will need an
additional $10 to $20 million in financing. NutraStar anticipates that it will
need $5 to $15 million to make certain acquisitions, $2.5 million to further
increase production capacity, and $2.5 million for additional working capital,
including the purchase of inventory for anticipated sales growth. NutraStar
expects to obtain this additional funding from private placements of the
Company's debt and/or equity securities, or through the public offering of its
Common Stock.
RESULTS OF OPERATION
Year Ended December 31, 2002 versus 2001
----------------------------------------
NutraStar generated revenues of $1,286,439 during the fiscal year 2002 compared
to total revenues of $1,610,222 generated in fiscal year 2001. While net sales
remained virtually the same for both years, commission revenue of $317,668 was
realized in fiscal year 2001 compared to no such revenues realized in fiscal
year 2002.
1
Cost of goods sold for fiscal year 2002 decreased by 15% to $800,255 compared to
costs of goods sold of $945,633 in fiscal year 2001. This decrease reflects
lower product sales and increasing the standard product canister size from 360
grams to 600 grams. Gross profits decreased from $664,589 in fiscal year 2001
to $486,184 in fiscal year 2002. This 27% decline in gross profits was
primarily due to the 20% decrease in total revenues realized in fiscal year
2002. Operating expenses of $3,592,337 reflect a 7% increase from $3,356,904 of
operating expenses incurred in fiscal year 2001. Operating expenses for fiscal
year 2002 include legal and accounting costs of approximately $63,400 incurred
in the preparation of the Company's SB-2 registration statement which was filed
with the SEC in June 2002, and $403,906 in non-cash consulting fees.
The Company's operating loss increased to $3,106,153 during fiscal year 2002
compared to an operating loss of $2,692,315 during the previous fiscal year.
This increase in operating loss reflects the 20% decrease in total revenues
during fiscal year 2002 which was offset to some extent by a decrease in costs
of goods sold. The net loss for fiscal year 2002 declined $567,031 to
$3,204,443 compared to a net loss of $3,771,474 for fiscal year 2001. The
decrease in net loss for 2002 was due primarily to the significant reduction in
interest expense which fell from $1,080,602 in fiscal year 2001 to $98,927 in
fiscal year 2002, offset by $403,906 in 2002 non-cash expense. The decrease in
interest expense reflects the reduction of debt resulting primarily from
exchanging $1,590,000 of debt for equity during fiscal year 2002.
Due to the December 14, 2001 share exchange with Alliance, for accounting
purposes, the acquisition has been treated as a recapitalization of NutraStar
(formerly Alliance) with NTI as the acquirer (reverse acquisition).
Consequently, the financial statements of NTI are presented as those of the
Company. As a result, a comparison of the current financial statements as
compared to those of Alliance as previously reported in its Form 10-SB may not
be deemed relevant.
CAPITAL FINANCING
As a part of the exchange transaction with NTI, Alliance issued 17,000,000
shares of its common stock to the shareholders of NTI in exchange for all of the
outstanding shares of NTI. An additional $249,770 shares were issued for
services rendered in connection with the exchange transaction. This transaction
has been accounted for as a reverse acquisition, whereby NTI is considered the
acquiring company and Alliance the acquired company.
In connection with the exchange agreement, Alliance obtained $1,000,000 in 2001
from the sale of one million shares of its common stock which was issued at
$1.00 per share. The Company issued an additional 249,770 shares of common
stock for services rendered valued at $249,770.
During fiscal year 2001, NutraStar also issued 2,084,707 shares of its Series A
Preferred Stock for services, settlement of a lawsuit, payment of accounts
payable and in exchange for outstanding promissory notes and interest thereon
valued at $1,899,000.
2
During fiscal year 2002, NutraStar raised an aggregate of $234,800 through the
issuance of short-term promissory notes. These notes bear interest of 10% per
annum. At December 31, 2002, certain of these notes were delinquent. Subsequent
to year end, all of those notes were modified to be due on demand. In addition
to the above, NutraStar entered into two secured promissory note agreements.
Both notes were in the principal amount of $50,000 and collateralized by shares
of the Company's stock. One of the notes was repaid during the year 2002. The
other note bears interest of 2% per month and is secured by 634,121 shares of
the Company's Series A preferred stock.
During fiscal year 2002, NutraStar's CEO gave personal NutraStar common stock to
an investment banker for the benefit of the Company, as compensation to the
consultant. No services were performed by this consultant, and the consultant
acknowledged that the stock should be returned to the Company. As the
investment capital company is currently involved in litigation with their stock
broker, it is uncertain when these shares will be returned to the Company. As
of December 31, 2002, the Company recorded $75,400 in non-cash consulting
expense related to this transaction.
LIQUIDITY AND CAPITAL RESOURCES
NutraStar has incurred significant operating losses for its last three fiscal
years and, as of December 31, 2002, NutraStar had an accumulated deficit of
$8,682,746. At December 31, 2002, the Company had cash and cash equivalents of
$34,718 and a net working capital deficit of $1,386,173.
To date, NutraStar has funded its operations through a combination of revenues,
short term debt and the issuance of common and preferred stock. During December
2001 NutraStar completed two private placements; the first raised $1,000,000
from the sale of common stock at $1.00 per share; and the second raised
approximately $1,841,707 through the conversion of debt into preferred stock
that was priced at $1.00 per share which is classified as convertible,
redeemable Series A Preferred Stock to conform with SEC accounting requirements.
During fiscal year 2002, NutraStar raised $100,000 from the sale of units
consisting of one share of common stock and a warrant to purchase one additional
share. The Company also committed to issue 1,060,000 shares of common stock in
payment of consulting fees valued at $172,500.
The Company is dependent on the proceeds from future debt or equity investments
to expand NutraStar's operations and fully implement NutraStar's business plan.
If the Company is unable to raise sufficient capital, the Company will be
required to delay or forego some portion of its business plan, which may have a
material adverse effect on the Company's anticipated results from operations and
financial condition. Alternatively, the Company may seek interim financing in
the form of bank loans, private placement of debt or equity securities, or some
combination thereof. Such interim financing may not be available in the amounts
or at the times when the Company requires, and will likely not be on terms
favorable to the Company.
The Company has various financial commitments including the following:
3
- as of December 31, 2002, the Company owed $150,129 in cumulative
dividends on its
Series A Preferred Stock.
- the Company owes $244,333 on the remaining four years of its office
lease.
- the Company has entered into several employment agreements with key
employees with terms ranging from 3 to 10 years and minimum future
payments under such agreements aggregating $2,130,416.
DEPENDENCE ON KEY SUPPLIER
NutraStar has entered into an agreement with The RiceX Company, whereby RiceX
will sell NutraStar its rice bran derivatives at prices equal to the lower of
RiceX's standard price or the price negotiated by other customers for like
quantities and products. The agreement also provided that RiceX would not sell
any rice bran derivatives products in the United States except to NutraStar.
This latter part of the agreement was terminated on July 9, 2002. To purchase
products from RiceX, NutraStar is required to pay for all purchase orders on a
COD basis.
In addition to the risks associated with the potential termination of RiceX as
NutraStar's major supplier, the inability of RiceX to deliver the amount of
product that NutraStar requires, any interruption in product delivery for any
reason, or the inability of RiceX to fulfill its contractual obligations would
have a material adverse effect on NutraStar's business, results from operations,
and financial condition, as NutraStar could not readily find and implement
alternative suppliers and likely not on advantageous terms. RiceX's ability to
manufacture certain of NutraStar's core products is currently limited to the
production capability of RiceX's Dillon, Montana plant (the "Dillon Plant").
Currently, the Dillon Plant is capable of producing only a limited quantity of
NutraStar's products, which will not be sufficient to meet NutraStar's long-term
sales goals. The Company and/or RiceX plan to add production capacity during
the current year.
CRITICAL ACCOUNTING POLICIES
NutraStar's discussion and analysis of its financial conditions and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require managers to make
estimates and disclosures on the date of the financial statements. On an
on-going basis, NutraStar evaluates its estimates, including, but not limited
to, those related to revenue recognition. The Company uses authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. NutraStar
believes that the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
4
Revenue recognition
--------------------
NutraStar is required to make judgments based on historical experience and
future expectations, as to the realizability of shipments made to its customers.
These judgments are required to assess the propriety of the recognition of
revenue based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue
Recognition," and related guidance. NutraStar makes these assessments based on
the following factors: i) customer-specific information, ii) return policies,
and iii) historical experience for issues not yet identified.
Valuation of long-lived assets
---------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of the Company's total
assets. Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the industry, and the anticipated future economic
environment.
Factors NutraStar considers important that could trigger a review for impairment
include the following:
(a) significant underperformance relative to expected historical or
projected future operating results,
(b) significant changes in the manner of its use of the acquired assets or
the strategy of its overall business, and
(c) significant negative industry or economic trends.
When the Company determines that the carrying value of patents and trademarks,
long-lived assets and related goodwill and enterprise-level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, it measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with the risk inherent in its current business model.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations." This statement addresses financial accounting and
reporting for business combinations and supersedes APB Opinion No. 16, "Business
Combinations," and SFAS No. 38, "Accounting for Pre-Acquisition Contingencies of
Purchased Enterprises." All business combinations in the scope of this statement
are to be accounted for using one method, the purchase method. The provisions
of this statement apply to all business combinations initiated after June 30,
2001. Use of the pooling-of-interests method for those business combinations is
prohibited. This statement also applies to all business combinations accounted
5
for using the purchase method for which the date of acquisition is July 1, 2001
or later. The Company does not expect adoption of SFAS No. 141 to have a
material impact, if any, on its financial position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." This statement addresses financial accounting and reporting for
acquired goodwill and other intangible assets and supersedes APB Opinion No. 17,
"Intangible Assets." It addresses how intangible assets that are acquired
individually or with a group of other assets (but not those acquired in a
business combination) should be accounted for in financial statements upon their
acquisition. This statement also addresses how goodwill and other intangible
assets should be accounted for after they have been initially recognized in the
financial statements. It is effective for fiscal years beginning after December
15, 2001. Early application is permitted for entities with fiscal years
beginning after March 15, 2001, provided that the first interim financial
statements have not been issued previously. The Company does not expect
adoption of SFAS No. 142 to have a material impact, if any, on its financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
statement replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of," the accounting and
reporting provisions of APB No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual, and Infrequently Occurring Events and Transactions," for the disposal
of a segment of a business, and amends Accounting Research Bulletin No. 51,
"Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The Company does not
expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." SFAS No. 145 updates, clarifies,
and simplifies existing accounting pronouncements. This statement rescinds SFAS
No. 4, which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net of related
income tax effect. As a result, the criteria in Accounting Principles Board No.
30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS
No. 4 and is no longer necessary as SFAS No. 4 has been rescinded. SFAS No. 44
has been rescinded as it is no longer necessary. SFAS No. 145 amends SFAS No. 13
to require that certain lease modifications that have economic effects similar
to sale-leaseback transactions be accounted for in the same
6
manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. This statement is not applicable to
the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is not applicable to the
Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123. SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to
require more prominent and more frequent disclosures in financial statements
about the effects of stock-based compensation. This statement is effective for
financial statements for fiscal years ending after December 15, 2002. SFAS No.
148 will not have any impact on the Company's financial statements as management
does not have any intention to change to the fair value method.
