UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB/A
(Amendment No. 1)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
NUTRASTAR INCORPORATED
----------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 87-0673375
---------------------------------------- ---------------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1261 Hawk's Flight Court
El Dorado Hills, California 95762
---------------------------------------- ---------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (916) 933-7000
--------------
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days:
YES X NO
-------- ----------
Common stock, no par value, 21,802,853 issued and outstanding as of April 30,
2002.
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION..............................................1
ITEM 1. FINANCIAL STATEMENTS.......................................1
ITEM 2.MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF
OPERATIONS........ .........................................13
PART II - OTHER INFORMATION..............................................II-1
ITEM 1. LEGAL PROCEEDINGS.......................................II-1
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................II-1
SIGNATURES...............................................................II-2
i
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PART 1 - FINANCIAL INFORMATION
1
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONTENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
Page
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheet F-2 - F-3
Condensed, Consolidated Statements of Operations F-4
Condensed, Consolidated Statements of Cash Flows F-5 - F-6
Notes to Condensed, Consolidated Financial Statements F-7 - F-12
F-1
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
March 31, 2002 (unaudited)
________________________________________________________________________________
ASSETS
(restated)
Current assets
Cash $ 43,620
Accounts receivable 34,485
Inventory 193,966
Prepaid expenses 22,661
----------
Total current assets 294,732
Property and equipment, net 225,133
Patents and trademarks, net 114,027
Goodwill 250,001
Deposits 136,495
----------
Total assets $1,020,388
==========
The accompanying notes are an integral part of these financial statements.
F-2
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
March 31, 2002 (unaudited)
________________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' DEFICIT
(restated)
Current liabilities
Accounts payable $ 524,398
Accrued salaries and benefits 88,577
Accrued expenses 85,654
Due to officer 12,759
Note payable to officer 100,000
-----------
Total current liabilities 811,388
Put option 130,000
-----------
Total liabilities 941,388
-----------
Contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,084,707 shares issued and outstanding 1,850,802
-----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
21,649,520 shares issued and outstanding 4,925,845
Common stock committed 636,424
Deferred compensation (936,174)
Accumulated deficit (6,397,897)
-----------
Total shareholders' deficit (1,771,802)
-----------
Total liabilities and shareholders' deficit $ 1,020,388
===========
The accompanying notes are an integral part of these financial statements.
F-3
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
_____________________________________________________________________________________
2002 2001
------------ ------------
(unaudited) (unaudited)
(restated)
Net sales $ 294,357 $ 468,320
Cost of goods sold 182,472 404,425
------------ ------------
Gross profit 111,885 63,895
Operating expenses 1,181,468 419,993
------------ ------------
Loss from operations (1,069,583) (356,098)
------------ ------------
Other income (expense)
Interest income 600 769
Interest expense (740) (4,898)
------------ ------------
Total other income (expense) (140) (4,129)
------------ ------------
Net loss $ (1,069,723) $ (360,227)
============ ============
Basic and diluted loss per share $ (0.05) $ (0.02)
============ ============
Basic and diluted weighted-average shares outstanding 21,649,520 15,346,340
============ ============
The accompanying notes are an integral part of these financial statements.
F-4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
____________________________________________________________________________________________
2002 2001
----------- -----------
(unaudited) (unaudited)
(restated)
Cash flows from operating activities
Net loss $(1,069,723) $ (360,227)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 29,982 16,910
Non-cash issuances of stock options 342,702 --
Non-cash issuances of committed stock 137,250 --
(Increase) decrease in
Accounts receivable (32,892) 21,071
Inventory (100,080) 261,311
Prepaid expenses (13,873) 3,977
Deposits 44,576 100,000
Increase (decrease) in
Accounts payable 142,280 (234,011)
Accrued salaries and benefits 27,563 5,247
Accrued expenses (1,715) 3,986
Due to officer (19,270) --
----------- -----------
Net cash used in operating activities (513,200) (181,736)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (41,124) (179,975)
Purchase of patents and trademarks (7,558) (2,940)
----------- -----------
Net cash used in investing activities (48,682) (182,915)
----------- -----------
Cash flows from financing activities
Proceeds from the issuance of common stock committed 100,000 --
Proceeds from notes payable -- 406,356
Proceeds from the issuance of common stock -- 31,000
Proceeds from note payable to officer 100,000 --
----------- -----------
Net cash provided by financing activities 200,000 437,356
----------- -----------
Net increase (decrease) in cash (361,882) 72,705
Cash, beginning of year 405,502 5,865
----------- -----------
Cash, end of year $ 43,620 $ 78,570
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-5
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
_______________________________________________________________________________________
2002 2001
--------------- ----------------
(unaudited) (unaudited)
(restated)
Supplemental disclosures of cash flow information
Interest paid $ -- $ --
================ ================
Income taxes paid $ 1,600 $ --
================ ================
The accompanying notes are an integral part of these financial statements.