7
ITEM 7. FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITOR'S REPORT. . . . . . . . . . . . . . . . . . . . . . . . 9
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . . 10
Consolidated Statements of Operations. . . . . . . . . . . . . . . . 12
Consolidated Statements of Shareholders' Deficit. . . . . . . . . . 13
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . .16
Notes to Consolidated Financial Statements. . . . . . . . . . . . . 20
8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
NutraStar Incorporated and subsidiaries
We have audited the accompanying consolidated balance sheet of NutraStar
Incorporated and subsidiaries as of December 31, 2002, as restated, and the
related consolidated statements of operations, shareholders' deficit, and cash
flows for each of the two years in the period ended December 31, 2002, as
restated. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above, as
restated, present fairly, in all material respects, the financial position of
NutraStar Incorporated and subsidiaries as of December 31, 2002, as restated,
and the consolidated results of their operations and their cash flows for each
of the two years in the period ended December 31, 2002, as restated, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
financial statements, during the year ended December 31, 2002, as restated, the
Company incurred a net loss of $3,204,443, as restated, and had negative cash
flows from operations of $871,266, as restated. In addition, the Company had an
accumulated deficit of $8,682,746 at December 31, 2002, as restated. These
factors, among others, as discussed in Note 3 to the financial statements, raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 3. The
consolidated financial statements, as restated, do not include any adjustments
that might result from the outcome of this uncertainty. As discussed in Note 2
to the consolidation financial statements, the December 31, 2002 consolidated
financial statements have been restated to correct a reporting error.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 29, 2003
9
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
=============================================================
ASSETS
CURRENT ASSETS
Cash $ 34,718
Accounts receivable 7,273
Inventory 42,695
Prepaid expenses 27,180
--------
Total current assets 111,866
PROPERTY AND EQUIPMENT, net 155,712
PATENTS AND TRADEMARKS, net 48,748
GOODWILL 250,001
--------
TOTAL ASSETS $566,327
========
10
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
==================================================================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 707,331
Accrued salaries and benefits 51,192
Deferred compensation 325,962
Accrued expenses 81,455
Customer deposits 44,316
Due to officer 16,457
Due to related party 40,526
Notes payable - related party 180,800
Note payable 50,000
------------
Total current liabilities 1,498,039
PUT OPTION 130,000
------------
Total liabilities 1,628,039
------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE, REDEEMABLE SERIES A PREFERRED STOCK,
no par value, $1 stated value
3,000,000 shares authorized
2,144,707 shares issued and outstanding 2,060,931
------------
SHAREHOLDERS' DEFICIT
Common stock, no par value
50,000,000 shares authorized
23,758,071 shares issued and outstanding 5,861,702
Committed common stock 571,674
Deferred compensation (873,273)
Accumulated deficit (8,682,746)
------------
Total shareholders' deficit (3,122,643)
------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 566,327
============
11
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
============================================================================
2002 2001
------------ ------------
(restated) (restated)
REVENUES
Net sales $ 1,286,439 $ 1,292,554
Commission revenue - 317,668
------------ ------------
Total revenues 1,286,439 1,610,222
COST OF GOODS SOLD 800,255 945,633
------------ ------------
GROSS PROFIT 486,184 664,589
OPERATING EXPENSES 3,592,337 3,356,904
------------ ------------
LOSS FROM OPERATIONS (3,106,153) (2,692,315)
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 637 1,443
Interest expense (98,927) (1,080,602)
------------ ------------
Total other income (expense) (98,290) (1,079,159)
------------ ------------
NET LOSS (3,204,443) (3,771,474)
CUMULATIVE PREFERRED DIVIDENDS 150,129 -
------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(3,354,572) $(3,771,474)
============ ============
BASIC AND DILUTED LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS PER COMMON SHARE $ (0.15) $ (0.20)
============ ============
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
USED TO COMPUTE BASIC AND DILUTED LOSS
ATTRIBUTABLE TO COMMON SHAREHOLDERS PER SHARE 22,070,881 18,686,078
============ ============
12
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
==================================================================================================================================
Convertible, Redeemable
Series A Preferred Stock Common Stock Committed Deferred
------------------------- ------------------------ Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
----------- ------------ ----------- ----------- -------- ---------- ------------ ------------
BALANCE, DECEMBER
31, 2000 - $ - 15,943,906 $ 382,877 $ - $ - $(1,556,700) $(1,173,823)
PREFERRED STOCK ISSUED
for settlement of
litigation for payment 100,000 100,000
for accounts payable
for conversion of notes 130,000 130,000
payable and accrued
interest 1,775,707 1,671,802
for services rendered 13,000 13,000
for deposits payable 56,000 56,000
as interest expense 10,000 10,000
COMMON STOCK ISSUED
for cash 28,546 20,000 20,000
for acquisition of
registered trademark 21,409 21,409 21,409
to extend note payable 356,824 356,824 356,824
for services rendered 249,314 249,314 249,314
for acquisition of
NutraGlo 250,001 250,001 250,001
for settlement
of litigation 150,000 150,000 150,000
for cash in conjunction with
acquisition by Alliance 4,649,520 1,000,000 1,000,000
COMMITTED STOCK FOR
CONVERSION OF NOTES
PAYABLE 399,174 399,174
STOCK OPTIONS ISSUED
for compensation - 647,429 (449,515) 197,914
for services rendered - 1,273,861 (476,360) 797,501
for settlement of
litigation - 107,047 107,047
13
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
==================================================================================================================================
WARRANTS ISSUED WITH
CONVERTIBLE DEBT - 114,083 114,083
PUT OPTION - (130,000)
NET LOSS (3,771,474) (3,771,474)
----------- ------------ ----------- ----------- -------- ---------- ------------ ------------
BALANCE, DECEMBER
31, 2001 (RESTATED) 2,084,707 1,850,802 21,649,520 4,572,845 399,174 (925,875) (5,328,174) (1,282,030)
PREFERRED STOCK ISSUED
for expense
reimbursement 60,000 60,000
PREFERRED STOCK DIVIDEND - 150,129 (150,129) (150,129)
COMMON STOCK ISSUED
for cash 1,908,551 395,000 395,000
for services rendered 200,000 90,000 90,000
ISSUANCE COSTS - (39,499) (39,499)
COMMITTED STOCK FOR
SERVICES RENDERED 172,500 172,500
STOCK OPTIONS ISSUED
for compensation - 193,750 (145,312) 48,438
for services rendered - 173,250 173,250
as interest expense - 5,600 5,600
WARRANTS ISSUED FOR
SERVICES RENDERED - 850 850
BENEFICIAL CONVERSION
FEATURE FOR THE ISSUANCE
OF CONVERTIBLE DEBT - 66,000 66,000
14
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
==================================================================================================================================
COMMON STOCK ISSUED
FOR CONSULTING FEES 403,906 403,906
AMORTIZATION OF DEFERRED
COMPENSATION 197,914 197,914
NET LOSS (3,204,443) (3,204,443)
----------- ------------ ----------- ----------- -------- ---------- ------------ ------------
BALANCE, DECEMBER
31, 2002 (RESTATED) 2,144,707 $ 2,060,931 23,758,071 $5,861,702 $571,674 $(873,273) $(8,682,746) $(3,122,643)
=========== ============ =========== =========== ======== ========== ============ ============
15
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
============================================================================
2002 2001
------------ ------------
(restated) (restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,204,443) $(3,771,474)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 126,460 94,397
Loss reserve for patents and trademarks 75,359 -
Non-cash issuances of preferred stock 60,000 468,511
Non-cash issuances of common stock 90,000 756,138
Non-cash issuances of committed stock 172,500 130,487
Non-cash issuances of stock options 425,202 1,102,462
Non-cash issuances of warrants 850 10,178
Non-cash payment of consulting fees 403,906 -
Beneficial conversion feature 66,000 -
(Increase) decrease in
Accounts receivable (5,680) 114,043
Inventory 51,191 421,886
Prepaid expenses (18,392) 6,597
Deposits 181,071 (80,546)
Increase (decrease) in
Accounts payable 325,214 (333,773)
Accrued salaries and benefits (9,822) 36,079
Deferred compensation 325,962 -
Accrued expenses 24,475 157,670
Customer deposits 44,316 -
Due to officer (5,435) 32,029
------------ ------------
Net cash used in operating activities (871,266) (855,316)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (61,150) (234,348)
Purchase of patents and trademarks (24,669) (30,199)
------------ ------------
Net cash used in investing activities (85,819) (264,547)
------------ ------------
16
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31,2002 (restated)
============================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable - 1,230,000
Principal payments on convertible notes payable - (490,000)
Proceeds from notes payable 334,800 -
Principal payments on notes payable (104,000) -
Refunds from deposits payable - (240,500)
Proceeds from the issuance of common stock, net 355,501 1,020,000
---------- -----------
Net cash provided by financing activities 586,301 1,519,500
---------- -----------
Net increase (decrease) in cash (370,784) 399,637
CASH, BEGINNING OF YEAR 405,502 5,865
---------- -----------
CASH, END OF YEAR $ 34,718 $ 405,502
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
INTEREST PAID $ - $ -
========== ===========
INCOME TAXES PAID $ - $ -
========== ===========
17
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During the year ended December 31, 2002, the Company
- issued 200,000 shares of common stock for services rendered totaling
$90,000.
- issued options to purchase 155,000 shares of common stock to an employee of
the Company. In relation to these issuances, the Company recorded
compensation expense totaling $193,750 and deferred compensation expense
totaling $145,312.
- issued options to purchase 425,000 shares of common stock for services
rendered. In relation to these issuances, the Company recorded consulting
expense totaling $173,250.
- issued options to purchase 28,000 shares of common stock for debt issued.
In relation to these issuances, the Company recorded interest expense
totaling $5,600.
- issued warrants to purchase 2,500 shares of common stock for services
rendered. In relation to these issuances, the Company recorded consulting
expense totaling $850.
- committed to issue 1,060,000 shares of common stock for services rendered.
In relation to these commitments, the Company recorded consulting expense
totaling $172,500.
- recorded interest expense totaling $66,000 related to the beneficial
conversion feature for the issuance of convertible debt.
- issued 60,000 shares of preferred stock as payment for an expense
reimbursement totaling $60,000.
- recorded 7% cumulative preferred stock dividends totaling $150,129
During the year ended December 31, 2001, the Company
- converted notes with a principal balance of $1,340,000 and accrued interest
of $90,196 into 1,430,196 shares of the Company's Series A preferred stock.
Related to these conversions, the Company issued an additional 345,511
shares of Series A preferred stock to certain of the note holders and
recorded related interest charges of $345,511. The remaining notes with a
principal balance of $250,000 and accrued interest of $18,687 had been
converted into committed common stock. Related to the conversion, the
Company recorded interest charges of $130,487 for additional shares that
will be issued.
- issued 100,000 shares of Series A preferred stock as a settlement of
certain litigation. Related to this transaction, the Company recorded
expenses totaling $100,000
18
The accompanying notes are an integral part of these financials
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES (CONTINUED)
- issued 130,000 shares of Series A preferred stock to a related party as
payment of accounts payable totaling $130,000 and subsequently executed a
put/call option with the related party (see Note 11).
- issued 13,000 shares of Series A preferred stock for services rendered
valued at $13,000.
- issued 56,000 shares of Series A preferred stock for deposits payable
totaling $56,000. In relation to one of these transactions, the Company
issued 10,000 shares of preferred stock as interest expense totaling
$10,000.
- issued 21,409 shares of common stock to acquire a registered trademark
valued at $21,409.
- issued 356,824 shares of common stock to extend the term of a note payable
and recorded interest expense totaling $356,824.
- issued 249,314 shares of common stock for services rendered valued at
$249,314.
- issued 250,001 shares of common stock in exchange for the remaining 20% of
the common stock of NutraGlo owned by a third party.
- issued 150,000 shares of common stock as a settlement for the cancellation
of a consulting agreement and recorded consulting expense totaling
$150,000.
- recorded committed common stock of $399,174 for the conversion of a note
payable and accrued interest.
- issued options to purchase 935,564 shares of common stock to employees of
the Company. In relation to these issuances, the Company recorded
compensation expense totaling $197,914 and deferred compensation expense
totaling $449,515.
- issued options to purchase 1,498,660 shares of common stock. In relation to
these issuances, the Company recorded consulting expense totaling $797,501
and deferred compensation expense totaling $476,360.
- issued options to purchase 142,730 shares of common stock in settlement of
certain disputes. In relation to these issuances, the Company recorded
settlement expenses totaling $107,047.
19
The accompanying notes are an integral part of these financials
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
NutraStar Incorporated ('NutraStar"), a California corporation, markets
proprietary whole food dietary supplements derived from nutrient-dense
stabilized rice bran (a nutraceutical) produced by an affiliated company,
The RiceX Company ("RiceX"), a current shareholder and a publicly traded
company. The Company (as defined in Note 4) has a license to distribute
certain derivatives of RiceX's stabilized rice bran, as well as
valued-added rice bran products in the United States of America.
On December 14, 2001, Alliance Consumer International, Inc. ("Alliance")
acquired all of the outstanding common stock of NutraStar. For accounting
purposes, the acquisition has been treated as a recapitalization of
NutraStar with NutraStar as the acquirer (reverse acquisition).
Effective April 27, 2000, NutraStar became an 80% owner of NutraGlo
Incorporated ("NutraGlo"), a Nevada corporation. NutraGlo was non-operative
during 2000. During the year ended December 31, 2001, NutraGlo started
marketing, manufacturing, and distributing NutraStar's stabilized rice bran
and other nutraceuticals to the equine market. In connection with
NutraStar's acquisition of Alliance, NutraStar issued 250,001 shares of
common stock in exchange for the remaining 20% of the common stock of
NutraGlo.
The transaction has been accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations,"
which is required for all transactions occurring after June 30, 2001. In
accordance with SFAS No. 141, the purchase price is to be allocated to
assets acquired and liabilities assumed based on the estimated fair market
value at the closing date of the acquisition, with the excess of the
purchase price being allocated to goodwill. Since there were not any assets
acquired and liabilities assumed in connection with this transaction, the
value of the shares issued of $250,001 has been recorded as goodwill in the
accompanying consolidated balance sheet. As NutraStar was the 80% owner of
NutraGlo, the operations of NutraGlo have been consolidated with NutraStar.
Therefore, pro forma information is not required.
Lines of Business
-------------------
The Company has four primary divisions through which it sells its products:
(1) TheraFoods(R), which distributes consumer products including
RiSolubles(R), RiceMucil(R), NutraFlex(TM), and StaBran(R), (2)
NutraCea(R), which was created to compliment medical food products, (3)
NutraBeauticals(R), which provides natural products to improve skin health,
and (4) NutraGlo(R), which developed a derivative of the NutraFlex(TM)
product for horses.
For internal reporting purposes, management segregates the Company into two
segments: (1) NutraStar, including the transactions of TheraFoods(R),
NutraCea(R), and NutraBeauticals(R), and (2) NutraGlo.
NOTE 2 - RESTATEMENT
DECEMBER 31, 2001
-------------------
During the year ended December 31, 2001, the Company issued 130,000 shares
of Series A preferred stock to a related party as payment of accounts
payable totaling $130,000. Related to these issuances, on January 15, 2002,
these holders executed a put/call agreement with the Company (see Note 11).
The Company previously had not recorded the put option on its financial
statements. The Company has also reclassified its convertible Series A
preferred stock
20
to convertible, redeemable Series A preferred stock to conform with the
accounting requirements of the United States Securities and Exchange
Commission.
This restatement does not have any effect on the Company's reported
earnings. Its impact on the previously reported total liabilities and
convertible, redeemable Series A preferred stock as of December 31, 2001 is
as follows:
As Previously
Reported Restatement As Restated
-------------- ------------- ------------
Total liabilities $ 562,529 $ 130,000 $ 692,529
Total convertible, redeemable Series
A preferred stock $ 1,980,802 $ (130,000) $ 1,850,802
DECEMBER 31, 2002
-----------------
NutraStar has restated its Consolidated Financial Statements for 2002 to
correct a reporting error that was discovered in the fourth quarter of
2003. During 2002, NutraStar's CEO transferred personal shares of common
stock to third-party consultants as compensation for services rendered to
NutraStar and to settle certain contingencies related to the failure to
file an effective registration statement by June 30, 2002. These
transactions were omitted in error from the financial statements as
originally reported. This restatement increases the net loss attributable
to common shareholders and common stock by $403,906.
The following table presents the effects of the correction and restatement
on a condensed basis.
FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
As previously Restatement As
reported adjustments restated
--------------- ------------ ------------
Shareholder's deficit:
Common stock $ 5,457,796 403,906 $ 5,861,702
Accumulated deficit $ (8,278,840) (403,906) $(8,682,746)
Operating expenses $ 3,188,431 403,906 $ 3,592,337
Net loss attributable to common
shareholders $ (2,950,666) (403,906) $(3,354,572)
Basic and diluted loss attributable
to common shareholders per
common share $ (1.34) (0.18) $ (1.52)
NOTE 3 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
United States generally accepted accounting principles which contemplate
continuation of the Company as a going concern. During the year ended
December 31, 2002, the Company incurred a net loss of $3,204,443, and it
had negative cash flows from operations of $871,266. In addition, the
Company had an accumulated deficit of $8,682,746 at December 31, 2002.
These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Recovery of the Company's assets is dependent upon future events, the
outcome of which is
21
indeterminable. Successful transition of the Company to the attainment of
profitable operations is dependent upon the Company achieving a level of
sales adequate to support the Company's cost structure. The financial
statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary should the Company be unable to
continue in existence.
Management's plans to alleviate substantial concern about the Company's
ability to continue as a going concern include the following:
- The Company anticipates that it will be able to raise additional
equity that will be sufficient for it to continue to implement its
current business strategy. It plans on registering all of its common
stock with the Securities and Exchange Commission not previously
registered as well as any future common stock issued. This should
result in more market liquidity for the Company's common shareholders.
- The Company plans on implementing an aggressive marketing strategy
that will enhance consumer awareness of its products. The strategy
includes establishing and/or expanding existing strategic
relationships; using an Internet business-to-business and
business-to-consumer Web site that will handle increased product
demand if its marketing strategy is successful; creating a direct
response marketing campaign; and advertising in targeted, industry
specific magazines.
- The Company is reducing its fixed overhead expenses and plans to
continue to control such items for the foreseeable future.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
-----------------------------
The consolidated financial statements include the accounts of NutraStar and
its wholly owned subsidiaries, NutraStar Technologies Incorporated and
NutraGlo (collectively, the "Company"). All significant inter-company
accounts and transactions are eliminated in consolidation.
Revenue Recognition
--------------------
Revenue is generally recognized upon shipment of product with a provision
for estimated returns and allowances recorded at that time, if applicable.
Commissions revenue is generally recognized when earned and collection is
reasonably assured.
Comprehensive Income
---------------------
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and its
components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which
are excluded from net income, include foreign currency translation
adjustments, minimum pension liability adjustments, and unrealized gains
and losses on available-for-sale securities. Comprehensive income is not
presented in the Company's financial statements since the Company did not
have any changes in equity from non-owner sources.
Accounts Receivable
--------------------
The Company provides for the possible inability to collect accounts
receivable by recording an allowance for doubtful accounts. The Company
writes off an account when it is considered to be uncollectible. As of
December 31, 2002, an allowance for doubtful accounts was not deemed
necessary.
22
Inventory
---------
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of nutraceutical products manufactured by an affiliated
company, RiceX, which the Company enhances for final distribution to its
customers. While the Company has an inventory of these products, which
contain ingredients supplied by RiceX, any significant prolonged shortage
of these ingredients or of the supplies used to enhance these ingredients
could materially adversely affect the Company's results of operations.
Property and Equipment
------------------------
Property and equipment are stated at cost. The Company provides for
depreciation using the straight-line method over the estimated useful lives
as follows:
Furniture and equipment 7 years
Software 3 years
Expenditures for maintenance and repairs are charged to operations as
incurred while renewals and betterments are capitalized. Gains or losses on
the sale of property and equipment are reflected in the statements of
operations.
Patents and Trademarks
------------------------
The Company has exclusive licenses for several patents, which were acquired
from independent third parties and a related party. All costs associated
with the patents are capitalized. Patents acquired from related parties are
recorded at the carryover basis of the transferor. The Company paid cash as
consideration for all patents and trademarks acquired, except the Via-Bran
registered trademark, which was acquired for 21,409 shares of common stock
valued at $21,409.
Amortization is computed on the straight-line method based on estimated
useful lives of 17 to 20 years. The Company also has registered trademarks,
which are amortized over estimated useful lives of 10 years.
The Company recorded a loss reserve totaling $75,359 as of December 31,
2002 related to the impairment of certain patents.
Deferred Compensation
----------------------
Deferred compensation at December 31, 2002 consisted of salaries payable to
employees of the Company that have been earned, but not paid.
Fair Value of Financial Instruments
---------------------------------------
For certain of the Company's financial instruments, including cash,
accounts receivable, inventory, prepaid expenses, accounts payable, accrued
salaries and benefits, deferred compensation, accrued expenses, customer
deposits, due to officer, due to related party, notes payable - related
party, note payable, and put option, the carrying amounts approximate fair
value due to their short maturities.
Stock-Based Compensation
-------------------------
SFAS No. 123, "Accounting for Stock-Based Compensation," defines a fair
value based method of accounting for stock-based compensation. However,
SFAS No. 123 allows an entity to continue to measure compensation cost
related to stock and stock options issued to employees using the intrinsic
method of accounting prescribed by Accounting Principles Board ("APB")
23
Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
electing to remain with the accounting method of APB No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting defined in SFAS No. 123 had been applied. The Company
has elected to account for its stock-based compensation to employees under
APB No. 25.
Advertising Expense
--------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the years ended
December 31, 2002 and 2001 was $57,264 and $24,369, respectively.
Income Taxes
-------------
The Company accounts for income taxes under the liability method, which
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income
taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their
financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.
Loss Per Share
----------------
The Company utilizes SFAS No. 128, "Earnings per Share." Basic loss per
share is computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per
share is computed similar to basic loss per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. Common equivalent
shares are excluded from the computation if their effect is anti-dilutive.
As such, basic and diluted loss per share are the same.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentrations of Credit Risk
--------------------------------
The Company sells its services throughout the United States, extends credit
to its customers, and performs ongoing credit evaluations of such
customers. The Company evaluates its accounts receivable on a regular basis
for collectability and provides for an allowance for potential credit
losses as deemed necessary.
On May 1, 2001, the Company entered into a three-year, exclusive
distribution agreement with a customer, in which the customer is required
to purchase a minimum of 90,000 pounds of the Company's product on or
before July 1, 2001, 120,000 pounds before September 1, 2002, 275,000
pounds between September 1, 2002 and August 31, 2003, and 350,000 pounds
between September 1, 2003 and August 31, 2004. During the year ended
December 31, 2002, sales to this customer totaled $516,596 (40% of total
sales). During the year ended December 31, 2001, sales to this customer
totaled $596,627 (46% of total sales).
In addition to the above, during the years ended December 31, 2002 and
2001, one customer
24
accounted for 10% and 19%, respectively, of the Company's sales.
Recently Issued Accounting Pronouncements
--------------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates,
clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board No. 30 will now be used to classify
those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer
necessary as SFAS No. 4 has been rescinded. SFAS No. 44 has been rescinded
as it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require
that certain lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical corrections to
existing pronouncements. While those corrections are not substantive in
nature, in some instances, they may change accounting practice. This
statement is not applicable to the Company.
Recently Issued Accounting Pronouncements (Continued)
--------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. This statement is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No.
72 and Interpretation 9 thereto, to recognize and amortize any excess of
the fair value of liabilities assumed over the fair value of tangible and
identifiable intangible assets acquired as an unidentifiable intangible
asset. This statement requires that those transactions be accounted for in
accordance with SFAS No. 141, "Business Combinations," and SFAS No. 142,
"Goodwill and Other Intangible Assets." In addition, this statement amends
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," to include certain financial institution-related intangible
assets. This statement is not applicable to the Company.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," an amendment of SFAS No. 123.
SFAS No. 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require more prominent and more frequent
disclosures in financial statements about the effects of stock-based
compensation. This statement is effective for financial statements for
fiscal years ending after December 15, 2002. SFAS No.148 will not have any
impact on the Company's financial statements as management does not have
any intention to change to the fair value method.
25
NOTE 5 - CASH
The Company maintains its cash balances at one bank located in California.
The balances at the bank are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 2002, the Company did not have
any uninsured cash.
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2002 consisted of the following:
Furniture and equipment $ 18,417
Software 347,773
--------
366,190
Less accumulated depreciation 210,478
--------
TOTAL $155,712
========
Depreciation expense was $116,393 and $89,026 for the years ended December
31, 2002 and 2001, respectively.
NOTE 7 - PATENTS AND TRADEMARKS
Patents and trademarks at December 31, 2002 consisted of the following:
Patents $89,399
Trademarks 52,259
------
141,658
Less loss reserve 75,359
Less accumulated amortization 17,551
------
TOTAL $48,748
=======
At December 31, 2002, $67,098 of the Company's patents and trademarks had
been purchased from a related party.