F-6
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
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 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, 2002,
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 value of the shares
was $250,001, which has been recorded as goodwill in the accompanying
consolidated balance sheet.
NOTE 2 - RESTATEMENT
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 7). The Company previously had not recorded the put
option on its financial statements. The Company has also reclassified
its convertible Series A preferred stock 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 March 31, 2002
are as follows:
As Previously
Reported Restatement As Restated
------------ ----------- -----------
Total liabilities $ 811,388 $ 130,000 $ 941,388
Total convertible, redeemable Series
A preferred stock $ 1,980,802 $ (130,000) $ 1,850,802
F-7
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of NutraStar
and its wholly owned subsidiaries, NutraStar Technologies, Inc. and
NutraGlo (collectively, the "Company"). All significant inter-company
accounts and transactions are eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-QSB and Regulation
S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
normal, recurring adjustments considered necessary for a fair
presentation have been included. The financial statements should be
read in conjunction with the audited financial statements and notes
thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2001. The results of operations for the three
months ended March 31, 2002 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2002.
Going Concern
-------------
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the uncertainty as to the
Company's ability to continue as a going concern. These consolidated
financial statements contemplate the ability to continue as such and do
not include any adjustments that might result from this uncertainty.
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the three
months ended March 31, 2002 and 2001 was $20,346 (unaudited) and $7,326
(unaudited), respectively.
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.
Reclassifications
-----------------
Certain amounts included in the prior period financial statements have
been reclassified to conform with the current period presentation. Such
reclassification did not have any effect on reported net loss.
F-8
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncement
----------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("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. The Company does not expect adoption of SFAS No.
145 to have a material impact, if any, on its financial position or
results of operations.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2002 consisted of the following:
Furniture and equipment $ 18,417
Software 327,747
--------
346,164
Less accumulated depreciation 121,031
--------
Total $225,133
========
Depreciation expense was $26,946 (unaudited) and $15,604 (unaudited)
for the three months ended March 31, 2002 and 2001, respectively.
F-9
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
NOTE 5 - PATENTS AND TRADEMARKS
Patents and trademarks at March 31, 2002 consisted of the following:
Patents $ 72,738
Trademarks 51,809
--------
124,547
Less accumulated amortization 10,520
--------
Total $114,027
========
Amortization expense was $3,036 (unaudited) and $1,306 (unaudited) for
the three months ended March 31, 2002 and 2001, respectively.
NOTE 6 - NOTE PAYABLE TO OFFICER
On March 4, 2002, the Company entered into a note payable agreement
with an officer of the Company, which bears interest at 10% per annum
and is due on March 3, 2003.
NOTE 7 - 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.
F-10
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
NOTE 8 - CONTINGENCIES
Litigation
----------
The Company is involved in certain legal proceedings and claims which
arise in the normal course of business. Management does not believe
that the outcome of these matters will have a material effect on the
Company's financial position or results of operations.
NOTE 9 - SHAREHOLDERS' DEFICIT
Common Stock Committed
----------------------
On March 15, 2002, the Company committed to issue 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. As of March 31, 2002, the Company had not issued
the stock and has recorded the transaction as committed stock.
Common Stock and Stock Options
------------------------------
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. As of March 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 at an exercise price of $1 per share. The options expire
in 10 years. 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, and issued options to purchase 50,000 shares of the Company's
common stock at an exercise price of $3 per share. The options expire
in two years. The Company recorded consulting expense totaling $90,250
in relation to this transaction.
F-11
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 (unaudited)
________________________________________________________________________________
NOTE 9 - SHAREHOLDERS' DEFICIT (Continued)
Common Stock and Stock Options (Continued)
------------------------------
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, and issued options to purchase 100,000
restricted shares of common stock at $1 per share, 100,000 at $2.50 per
share, and 100,000 at $4 per share. The Company recorded consulting
expense totaling $159,000 in relation to this transaction.