The Company recorded a loss reserve totaling $75,359 as of December 31,
2002 related to the impairment of certain patents.
Amortization expense was $10,067 and $5,371 for the years ended December
31, 2002 and 2001, respectively. Future estimated, aggregate amortization
expense at December 31, 2002 was as follows:
26
Year Ending
December 31,
------------
2003 $ 9,696
2004 9,696
2005 9,696
2006 9,696
2007 9,694
-------
TOTAL $48,478
=======
NOTE 8 - GOODWILL
Goodwill represents the purchase price of the remaining 20% of NutraGlo. As
of January 1, 2002, the Company adopted SFAS No. 142. SFAS No. 142
prohibits the amortization of goodwill, but requires that it be reviewed
for impairment at least annually or on an interim basis if an event occurs
or circumstances change that could indicate that its value has diminished
or been impaired. Recoverability of goodwill is measured by a comparison of
its carrying value to the future net cash flows expected to be generated by
it.
Cash flow projections are based on historical experience, management's view
of growth within the industry, and the anticipated future economic
environment. Since the Company purchased the remaining 20% of NutraGlo on
December 12, 2001, amortization expense was not recorded as of December 31,
2001. As such, the transitional disclosure provisions of SFAS No. 142 do
not apply.
NOTE 9 - NOTES PAYABLE - RELATED PARTIES
During the year ended December 31, 2002, the Company raised an aggregate of
$234,800 through the issuance of short-term promissory notes. Notes payable
- related parties at December 31, 2002 consisted of the following:
Notes payable to the Chief Executive Officer, bearing interest
at 10% per annum, with $74,000 due prior to December 31,
2002, $1,800 due on January 26, 2003, and $100,000 due on
March 3, 2003. At December 31, 2002, a total of $74,000
of these notes were delinquent. Subsequent to December 31,
2002, all of these notes were modified to be due on demand. $ 175,800
Note payable to a related party, bearing interest at 10% per annum
and due on December 20, 2002. At December 31, 2002,
this note was delinquent. Subsequent to December 31, 2002,
this note was modified to be due on demand. 5,000
---------
TOTAL $ 180,800
=========
NOTE 10 - NOTE PAYABLE
Note payable at December 31, 2002 amounted to $50,000 to a third party,
bearing interest at 2% per month, secured by 243,036 shares of common
stock, and due on December 20, 2002. As of
27
December 31, 2002, the Company was in default on the note. Subsequent to
December 31, 2002, the Company entered into an agreement with the third
party to modify the collateral to 634,121 shares of preferred stock and
extended the due date of the note to September 20, 2003.
NOTE 11 - PUT OPTION
During the year ended December 31, 2001, the Company issued 130,000 shares
of Series A preferred stock to a related party as payment of accounts
payable totaling $130,000. On January 15, 2002, these holders of the Series
A preferred stock executed a put/call agreement. The put allows for the
holder to sell to the Company all, but not less than all, of the 130,000
shares of the Company's Series A preferred stock, or common stock if any of
the Series A preferred stock were converted, for $130,000, plus all
accumulated, but unpaid dividends, at any time after six months from
January 15, 2002. Related to the put option and the related conversion of
debt, the Company has recorded a liability of $130,000.
In addition, the Company maintains the right to call the option and
purchase back the shares of the Series A preferred stock for $130,000, plus
any unpaid and accrued dividends at any time, subject to certain
provisions.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Lease
-----
The Company leases its office space under a non-cancelable operating lease
with RiceX that expires in September 2006 and requires monthly payments of
$5,358. Future minimum payments under this lease agreement at December 31,
2002 were as follows:
Year Ending
December 31,
------------
2003 $64,298
2004 64,700
2005 65,906
2006 49,429
------
TOTAL $244,333
========
Rent expense was $63,899 and $66,799 for the years ended December 31, 2002
and 2001, respectively.
Registration Statement
-----------------------
The Company will pay all of the costs connected with the registration on
Form SB-2 related to the re-sale of up to 3,709,028 shares of common stock
originally filed on June 4, 2002, except the holder of the common stock
will pay all sales commissions or brokers' discounts and the fees and
expenses of the holders' legal counsel or accountants, if any.
Agreements
----------
The Company has entered into several employment agreements with key
employees with terms ranging from three to 10 years. Minimum future
payments under these agreements at December 31, 2002 were as follows:
28
Year Ending
December 31,
------------
2003 $508,750
2004 380,000
2005 283,333
2006 250,000
2007 250,000
Thereafter 458,333
--------
TOTAL $2,130,416
==========
Generally, if the Company terminates these agreements without cause or the
employee resigns with good reason, as defined, the Company will pay the
employees' salaries, bonuses, and benefits payable for the remainder of the
term of the agreements.
On December 14, 2001, the Company entered into a 12-month consulting
services agreement, whereby a $15,000 retainer fee is due every month for
financial and accounting services. This agreement was canceled in March
2002. During the year ended December 31, 2002, total consulting expenses
paid under this contract were $37,500.
On December 14, 2001, the Company entered into a 12-month consulting
services agreement, whereby it agreed to pay a $5,000 retainer fee for
financial and accounting services. In addition, upon the attainment by the
consultant of certain capital transactions, such as any financing business
combination, sale, or acquisition, a certain percentage, ranging from 2% to
6%, of the value of the capital transaction will be paid by the Company to
the consultant in cash. As of December 31, 2002, consulting expenses paid
under this contract were $35,000.
On February 26, 2002, the Company entered into a master services agreement
for certain e-commerce services in the amount of $9,975.
On April 12, 2002, the Company entered into a two-year marketing agreement,
whereby the Company is to pay a commission of 10% of gross receipts on
sales from customers introduced to the Company by the consultant, subject
to certain requirements. In relation to this agreement, the Company must
grant to the consultants five-year options to purchase up to 150,000 shares
of the Company's common stock upon the attainment of customers at an
exercise price of $0.75 per share, vesting according to the achievement of
certain levels of gross receipts. The agreement automatically renews after
the initial two-year term. As of December 31, 2002, the consultant had not
produced any sales. Therefore, options had not been issued. Options issued
upon procurement of customers will be valued either at the fair market
value of the services performed or the fair market value of the options,
whichever is more readily available, with the expense amortized over the
service period.
On May 6, 2002, the Company entered into a one-year finder's and advisory
agreement, whereby the finder is to seek businesses that are consistent
with the Company's business and strategic plans or to introduce the Company
to investors. The fees paid to the finder for finding investors to fund the
Company are based upon certain percentages, ranging from 2% to 10%, plus
unaccountable expenses, depending on the amount funded by the investors. In
addition, 10% of the transaction value will be paid in cashless warrants.
If the finder arranges a credit line or other types of debt placement, the
fees paid to the finder will be 2% of the total debt placement.
If the finder introduces a business or entity and the Company engages in a
merge-type transaction
29
or other similar transactions, the fees paid to the finder are based upon
certain percentages, ranging from 3% to 7%, depending on the transaction
value. In addition, 10% of the transaction value will be paid in cashless
warrants. This agreement is automatically renewed after the initial
one-year term. As of December 31, 2002, amounts were not paid to the
finder.
On June 10, 2002, the Company entered into a one-year finder's fee
agreement, whereby the Company is to pay the finder 5% of the gross
revenues generated from a commercial transaction other than financing, a
merger, or some other form of business combination. For every $100,000 in
gross revenues that are generated by the finder, the Company will issue
warrants to the finder to purchase 5,000 shares of common stock, which will
be exercisable immediately, at the then current market price on a cashless
basis, subject to certain limitations.
In September 2002, the Company entered into a secured promissory note
agreement for $50,000, which was paid off prior to the year ended December
31, 2002. The note was collateralized by 500,000 shares of the Company's
common stock. As of December 31, 2002, these shares had not been returned
to the Company by the loaner. The Company has reflected these shares as
being issued and outstanding as of December 31, 2002.
In September 2002, the Company entered into a secured promissory note
agreement for $50,000, due on December 20, 2002. The note was
collateralized by 243,036 shares of the Company's common stock. As of
December 31, 2002, the Company was in default on this agreement. Subsequent
to December 31, 2002, the Company and the loaner agreed to modifications in
the agreement, whereby the note will be secured by 634,121 shares of the
Company's convertible, redeemable Series A preferred stock and will be due
on demand.
In November 2002, the Company entered into a one-year consulting agreement
with a third party in exchange for a fixed monthly fee. In addition, the
Company must issue to the consultant $100,000 worth of common stock as a
commencement bonus. The per share price of the Company's common stock was
$0.10 on the date services were first provided by the consultant.
Therefore, the Company is committed to issue 1,000,000 shares of common
stock as of December 31, 2002. The expense related to the transaction has
been recorded in operating expenses on the accompanying statement of
operations. Furthermore, the contract calls for the issuance to the
consultant options to purchase 1,200,000 shares of common stock. Subsequent
to December 31, 2002, this agreement was terminated, and the options were
canceled. These stock options are not included in the stock options
outstanding at December 31, 2002.
On August 21, 2002, the Company entered into a one-year investment banking
agreement, whereby the Company is to pay commission of $5,000 a month to
the consultant upon the raising of $500,000 in capital. In addition, the
Company's CEO gave 290,000 of personal NutraStar common stock to the
investment banker as compensation for the benefit of the Company. As of
December 31, 2002, the consultant had not raised any funds. Therefore the
Company was not liable for the 290,000 shares issued upon execution of the
agreement. The investment banker acknowledges these shares will be
returned, however, since they are involved in litigation with a third party
who holds these shares, it is uncertain when these shares will be returned.
Litigation
----------
On April 4, 2002, a complaint was filed against the Company by Millennium
Integrated Services, Inc. ("MISI"). MISI provided Web site development
services to the Company at a cost of $204,405. MISI is seeking contract
payment of $204,405, plus interest of $32,031 and damages for alleged
conversion and misappropriation of trade secrets. On April 9, 2002, MISI
filed a Motion for a Writ of Attachment that would allow MISI to seize and
hold the Company's assets
30
worth $236,436, pending the resolution of the lawsuit. This Writ of
Attachment was granted on April 10, 2002.
Certain of the Company's accounts receivable as of December 31, 2002 have
been attached to secure an accounts payable balance to MISI of $188,882 as
of December 31, 2002. The Company believes that the settlement of this case
may have a material effect on the Company's cash flows.
On July 16, 2002, the Company was summoned to answer a complaint filed by
Faraday Financial, Inc. ("Faraday"). Between December 2000 and March 2001,
the Company issued convertible promissory notes totaling $450,000 and a
promissory note totaling $50,000. On December 13, 2001, Faraday entered
into a settlement agreement with the Company, whereby Faraday agreed to
cancel the promissory notes in exchange for 735,730 shares of preferred
stock. Faraday claims that the settlement agreement required that the
Company effect a registration statement covering the preferred stock by
June 30, 2002. In the event the Company failed to effect a registration
statement by June 30, 2002, the Company was to immediately forfeit to
Faraday 735,730 shares of common stock in the name of the Chief Executive
Officer of the Company. As of December 31, 2002, the Company recorded
$292,506 of non-cash compensation expense related to this transaction.
In addition, the Chief Executive Officer entered into an escrow agreement
to ensure the automatic forfeiture of the common stock and entered into a
guarantee to be personally responsible to Faraday for the original $500,000
loan amount, plus 12% interest per annum. Faraday has filed its fourth
claim for relief for a judgment against the Company for $500,000, plus
accrued, but unpaid interest, attorneys' fees and costs, and other such
costs. As of September 30, 2002, management believes the maximum exposure
for the Company is approximately $500,000, plus interest and fees.
The Company was involved in litigation with several potential investors.
The plaintiffs requested a return of $750,000 in funds deposited with the
Company, representing potential permanent investments. These matters have
been resolved in connection with the acquisition of Alliance during
December 2001. As of December 31, 2002, there were not any additional
liabilities related to these matters.
There are various other claims that have been made against the Company by
certain of its vendors. Management expects that the settlement of these
claims will not have a significant effect on the Company's financial
position and results of operations.
From February through July 2000, a third party solicited funds on behalf of
an undetermined public shell company, into which it was contemplated that
the Company might merge. In this regard, the Company received approximately
$320,000 in deposits to be used for such purpose. As a result of these
solicitations, there may have been violations of federal and/or state
securities laws by such third party. The Company never proceeded with the
contemplated merger. Instead, the Company applied such funds to a
subsequent private placement that the Company conducted, in which shares of
the Company's common stock were issued for the $320,000 investment. The
Company has offered full refunds to all people who provided monies to the
Company. There are not any assurances that federal and/or state securities
authorities will not investigate and possibly bring an action against the
third party who solicited the funds and the Company.
NOTE 13 - SHAREHOLDERS' DEFICIT
31
Convertible, Redeemable Series A Preferred Stock
-----------------------------------------------------
In December 2001, the Company approved the issuance of 3,000,000 shares of
convertible, redeemable Series A preferred stock and executed a certificate
of designation of the rights, preferences, and privileges of the Series A
preferred stock. Each shareholder of Series A preferred stock is entitled
to receive a 7% cumulative dividend, which is only payable in the case of
liquidation or redemption. The Series A preferred stock has a $1 per share
stated value and will receive certain liquidation preferences after
satisfaction of claims of creditors, but before payment or distributions of
assets and surplus funds.
Furthermore, the Series A preferred stock is convertible at the option of
the holder at $1 per share into the Company's common stock, subject to
certain anti-dilution provisions. In addition, the Series A preferred stock
will automatically convert into common stock in the event of a qualified
public trading benchmark, which is defined as (i) the common stock is
listed on a national exchange at twice its conversion price or (ii) the
common stock is quoted on the over-the-counter bulletin board at an average
bid price of at least $1.25 per share over any 30-day trading period.
The Company may redeem any and all outstanding shares of Series A preferred
stock. Upon the five-year anniversary of the date of issuance, the Company
is required to redeem all of its outstanding shares of Series A preferred
stock at $1 per share, plus all accrued and unpaid dividends declared. As
of December 31, 2002, cumulative dividends totaled $150,129.
During the year ended December 31, 2001, the Company issued 100,000 shares
of Series A preferred stock as a settlement of certain litigation. Related
to this transaction, the Company recorded expenses totaling $100,000 during
the year ended December 31, 2001.
During the year ended December 31, 2001, the Company issued 130,000 shares
of Series A preferred stock to a related party as payment of accounts
payable totaling $130,000 and subsequently executed a put/call option with
the related party (see Note 11).
During the year ended December 31, 2001, the Company issued 13,000 shares
of Series A preferred stock for services rendered. In relation to this
transaction, the Company recorded consulting expense totaling $13,000 as of
December 31, 2001.
During the year ended December 31, 2001, the Company issued 56,000 shares
of Series A preferred stock for deposits payable totaling $56,000. In
relation to one of these transactions, the Company issued 10,000 shares of
preferred stock as interest expense totaling $10,000 as of December 31,
2001.
Convertible, Redeemable Series A Preferred Stock (Continued)
-----------------------------------------------------
During the year ended December 31, 2001, notes with a principal balance of
$1,340,000 and accrued interest of $90,196 had been converted into
1,430,196 shares of the Company's Series A preferred stock. Related to
these conversions, the Company issued an additional 345,511 shares of
Series A preferred stock to certain of the note holders and recorded
related interest charges of $345,511. The remaining notes with a principal
balance of $250,000 and accrued interest of $18,687 had been converted into
committed common stock. Related to the conversion, the Company recorded
interest charges of $130,487 for additional shares that will be issued.
Common Stock
-------------
During the year ended December 31, 2002, The Company issued 180,000 shares
of common stock to consultants at a price of $.20 per share for services
received. In relations to this
32
transaction, the Company recorded non-cash consulting expense totaling
$36,000.
On March 4, 2002, the Company commenced a private placement of up to
6,666,667 units. Each unit consisted of one share of common stock and one
warrant to purchase an additional share of common stock. The units were
offered at $0.65 per unit. The warrants have an exercise price of 120% of
the current market value of the Company's common stock at the time of
exercise.
In relation to this offering, on March 15, 2002, the Company issued 153,333
shares of common stock with a detachable purchase warrant to purchase
153,333 shares of common stock at an exercise price of $1.20 per share in
exchange for $100,000.
Effective December 14, 2001, the Company was combined with Alliance,
whereby the Company became a wholly owned subsidiary of Alliance. In
connection with the acquisition, the Company issued an additional 249,770
shares of common stock for services rendered. Under the terms of the
agreement, all of the issued and outstanding shares of the Company's common
stock were exchanged for 17,000,000 shares of Alliance's common stock.
The transaction has been accounted for as a reverse acquisition, whereby
NutraStar is considered the acquiring company and Alliance the acquired
company. The equity section of NutraStar has been restated, similar to a
recapitalization, to reflect the pro-rata shares it received in the
acquisition. The ratio of shares issued in the share-exchange was
approximately 1.43 shares of Alliance's common stock to every one share of
NutraStar's outstanding common stock. All share and per share data prior to
the acquisition have been restated to reflect this ratio.
Common Stock (Continued)
-------------
Outstanding unexercised options and warrants of the Company were also
converted into options and warrants to acquire shares of Alliance's common
stock at a ratio of 1 to 1.43. Alliance also obtained $1,000,000 from the
sale of its common stock in connection with the acquisition agreement.
These shares of stock were issued for $1 per share. There were 3,649,520
shares outstanding as of the date of the acquisition. Prior to the
acquisition, NutraStar changed its name to NutraStar Technologies
Incorporated. Subsequent to the acquisition, Alliance changed its name to
NutraStar Incorporated.
During the year ended December 31, 2001, the Company issued 28,546 shares
of common stock for cash totaling $20,000.
During the year ended December 31, 2001, the Company issued 21,409 shares
of common stock to acquire a registered trademark valued at $21,409.
During the year ended December 31, 2001, the Company issued 356,824 shares
of common stock to extend the term of a note payable and recorded interest
expense totaling $356,824.
During the year ended December 31, 2001, the Company issued 249,314 shares
of common stock for services rendered. In relation to this transaction, the
Company recorded consulting expense totaling $249,314 as of December 31,
2001.
During the year ended December 31, 2001, the Company issued 250,001 shares
of common stock to a third party in exchange for the remaining 20% of the
common stock of NutraGlo.
During the year ended December 31, 2001, the Company issued 150,000 shares
of common stock as settlement for the cancellation of a consulting
agreement and recorded consulting expense
33
totaling $150,000.
Committed Common Stock
------------------------
During the year ended December 31, 2001, the Company converted notes
payable with a principal balance of $250,000 and accrued interest of
$18,687 into committed common stock. Related to this conversion, the
Company recorded interest charges of $130,487 for additional shares that
will be issued.
During the year ended December 31, 2002, the Company committed to issue
1,060,000 shares of common stock for services rendered. In relation to
these commitments, the Company recorded consulting expense totaling
$172,500.
The following table reconciles total shares and amount recorded as common
stock committed:
Shares Amount
--------- --------
Committed upon conversion of debt and accrued
interest 399,174 $399,174
Committed for consulting services 1,060,000 172,500
--------- --------
TOTAL 1,459,174 $571,674
========= ========
Common Stock Warrants
---------------------
A summary of the Company's warrant activity is listed below:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Stock Stock Remaining Price of Price of
Exercise Warrants Warrants Contractual Warrants Warrants
Price Outstanding Exercisable Life Outstanding Exercisable
--------- ----------- ----------- ----------- ------------ ------------
$ 1.00 300,000 300,000 5 years $ 1.00 $ 1.00
Options
-------
The expense, if any, of stock options issued to employees is recognized
over the shorter of the term of service or vesting period. The expense of
stock options issued to consultants or other third parties are recognized
over the term of service. In the event services are terminated early, the
entire amount is recognized. The unamortized portion of the expense to be
recognized is recorded as deferred compensation.
During the year ended December 31, 2001, the Company issued options to
purchase 935,564 shares of common stock to employees of the Company. The
exercise prices of the options issued ranged from $0.25 to $1. The fair
market value of the common stock at the grant date was $1. The intrinsic
values ranged from $0.73 to $0.75. The options are amortized over the
vesting period, which ranges between two to five years, with the current
year amortization recorded as compensation expense. In relation to these
issuances, the Company recorded compensation expense totaling $197,914 and
deferred compensation expense totaling $449,515 as of December 31, 2001.
During the year ended December 31, 2001, the Company issued options to
purchase 1,498,660 shares of common stock. The exercise price of the
options issued ranged from $0.25 to $1. The
34
fair market value of the options at grant date ranged from $0.75 to $0.89.
The fair market value of the common stock at the grant date was $1. These
options are amortized over the period of service of the consultant, with
the current year amortization recorded as consulting expense. In addition,
certain of these options vest immediately, with others vesting upon the
attainment of certain performance criteria. In relation to these issuances,
the Company recorded consulting expense totaling $797,501 and deferred
compensation expense totaling $476,360 as of December 31, 2001.
During the year ended December 31, 2001, the Company issued options to
purchase 142,730 shares of common stock in settlement of certain disputes.
The exercise price of the options issued was $1. The fair market value of
the options at grant date was $0.75. The fair market value of the common
stock at grant date was $1. In addition, these options vest immediately. In
relation to these issuances, the Company recorded settlement expenses
totaling $107,047 as of December 31, 2001.
On January 7, 2002, the Company entered into a five-year employment
agreement with an employee. In relation to this agreement, the Company
issued options to purchase 155,000 shares of common stock. The options vest
over four years in increments of 80,000, 25,000, 25,000, and 25,000, have
an exercise price of $1 per share, and expire on January 7, 2012. The fair
market value of the common stock at the grant date was $2.25. The intrinsic
value was $1.25. The options are amortized over the vesting periods. As of
December 31, 2002, the Company recorded compensation expense and deferred
compensation totaling $48,438 and $145,312, respectively, in relation to
this transaction.
On January 10, 2002, the Company entered into a six-month consulting
services agreement for marketing services. In relation to this agreement,
the Company issued options to purchase 25,000 shares of common stock valued
at $47,250 at an exercise price of $1 per share. The options vest
immediately and expire in 10 years. The fair market value of the options at
grant date was $1.89. The fair market value of the common stock at grant
date was $1. The Company recorded consulting expense of $47,250 in relation
to this transaction.
On February 4, 2002, the Company entered into a three-month marketing
services agreement for public relations and advertising services. In
relation to this agreement, the Company paid a retainer of $35,000 upon
execution of the agreement, issued 35,000 shares of restricted common stock
valued at $47,250, and issued options to purchase 50,000 shares of the
Company's common stock valued at $43,000 at an exercise price of $3 per
share. The options vest immediately and expire in two years. The fair
market value of the options at grant date was $0.86. The fair market value
of the common stock at grant date was $1.35. The Company recorded
consulting expense totaling $90,250 in relation to this transaction.
On February 21, 2002, the Company entered into a one-year financial
advisory services agreement. In relation to this agreement, the Company
paid a non-refundable retainer of $20,000, issued 200,000 restricted shares
of common stock valued at $90,000, and issued options to purchase 100,000
restricted shares of common stock at $1 per share valued at $29,000,
100,000 at $2.50 per share valued at $22,000, and 100,000 at $4 per share
valued at $18,000. The options vest immediately and expire in two years.
The fair market value of the options at grant date ranged from $0.18 to
$0.29. The fair market value of the common stock at grant date was $0.45.
The Company recorded consulting expense totaling $159,000 in relation to
this transaction.
On June 19, 2002, the Company issued options to purchase 50,000 shares of
common stock at an
35
exercise price of $1 per share to a consultant for consulting expenses
valued at $14,000. The options vest over two years and expire in 10 years.
The fair market value of the options at grant date was $0.28. The fair
market value of the common stock at grant date was $0.51.
On August 13, 2002, the Company issued options to purchase 28,000 shares of
common stock at an exercise price of $0.25 per share to a debtor. The
options vest immediately and expire in 10 years. The fair market value of
the options at grant date was $0.20. The fair market value of the common
stock at grant date was $0.21. In relation to this transaction, the Company
recorded interest expense of $5,600.