NOTE 10 - SUBSEQUENT EVENTS
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 granted to the consultants five-year options to
purchase up to 150,000 shares of the Company's common stock 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.
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 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.
F-12
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS
Caution About Forward-Looking Statements
This Form 10-QSB 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. The Company does not undertake to update the
information in this Form 10-QSB 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-QSB 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 the
Company on December 14, 2001. To date, the Company has focused on its
relationship with the producer of its raw materials, RiceX, and to a lesser
extent on its strategic alliances. The Company 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 near
future, the Company 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 the
Company business plan.
The Company anticipates that in the next 12 to 24 months, it will need an
additional $10 to $20 million in financing. The Company 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. The Company
expects to obtain this additional funding from private placements of debt and/or
equity securities, or possibly through the public offering of its common stock.
Results of Operation
First Quarter 2002 versus First Quarter 2001
--------------------------------------------
During the first quarter 2002, NutraStar generated net sales of $294,357
compared to $468,320 for the first quarter 2001, a decrease of 37% in comparison
to 2001. Reasons for the decrease include a delay in obtaining final approval of
the new Exclusive Distribution Agreement with The RiceX Company, which
temporarily limited the amount of stabilized rice bran being shipped to the
Company. In addition, new terms of the Exclusive Distribution Agreement
transferred prior industrial customers of NutraStar to RiceX.
The cost of goods sold for the quarter ended March 31, 2002 decreased 45% to
$182,472 compared to $404,425 for the quarter ended March 31, 2001. This
decrease reflects the increase in production of higher margin products for
resale as well as 2001 having more start-up production costs. The Company's
gross profit percentage increased to 38% from 14% for the quarter ended March
31, 2002 compared to the quarter ended March 31, 2001. Operating expenses of
13
$1,181,468 in the first quarter of 2002 more than doubled over the comparable
period in fiscal year 2001 with operating expenses of $419,993. This increase
represents the Company's continued expansion of operations during fiscal year
2002 in a number of areas. During the quarter ended March 31, 2002 employee
related expenses rose $235,000 to $451,000 as result of additional hired
employees both after the first quarter of 2001 and during the first quarter of
2002. Professional fees increased approximately $449,000 to $558,000 in the
first quarter of 2002 as the Company is using outside consultants in such areas
as legal, financial and marketing in an attempt to limit direct hires until
additional funding is obtained. Included in operating expenses in the
quarter-ended March 31, 2002 is approximately $479,951 related to restricted
stock grants issued in lieu of cash to both employees and outside consultants.
The Company incurred an operating loss of $1,069,583 during the quarter ended
March 31, 2002 compared to an operating loss of $356,098 during the quarter
ended March 31, 2001. This 200% increase in operating loss reflects the
significant increase in the operating expenses relating to the Company's
expanded business operations during fiscal year 2002 as discussed above.
During the quarter ended March 31, 2002, the Company recognized interest expense
of $740, which reflects interest paid on short-term promissory notes outstanding
during all or part of the quarter and represents a decrease from interest
expense of $4,898 for the quarter ended March 31, 2001 which reflects the
significant reduction in the amount of promissory notes outstanding. This
expense increased the Company's overall net loss to $1,069,723 compared to a
total loss of $360,227 recorded in the quarter ended March 31, 2001.
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.
Liquidity and Sources of Capital
NutraStar has incurred significant operating losses since its inception, and, as
of March 31, 2002 NutraStar has an accumulated deficit of $6,397,897. At March
31, 2002, NutraStar had cash and cash equivalents of $43,620 and a net working
capital deficit of $516,656.
To date, NutraStar has funded its operations, in addition to sales revenues,
through a combination of short-term debt and the issuance of common and
preferred stock. As of December 31, 2000 NutraStar had raised approximately
$383,000 from the sale of its common stock through private placement channels.
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 and
accrued interest 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 the quarter ended March 31, 2002,
NutraStar raised an additional $100,000 through the sale of its common stock as
well as received proceeds of $100,000 from a note payable to the Chairperson of
NutraStar.
14
The Company expects its expenses to continue to increase during the foreseeable
future as a result of increased marketing expenses and expansion of its product
line. The Company is dependent on the proceeds from future debt or equity
investments to expand its operations and fully implement the Company'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.