The following table summarizes all of the Company's stock option
transactions:
Employee Options Consultant Options
--------------------------- -----------------------------
Weighted- Weighted-
Average Average
Stock Options Exercise Stock Options Exercise
Outstanding Price Outstanding Price
----------- -------------- ------------ --------------
Outstanding,
December 31, 2000 - $ - $ - $ -
Granted 935,564 $ 0.31 1,641,390 $ 0.51
----------- ------------
Outstanding,
December 31, 2001 935,564 $ 0.31 1,641,390 $ 0.51
Granted 155,000 $ 1.00 455,500 $ 2.16
----------- ------------
OUTSTANDING,
DECEMBER 31, 2002 1,090,564 $ 0.41 2,096,890 $ 0.87
=========== ============
EXERCISABLE,
DECEMBER 31, 2002 351,683 $ 0.44 1,433,198 $ 1.09
=========== ============
The weighted-average remaining contractual life of the options outstanding
at December 31, 2002 was 7.97 years. The exercise prices of the options
outstanding at December 31, 2002 ranged from $0 to $4, and information
relating to these options is as follows:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Range of Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Prices Outstanding Exercisable Life Outstanding Exercisable
------------ ----------- ----------- ----------- ------------ ------------
0.00 - 0.28 1,962,671 827,313 8.90 years $ 0.25 $ 0.25
0.29 - 1.00 974,783 707,568 7.82 years $ 1.00 $ 1.00
1.01 - 4.00 250,000 250,000 1.20 years $ 3.20 $ 3.20
----------- -----------
3,187,454 1,784,881
=========== ===========
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost other than that required to be recognized
by APB 25 for the difference between the fair value of the Company's common
stock at the grant date
36
and the exercise price of the options has been recognized. Had compensation
cost for the Company's stock option plan been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS
No. 123, the Company's net loss and loss per share for the years ended
December 31, 2002 and 2001 would have been increased to the pro forma
amounts indicated below:
2002 2001
------------ ------------
Net loss
As reported $(3,354,572) $(3,771,474)
Pro forma $(3,486,838) $(4,099,194)
Basic loss per common share
As reported $ (0.15) $ (0.20)
Pro forma $ (0.16) $ (0.22)
The fair value of these options was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions
for the years ended December 31, 2002 and 2001: dividend yields of 0% and
0%, respectively; risk-free interest rates of 2.19% and 3.12%,
respectively; and expected life of 2.79 and 2.85 years, respectively. The
weighted-average exercise price was $0.71 at December 31, 2002.
The weighted-average fair value of the options issued during the year ended
December 31, 2002 was $0.84.
Warrants
--------
In connection with the issuance of certain promissory notes during the year
ended December 31, 2001, the Company issued warrants to purchase 350,000
shares of the Company's common stock at an exercise price of $1 per share.
The warrants expire on June 25, 2006 and are immediately exercisable. The
Company recorded a discount related to the detachable warrants of $114,083,
which represented the portion of the proceeds allocated to the warrants
based on the relative fair values of the debt and warrants. At the date of
conversion, $103,905 of the discount remained unamortized and has been
debited to convertible Series A preferred stock as part of the conversion.
In relation to these issuances, interest expense of $10,178 was recorded.
On June 10, 2002, the Company issued warrants to purchase 2,500 shares of
common stock at $0.50 per share to a consultant for consulting expenses
valued at $850.
NOTE 14 - INCOME TAXES
Significant components of the Company's deferred tax asset for income taxes
consisted of the following at December 31, 2002:
Deferred tax asset
Net operating loss carryforwards $ 3,241,401
Less valuation allowance 3,241,401
---------
NET DEFERRED TAX ASSET $ -
=========
A reconciliation of the expected income tax computed using the federal
statutory income rate to the Company's effective rate for the years ended
December 31, 2002 and 2001 was as follows:
37
2002 2001
------ ------
Income tax computed at federal statutory tax rate 34.0% 34.0%
State taxes, net of federal benefit 5.8 5.8
Change in valuation allowance (39.8) (39.8)
------ ------
TOTAL -% -%
====== ======
Realization of the future tax benefits related to the deferred assets is
dependent on many factors, including the Company's ability to generate
taxable income within the net operating loss carryforward period.
Management has considered these factors in reaching its conclusion as to
the valuation allowance for financial reporting purposes.
At December 31, 2002, the Company had net operating loss carryforwards for
federal and state income tax purposes of approximately $8,129,000, which
begin to expire in 2020. Certain of the net operating loss carryforwards
are limited to each year in accordance with the Internal Revenue Code.
NOTE 15 - RELATED PARTY TRANSACTIONS
On December 12, 2001, the Company entered into a 15-year agreement with
RiceX to be the exclusive distributor of rice solubles and rice bran fiber
concentrate in the United States of America and to have the exclusive
rights to various patents and trademarks owned by RiceX. Under the terms of
this agreement, RiceX has agreed to cancel certain indebtedness by the
Company in exchange for 130,000 shares of Series A preferred stock and
payment of $41,335 in interest, has agreed to new minimum purchase
requirements, and has agreed to extend the term of the agreement for five
years, with two additional renewal periods of five years each.
The sales price to the Company will be the lower of RiceX's published
standard price or the price negotiated by other customers for like
quantities and products. In January 2002, the Company revised the 15-year
agreement with RiceX.
To maintain rights under this revised agreement, the Company must purchase
$250,000 of product from RiceX by April 2002, $500,000 by July 2002,
$750,000 by October 2002, $1,250,000 by January 2003, $1,500,000 by July
2003, $2,250,000 by January 2004, $6,000,000 by January 2005, and
increasing thereafter by 10% per annum through the remaining term of the
agreement. During the year ended December 31, 2002, the Company received
notice from RiceX, stating that the Company was in default under the terms
of this distribution agreement with RiceX. On July 9, 2002, RiceX exercised
its right to terminate the exclusive distribution agreement and the related
license agreements with the Company due to the Company's default. However,
RiceX has agreed that the Company has license to use the patents in its
business pursuits. Purchase of inventory from RiceX as of December 31, 2002
totaled $441,739. The Company has recorded a loss reserve for the license
agreement totaling $75,359 as of December 31, 2002.
In connection with this agreement, the Company was granted exclusive patent
and licensing rights by RiceX for which the Company will pay RiceX a
royalty equal to 2% of gross receipts received by the Company from the sale
of the Company's products that incorporate any of RiceX's products, less
certain selling expenses. At December 31, 2002, the Company recorded
patents and licenses in the amount of $12,132 related to these exclusive
rights.
During the year ended December 31, 2001, the Company was unable to meet
customer demands for inventory. Therefore, RiceX sold its inventory
directly to the Company's customers. RiceX
38
remitted the gross profit for these sales to the Company, and the Company
recorded commissions revenue totaling $317,668 from RiceX related to sales
made by RiceX to customers of the Company.
During the year ended December 31, 2001, the Company issued 300,000 Series
A preferred stock to the Chief Executive Officer in exchange to cancel
$300,000 of convertible promissory notes.
During the year ended December 31, 2001, the Company entered into a
non-interest-bearing loan agreement with the Chief Executive Officer of the
Company. Related to this agreement, the Company recorded a Due to Officer
in the amount of $16,457 at December 31, 2002.
During the year ended December 31, 2001, certain operating expenses of the
Company totaling $111,313 were paid by RiceX. These expenses were
reimbursed by the Company, and at December 31, 2002, there were not any
amounts owed to RiceX.
NOTE 16 - 401(K) PROFIT SHARING PLAN
Effective April 2000, the Company adopted a 401(k) profit sharing plan (the
"Plan") for the exclusive benefit of eligible employees and their
beneficiaries. Substantially all employees are eligible to participate in
the Plan. Matching contributions to the Plan are 3% of the employees' gross
salary, not to exceed a certain percentage. For the years ended December
31, 2002 and 2001, the Company made matching contributions of $14,696 and
$18,620, respectively.
NOTE 17 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into two
segments as follows for the years ended December 31, 2002 and 2001:
2002
---------------------------------------
NutraStar NutraGlo Eliminations Total
------------ ---------- -------------- ------------
Total revenues $ 683,097 $ 603,342 $ - $ 1,286,439
Loss from operations $(2,983,311) $(122,842) $ - $(3,106,153)
Identifiable assets $ 287,588 $ 433,909 $ (155,170) $ 566,327
Capital expenditures $ 61,150 $ - $ - $ 61,150
Depreciation and
amortization $ 126,460 $ - $ - $ 126,460
2001
---------------------------------------
NutraStar NutraGlo Eliminations Total
------------ ---------- -------------- ------------
Total revenues $ 1,018,688 $ 591,534 $ - $ 1,610,222
Income (loss) fro
operations $(2,947,059) $ 254,744 $ - $(2,692,315)
Identifiable assets $ 964,944 $ 537,277 $ (238,920) $ 1,261,301
Capital expenditures $ 234,348 $ - $ - $ 234,348
Depreciation and
amortization $ 94,397 $ - $ - $ 94,397
39
NOTE 18 - SUBSEQUENT EVENTS (UNAUDITED)
Effective November 12, 2003 and pursuant to adoption of the Company's
"Certificate of Amendment of Restated Articles of Incorporation" dated October
27, 2003, the Company effected a reverse split of all previously issued common
stock on the basis of one-for-ten shares. Additionally, per the "Certificate of
Amendment of Restated Articles of Incorporation", the number of authorized
shares of common stock was increased from 50,000,000 to 100,000,000, and the
number of authorized shares of preferred stock was increased from 10,000,000 to
20,000,000. All share amounts reflected in Note 18, "Subsequent Events" have
been adjusted to account for the one-for-ten reverse split.
On February 23 and March 19, 2004, respectively, Eliot Drell, MD and Ernie
Bodai, MD were appointed to serve on the Board of Directors until the next
annual meeting and election.
Notes Payable-Related Parties
At December 31, 2002, NutraCea owed Ms. Patricia McPeak, Chief Executive Officer
of NutraCea, $175,800 on a demand note payable bearing interest at 10%. NutraCea
borrowed an additional $20,422, bearing interest at 10%, from her during 2003.
All of this debt was repaid prior to December 31, 2003. NutraCea also borrowed
$50,000 and $40,000 in June and September 2003, respectively, from a then
greater than 5% shareholder. The notes were convertible at the option of the
holder into shares of the Company's common stock at a conversion price of $.20
per share, bearing interest at 10% per annum and due in June and September 2004,
respectively. Upon conversion of the notes payable, the holder will be entitled
to receive one warrant to purchase common stock for each common share issued.
The warrant will have an exercise price of $.20 per share and will expire one
year from the date of issuance. In November 2003 the holder exercised the
conversion option and 451,517 shares of common stock were issued in full
satisfaction of the debt. The relative fair value of the warrants was $30,939.
The discount for the warrants created a beneficial conversion feature of
$16,128, which was amortized until conversion and fully expensed upon
conversion.
There was no outstanding debt due to related parties at December 31, 2003. Notes
Payable
At December 31, 2002, NutraCea owed $50,000 to a third party, bearing interest
at 2% per month, secured by 243,036 shares of common stock, and due on December
20, 2002. As of December 31, 2002, NutraCea was in default on the note.
Subsequent to December 31, 2002, NutraCea agreed to modify the collateral to
634,121 shares of preferred stock and extended the due date of the note to
September 20, 2003. In addition, at December 31, 2002 NutraCea owed $5,000 to a
third party, bearing interest at 10% per annum, and due on December 20, 2002.
Both of these notes were retired in full by cash payments during 2003.
In March 2003, NutraCea executed two promissory notes totaling $45,000 to a
third party investor. The $40,000 note was convertible at the option of the
holder into shares of NutraCea's common stock at a conversion price of $.20 per
share. The notes bear interest at 2% per month, are due on demand, and are
collateralized by shares of NutraCea's common stock. NutraCea retired $5,000 of
this debt in September, 2003. The balance of the note, $40,000, was converted
into 203,320 shares of common stock of NutraCea prior to December 31, 2003.
There was no beneficial conversion feature associated with this note payable.
During 2003, NutraCea borrowed $339,000 from various third party investors. The
notes bear interest at 10% per annum, mature twelve months from the date of
issue, and are convertible at the option of the holder into shares of NutraCea's
common stock at a conversion price of $0.20 cents per share. Upon conversion of
the notes payable, the holders will be entitled to receive one warrant to
purchase common stock for each common share issued. The warrant will have an
exercise price of $.20 per share and will expire one year from the date of
issuance. Prior to December 31, 2003, at the option of the holders, all of the
notes were converted into 1,625,911 shares of common stock in full satisfaction
of the debts. The
40
relative fair value of the warrants was $111,225. The discount for the warrants
created a beneficial conversion feature of $83,388, which was amortized until
conversion and fully expensed upon conversion.
In June and July, 2003, NutraCea borrowed $160,000 from a third party investor.
The notes were convertible at the option of the holder into shares of NutraCea's
common stock at a conversion price of $0.20 per share. Upon conversion of the
notes, the holder is entitled to receive one warrant to purchase one share of
common stock for each share of common stock issued. The warrants will have an
exercise price of $0.20 per share and will expire five years from the date of
the issuance. Prior to December 31, 2003, at the option of the holder, these
notes were converted into 805,547 shares of common stock in full satisfaction of
the debt. The relative fair value of the warrants was $41,691. The discount for
the warrants was amortized until conversion and fully expensed upon conversion.
There was no beneficial conversion feature associated with this note payable.
Agreements
On March 5, 2003, the Company hired a consultant to assist with fundraising. As
compensation for any funding, the consultant is to be paid 7.5% of any cash
received, 2.5% in value of such funding in warrants to purchase common stock of
the Company, based on the closing price on the day any agreement is signed, and
a warrant to purchase one share of the Company's common stock for every dollar
funded. The warrants are exercisable at $5.00 per share on or before three years
from the anniversary of any funding. Pursuant to this agreement, during the
twelve months ended December 31, 2003, the Company issued warrants to purchase
8,955 shares of common stock at an exercise price of $0.01 per share and
warrants to purchase 6,021 shares of common stock at an exercise price of $5.00
per share. Non-cash compensation expense of $20,662 was recorded as a result of
these awards. As of December 31, 2003, all of the warrants had been exercised.
In April 2003, the Company entered into a three-year employment agreement with
its Chief Operating Officer, whereby the Company is to pay the officer a base
salary of $10,000 per month. The agreement states that the first four months
salary will be deferred, except for a 10% bonus to be paid to the officer
dependent upon certain reductions in monthly operation costs or conversion of
debt into equity. The agreement also provides that the officer is entitled to an
annual bonus based upon performance and a monthly car allowance of $500,
beginning on the seventh month of employment. In addition, the officer was
issued warrants to purchase 1,000,000 shares of the Company's common stock.
During July 2003, the Company entered into a settlement agreement with a
consultant for $60,000 as payment on accounts payable. The Company executed a
convertible promissory note for $60,000, bearing interest of 10%, due on July
21, 2004, and committed to execute an agreement for future consulting services
for a total obligation of $25,000. The note is convertible at the option of the
holder into shares of the Company's common stock at a conversion price of $0.20
per share. Upon conversion of the note, the holder is entitled to receive one
warrant to purchase one share of common stock for each share of common stock
issued. The warrant will have an exercise price of $0.20 per share and will
expire five years from the date of issuance. As part of this transaction, the
Company also issued warrants to purchase 15,000 shares of common stock at an
exercise price of $0.01 per share. The warrants expire on the earlier date of
July 12, 2008 or upon the Company's change of control through acquisition or
sale of substantially all of its assets. Non-cash compensation expense of
$12,000 was recorded related to issue of these warrants. As of August 6, 2003,
all of the warrants had been exercised.
During July 2003, the Company entered into a compensation agreement with a
consultant, whereby the Company will pay a total of $17,000 of earned and unpaid
compensation due to the consultant in monthly payments of $3,000, payable on the
first of the month beginning September 1, 2003. Per the compensation agreement,
the Company also issued warrants to purchase 32,900 shares of common stock at an
exercise price of $0.01 per share, thereby retiring an additional $23,000 in
earned and unpaid compensation. In addition, in September 2003, the Company
issued warrants to purchase 50,000 shares of common stock at an exercise price
of $0.01 per share to the consultant in exchange for a technology
41
agreement relating to NutraCea/NutraStar product formulas. Non-cash compensation
of $40,000 was recorded as a result of this award. As of December 31, 2003, all
of the warrants had been exercised.
In July 2003, the Company hired a consultant to provide investor relations
services. The consultant will be compensated by the issuance of 250,000 shares
of restricted common stock, with the expectation that those shares will be
registered or released from restriction within one year of issue. These shares
were not issued to the consultant until the first quarter of 2004.
On July 30, 2003, the Company issued 100,000 shares of common stock previously
recorded in committed stock, and entered into an additional agreement with a
consultant as payment on accounts payable totaling $24,000. The consultant
accepted a cash payment of $2,500 and a commitment to provide product valued at
$2,500; a promissory note payable at $2,000 a month beginning November 1, 2003
was executed for the balance of $19,000.
During 2003 the Company issued 8,231 shares of common stock to a consultant for
services valued at $9,795. In addition, under an agreement dated August 6, 2003,
the Company was committed to issue 1,000 pre-reverse split shares of common
stock per month up to a value of $2,000, plus an additional $2,000 per month in
cash, for future services.
On September 18, 2003, the Company entered into a Technology Agreement with a
third party, whereby the initial term of a distribution agreement dated May 1,
2001 granting the exclusive worldwide distributorship of a food supplement
formulation based on NutraCea's proprietary technology rights was extended to
September 17, 2006. In addition, the Technology Agreement restates certain
minimum purchase requirements under the distribution agreement and transfers all
rights to the production and distribution of certain nutraceutical products
created using NutraCea's technology. Under the terms of the agreement, NutraCea
will receive the sum of $100,000, to initially be recorded as a deposit towards
the minimum purchase requirement. Should the payor at a later date desire to
obtain certain additional rights to the NutraCea technology, the payor will pay
to NutraCea a lump sum option fee of $300,000. The aforementioned payment of
$100,000 towards the minimum purchase requirement shall be deemed a deposit
against the option fee to the degree it has not been used for product purchases.
In December 2003 the hired a consultant to provide marketing services. Under the
terms of the agreement, the Company will issue 400,000 warrants to purchase
shares of common stock at $0.50 per share. As of December 31, 2003, 120,000 of
the warrants had been exercised.
Effective January 1, 2004, the Company amended two executive employment
contracts to reflect quarterly bonuses. Under the contract, compensation shall
be $45,000 per calendar quarter, with 250,000 shares of common stock to be
granted in the event the Company achieves gross revenues of $1 million or more
for the quarter. In addition, a one-time stock grant of 550,000 shares of common
stock will be awarded for the first quarter gross revenues equal or exceed $5
million. This bonus agreement is effective until April 15, 2006, unless extended
by the board. The Company also agreed to maintain an annual bonus program for
members of the senior management group, including the Chief Executive Officer.
The Chief Executive Officer shall be eligible to receive an annual bonus under
terms otherwise governing the annual bonus program.
Effective January 1, 2004, the Company amended the stock options section of an
executive employment contract dated April 15, 2003. The amendment changed the
vesting conditions on 250,000 shares of common stock to "upon the completion of
the twelfth month of employment " instead of "upon the Company achieving two
successful calendar quarters of net profits from operations of the business of
the Company before interest, taxes, depreciation and amortization as
conclusively determined by the independent certified public accountant for the
Company".
On January 12, 2004, the Company entered into a one-year consulting agreement
with a sales and marketing company. Under the terms of the agreement,
compensation shall be warrants to purchase 4,000,000 shares of common stock as
follows: 300,000 shares at $.50 per share on or before January 12, 2004;
400,000 shares at $.50 per share on or before February 17, 2004; and 3,300,000
shares at $.50 per
42
share on or before April 19, 2004. Non-cash compensation expense of $3,200,000
was recorded relating to this agreement. All of the warrants had been exercised
at March 31, 2004.
On January 28, the Company entered into a one-year consulting agreement with a
sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 90,000 shares of common stock at an exercise price
of $.01 per share. Non-cash compensation expense of $136,800 was recorded
relating to this agreement. As of March 31, 2004, these warrants had been
exercised.
On February 2, 2004, the Company entered into a six -month consulting agreement
with a communications company. Under the terms of the agreement, compensation
shall be $2,500 per month, plus shares of common stock valued at $6,000 issued
at signing of contract. Either party may terminate the agreement with sixty days
written notice. At March 31, 2004, the shares had been issued in full.
On February 23, 2004, the Company entered into a one-year consulting agreement
with a marketing company. Under the terms of the agreement, compensation shall
be monthly issuance of shares of common stock valued at $7,500 per month. In
addition, the consultant is entitled to a 3% commission on equity or debt
financing introduced to the Company.
On March 1, 2004, the Company entered into a 90-day consulting agreement with an
advertising and promotional services company. Compensation shall be the issuance
of 100,000 shares of common stock per month.
On March 1, 2004, the Company entered into a one-year consulting agreement with
a sales and marketing company. Compensation shall be the issuance of 25,000
shares of common stock. At March 31, 2004, these shares had been issued.
Non-cash compensation expense of $35,500 was recorded relating to this
agreement.
On March 9, 2004, the Company entered into a one-year consulting agreement with
a communications company. Under the terms of the agreement, compensation shall
be issuance shares of common stock valued at $36,000. At March 31, 2004, these
shares have been issued in full.
On March 15, 2004, the Company entered into a six-month consulting agreement
with a sales and marketing company. Under the terms of the agreement,
compensation shall be warrants to purchase 400,000 shares of common stock, at an
exercise price of $.001 and warrants to purchase up to 1,000,000 shares of
common stock at an exercise price of $1.20, to be exercised within three years.
At March 31, 2004, the 400,000 warrants exercisable at $.001 had been exercised.
On March 19, 2004, the Company approved granting a one-time cash bonus of 2/3 of
normal salary to the CEO and President. The bonus amount for both executives is
$180,000, payable April 1, 2004.
On March 25, 2004, the Company entered into two, two-year consulting agreements
with two medical advisors. Under the terms of the agreement, compensation shall
be 100,000 shares of common stock each, payable in advance, and options to
purchase 100,000 shares of common stock at a price of $.50 per share for the
second year of service. The 200,000 shares of common stock are valued at
$78,920.
On March 25, 2004, the Company entered into a three-year consulting agreement
with a development and marketing company. Under the terms of the agreement,
compensation shall be $1 per unit (a minimum 30-day supply of NutraCea product)
for up to a total accumulated payment of $750,000, and $.50 per unit thereafter,
payable quarterly within 45 days after the end of the quarter. In addition, the
Company will issue 100,000 shares of common stock for each formulation the
company markets, and options to purchase 300,000 shares of common stock at an
exercise price of $1 per share with 100,000 options to be vested immediately and
50,000 shares per year thereafter. The vested options are valued at $39,840.
On April 2, 2004, the Company entered into a 180-day consulting agreement with a
marketing and investor relations company. The term can be extended another 180
days by mutual agreement. Under the terms of the agreement, compensation shall
be 400,000 shares of common stock, and $4,000 cash per month. Compensation shall
also include an 8% cash commission on equity or debt financing introduced
43
to the Company, as well as a warrant, exercisable within 3 years, for common
shares to equal 10% of the gross financing proceeds. The warrant is to be priced
at 110% of the closing bid price for the preceding 30 business days of the day
of closing, such warrant or shares to be issued at closing.
On April 29, 2004, the Company entered into a one-year consulting agreement
(with options to extend for four successive terms of one year each) with two
retired employees of the Company. Under the terms of the agreements, annual
compensation of $75,000 each is payable on a monthly basis. In addition, each of
the consultants received warrants to purchase 50,000 shares of common stock at
$.20 a share. The 100,000 warrants are valued at $91,370 and expire in 5 years.
Either party can cancel this agreement with 30-day written notice.
Litigation
A Complaint was filed against NTI by Millennium Integrated Services, Inc.
("MISI") in Superior Court, Sacramento County, on April 4, 2002 (Case No.
02A502006). A Settlement Agreement and Mutual Release was executed on May 27,
2003. In consideration, the NutraCea defendants agreed to pay MISI one hundred
and forty-eight thousand dollars ($148,000). The settlement was fully paid on
July 1, 2003 and the complaint was dismissed on August 28, 2003.
On July 16, 2002, the Company was summoned to answer a Complaint filed by
Faraday Financial, Inc. ("Faraday") in District Court, County of Salt Lake, Utah
(Case No. 020906477). A Settlement Agreement was executed on December 10, 2003.
In consideration for the mutual releases, Faraday converted 735,730 preferred
into 735,730 common shares and $90,127 of accrued preferred dividends into
1,201,692 common shares. Within the next year, if Faraday cannot realize
$551,797 and approximately $9800 in legal expenses from the sale of the common
shares, NutraCea will make up any deficiency. If stock sale exceeds $561,597,
Faraday is entitled to keep any excess. Subsequent to December 31, 2003, the
Company issued an additional 250,000 shares to Faraday. Concurrently, with the
executed Settlement Agreement, a joint stipulated motion to stay all proceedings
was filed with the Court. After all the above conditions are met, if Faraday has
not lifted the stay within 18 months of December 10,2003, NutraCea shall deliver
to Faraday an executed stipulation for dismissal with prejudice of the Complaint
and Counterclaim.
Convertible, Redeemable Series A Preferred Stock
On July 7, 2003, the Company cancelled 634,121 shares of preferred stock
previously issued to a shareholder as collateral and issued 20,000 shares of
preferred stock for accrued interest totaling $8,351 on a promissory note dated
September 23, 2002.
During the year ended December 31, 2003, the Company converted 1,674,707 shares
of preferred stock to 254,323 shares of common stock valued at $1,651,860.
During the year ended December 31, 2003, the Company issued 278,766 shares of
common stock in payment of preferred stock dividends due in the amount of
$190,043.
As of December 31, 2003, cumulative dividends totaled $274,540.
Common Stock
During 2003, NutraCea issued 134,048 shares of common stock for $104,500, net of
$7,000 in related commissions.
During 2003, NutraCea issued 4,519,373 shares of common stock pursuant to the
exercise of stock options and warrants for $427,575.
During 2003, NutraCea issued 28,688 shares of common stock to various
consultants for services rendered with a fair value of $29,795.
On August 18, 2003, NutraCea agreed to pay a consultant for unpaid fees in the
amount of $9,236. NutraCea will pay $4,636 in monthly installments of $1,159,
payable on the first of each month
44
beginning October 1, 2003. NutraCea also agreed to issue 2,421 shares of common
stock, valued at $4,600, to the consultant as payment in full.
In September 2003, NutraCea agreed to pay $38,771 of unpaid fees to a
consultant, of which $8,771 is payable upon execution of the agreement and the
balance, $30,000, is payable in monthly installments of $2000, payable on the
first of each month beginning October 1, 2003. NutraCea also agreed to issue
73,519 shares of common stock, valued at $56,037, to the consultant as payment
in full.
On October 31, 2003, the Board of Directors approved the issuance of common
stock in lieu of compensation to the Company's Chief Operating Officer and Chief
Executive Officer. Chief Operating Officer John Howell received 72,911 shares of
common stock in lieu of $94,784 in salary and other compensation accrued for
past services; Chief Executive Officer Patricia McPeak received 402,644 shares
of common stock in lieu of $322,115 in salary and other accrued compensation for
past services. These shares of common stock were issued under the 2003 Stock
Compensation Plan.
Due to the termination of certain employees during 2003, the Company recorded a
reversal of deferred compensation totaling $243,605.
During 2003, the Company issued 3,431,251 shares of common stock, valued at
$823,119, to various parties for conversion of convertible notes payable and
accrued interest in the amount of $776,887 and $46,232, respectively.
At December 31, 2002, the Company was committed to issue 145,917 shares of
common stock representing $399,174 for conversion of debt and accrued interest
and $172,500 for consulting services. These shares were issued in 2003, and no
committed stock remains at December 31, 2003.
On March 25, 2004, the Company established the NutraCea Patent Incentive Plan,
which grants 15,000 shares of common stock to each named inventor on each
granted patent.
During the quarter ended March 31, 2004, the Company issued 544,965 shares of
common stock to consultants for services rendered valued at $723,381. Subsequent
to March 31, 2004, the Company issued an additional 660,797 shares of common
stock to consultants for services rendered valued at $905,650.
During the quarter ended March 31, 2004, the Company issued 168,095 shares of
common stock to vendors in payment of accounts payable totaling $120,789.
Subsequent to March 31, 2004, the Company issued an additional 531 shares of
common stock to a vendor in payment of accounts payable in the amount of $833.
During the quarter ended March 31, 2004, the Company issued 6,490,711 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $2,744,507. Of these issuances, 1,200,000 shares valued at $557,500
were issued pursuant to the 2003 Stock Compensation Plan. Subsequent to March
31, 2004, the Company issued an additional 309,445 shares of common stock
pursuant to the exercise of stock options and warrants for cash totaling
$10,344.
During the quarter ended March 31, 2004, the Company issued 280,000 shares of
common stock to two consultants in settlement of contractual agreements valued
at $477,816.
During the quarter ended March 31, 2004, the Company issued 5,500,000 shares of
common stock, valued at $8,360,000, to the Company's Chief Executive Officer in
exchange for execution of a non-compete agreement and transfer to the Company of
all intellectual property owned by the Chief Executive Officer.
On April 1, 2004, the Company repurchased 344,956 shares of common stock valued
at $230,000 from the Chief Executive Officer of the Company pursuant to a
repurchase agreement of that date.
Stock Options and Warrants
45
On October 31, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of the Company to execute a
registration statement under the Securities Act of 1933 for 10,000,000 shares of
common stock.
In April 2003, the Company issued warrants to purchase 1,000,000 shares of
common stock to its Chief Operating Officer in accordance with an employment
agreement dated April 15, 2003. The warrants have an exercise price of $0.001
per share and vest as follows:
- 250,000 on April 15, 2003
- 250,000 upon the fourth month of employment
- 250,000 upon the eighth month of employment
- 250,000 upon the twelfth month of employment
In relation to this transaction, the Company recorded deferred compensation
expense totaling $109,000. As of December 31, 2003, $34,750 of the deferred
compensation remains unamortized. In addition, because this grant as modified
due to the reverse split of November 21, 2003 must be accounted for as a
variable award, an additional $303,750 was recorded relating to this award as of
December 31, 2003.
On June 20, 2003, the Company issued warrants to purchase 32,900 shares of
common stock to a vendor as payment on accounts payable totaling $27,786. The
warrants have an exercise price of $.01 per share and expire June 18, 2008. In
addition, the Company entered into a note payable agreement with the consultant
totaling $17,000, payable at $3,000 per month beginning September 2003.
On July 31, 2003, the Company issued warrants to purchase 7,143 shares of common
stock to a vendor as payment on accounts payable totaling $5,676. The warrants
have an exercise price of $0.01 per share and expire June 12, 2008. In addition,
the Company entered into a note payable agreement with the consultant totaling
$4,000, payable at $1,000 a month beginning October 1, 2003.
During September 2003, the Company entered into a compensation agreement with a
consultant, whereby the Company will pay a total of $5,356 of unpaid fees due to
the consultant in monthly payments of $670, payable on the first of the month
beginning October 1, 2003. Per the agreement, the Company also issued warrants
valued at $7,065 to purchase 4,167 shares of common stock at an exercise price
of $0.01 per share. The warrants expire on August 5, 2008.
During the six months ended June 30, 2003, the Company issued warrants to
purchase 321,285 shares of common stock at exercise prices ranging from $0.01 to
$0.70 per share to employees in lieu of deferred salaries totaling $150,465. The
warrants expire five years from date of issue.
During the year ended December 31, 2003, options and warrants representing
4,519,373 shares of common stock were exercised for a total value of $427,575.
During the year ended December 31, 2003 the Company issued 3,796,563 options to
various consultants for services rendered. The options have exercise prices
between $.001 and $5.00 and expire at varying times between six months and five
years. Non-cash consulting expense of $1,165,584 was recorded relating to these
agreements.
During the year ended December 31, 2003, the Company issued warrants to purchase
2,545,000 shares of common stock exercisable at $.20 per share and expiring five
years from date of issue. The warrants were issued in connection with the
conversion of $823,119 of convertible notes payable and accrued interest to
common shares of the Company, and non-cash expense of $183,855 was recorded
relating to these warrants.
During the quarter ended March 31, 2004, the Company issued 6,547,263 warrants
with exercise prices between $.001 and $5.00 per share to consultants. The
warrants expire at varying times between six months and five years. A total of
$7,271,062 in non-cash compensation expenses was recorded relating to the issue
of these warrants. Subsequent to March 31, 2004 the Company issued an additional
401,230
46
warrants with exercise prices between $.001 and $5.00 to consultants. The
warrants expire at varying times between four and five years. A total of
$443,698 in non-cash compensation expense was recorded relating to the issue of
these warrants.
Modification of Employee Awards Accounted for Under APB 25
----------------------------------------------------------
NutraCea granted 1,000,000 options in 2003 to an employee where the option
agreement contained a provision whereby the number of options nor the exercise
price would be adjusted by reverse splits. Effective November 12, 2003, NutraCea
authorized a 1 for 10 reverse split. This triggered variable accounting for this
award. As of November 12, 2003, 500,000 options had been exercised and only
500,000 remained. Variable accounting requires any intrinsic value at the
modification date in excess of the amount measured at the original measurement
date shall be recognized as compensation cost over the remaining future service
period if the award is unvested, or immediately if the award is vested, for any
employee who could benefit from the modification. The award vests 75% in 2003
and 25% in 2004. The award will be marked to market each balance sheet date with
the changes charged to compensation expense and additional paid in capital. As
of December 31, 2003, the additional intrinsic value on the vested portion
totaled $303,750.
Modification of Non-Employee Awards Accounted for Under FAS 123
---------------------------------------------------------------
NutraCea granted 5,725,000 warrants to outsiders in 2003 where the warrant
agreements contained a provision whereby the number of warrants nor the exercise
price would be adjusted by reverse splits. Effective November 12, 2003, NutraCea
authorized a 1 for 10 reverse split. This triggered a modification for this
award. A modification of the terms of an award that makes it more valuable shall
be treated as an exchange of the original award for a new award. In substance,
the entity repurchases the original instrument by issuing a new instrument of
greater value, incurring additional compensation cost for that incremental
value. The incremental value shall be measured by the difference between (a) the
fair value of the modified option determined in accordance with the provisions
of this section and (b) the value of the old option immediately before its terms
are modified, determined based on the shorter of (1) its remaining expected life
or (2) the expected life of the modified option. As of December 31, 2003, the
additional value totaled $9,811,002 which was recorded as non-cash compensation
expense.
47
ITEM 8A. CONTROLS AND PROCEDURES.
The Company has adopted and implemented internal disclosure controls and
procedures designed to provide reasonable assurance that all reportable
information will be recorded, processed, summarized and reported within the time
period specified in the SEC's rules and forms. Under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and the Company's Controller and Principal Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e) as of the end of the year covered by this report. Based on that
evaluation, the President and Chief Executive Officer and the Controller and
Principal Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in the Company's internal
controls or in other factors during or since the end of the fiscal year covered
by this report that have had a material affect or are reasonably likely to have
a material affect on internal controls subsequent to the end of the year covered
by this report.
48
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NUTRACEA
Date: July 20, 2004 By /s/ Patricia McPeak
---------------------------
Patricia McPeak
President and Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Patricia McPeak
---------------------
Patricia McPeak Director, Chairman of the
Board and Chief Executive
Officer July 20, 2004
/s/John Howell
---------------
John Howell Director and President July 20, 2004
/s/Eliot Drell Director July 20, 2004
---------------
Eliot Drell
/s/Ernie Bodai Director July 20, 2004
---------------
Ernie Bodai
/s/ Edward G. Newton
-----------------------
Edward G. Newton Secretary July 20, 2004
/s/ Joanna Hoover
-------------------
Joanna Hoover Chief Financial Officer July 20, 2004
(Principal Financial and Accounting Officer)
49