Dependence on Key Supplier
NutraStar has entered into an agreement with The RiceX Company, whereby RiceX
will sell NutraStar its rice bran solubles and rice bran fiber concentrates 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 provides
that RiceX will not sell any rice bran solubles or rice bran fiber concentrates
products in the United States except to NutraStar. To maintain this exclusive
right, NutraStar must purchase products equal to $250,000 by April 15, 2002
(which quota has been met), $500,000 during the three-month period ending July
15, 2002, $750,000 during the three-month period ending October 15, 2002,
$1,250,000 during the three-month period ending January 15, 2003, $1,500,000 for
the six month period ending July 15, 2003, $2,250,000 for the six-month period
ending January 15, 2004, $6,000,000 for the one-year period ending January 15,
2005, and increasing amounts each one-year period thereafter at a 10% increase
per year. In consideration for this exclusive right, NutraStar will pay RiceX a
royalty of 2% of NutraStar's gross receipts of all NutraStar's products that
incorporated RiceX products, exclusive of shipping charges and returned product.
To purchase products from RiceX, the NTI is required to provide a 50% deposit
for all purchase orders in addition to the $135,000 security deposit already
paid to RiceX. The agreement has a 5-year term, and automatically renews for 2
additional 5-year terms unless NutraStar elects not to renew.
In addition to the risks associated with the potential termination of the RiceX
Agreement, 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. NutraStar has the exclusive
right to distribute certain of RiceX's products in the United States, but
NutraStar may lose this exclusive right if it does not purchase increasing
amounts of product from RiceX each year. 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 short-term and long-term sales
goals. The Company and/or RiceX plan to add production capacity during the
current year.
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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
for using the purchase method for which the date of acquisition is July 1, 2001
or later. NutraStar 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. NutraStar 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 NutraStar.
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. NutraStar does not
expect adoption of SFAS No. 144 to have a material impact, if any, on its
financial position or results of operations.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
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United States. The preparation of financial statements require managers to make
estimates and judgments that affect the reported amounts of assets and
liabilities, revenues and expenses and disclosures on the date of the financial
statements. On an on-going basis, we evaluate our estimates, including, but not
limited to, those related to revenue recognition. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. We believe
that the following critical accounting policies affect our more significant
judgments and estimates in the preparation of our consolidated financial
statements.
Revenue recognition
-------------------
We are required to make judgments based on historical experience and future
expectations, as to the realizability of shipments made to our 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. We make 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 NutraStar'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 we consider 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 our use of the acquired assets or the
strategy of our overall business, and
(c) significant negative industry or economic trends.
When we determine 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,
we measure any impairment based on a projected discounted cash flow method using
a discount rate determined by our management to be commensurate with the risk
inherent in our current business model.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Subsequent to the quarter ended March 31, 2002, a Complaint was filed against
NTI by Millennium Integrated Services, Inc. ("MISI") in Superior Court,
Sacramento County, on April 4, 2002 (Case No. 02A502006). MISI provided website
development services to NTI, at a cost of $204,405. MISI is seeking contract
payment of $204,405 plus interest of $32,031 as well as damages for alleged
conversion and misappropriation of trade secrets. Additionally, MISI has stated
that it will move the court to amend its Complaint to add a cause of action for
negligent and intentional interference with an employment agreement between MISI
and one of its programmers. On April 9, 2002, MISI filed a Motion for a Writ of
Attachment which would allow MISI to seize and hold NTI assets worth $236,436
pending the resolution of the lawsuit. On April 10, 2002, a Writ of Attachment
was granted by the Court. NTI believes it has valid defenses and offsets to the
payment for these services and either will appeal the Court's action or attempt
to settle this matter. Discovery is just beginning and it is too early to opine
upon the possible outcome of the litigation. Settlement of this case could have
a material affect on NutraStar's cash flow depending on how quickly any
settlement would need to be paid. Conversely, litigating this matter could also
have a material adverse affect on NutraStar's operations and financial results.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
-------------------
On February 27, 2002, the Company filed an Amended Form 8-K/A
for December 14, 2002, reporting an Item 7 submission
regarding the filing of financial statements resulting from
the Company's Plan and Agreement of Exchange with NTI.
On March 14, 2002, the Company filed a Form 8-K for March 7,
2002, reporting an Item 4 event regarding the change of
independent accountants for the Company and its subsidiaries.
On March 25, 2002, the Company filed an Amended Form 8-K/A for
March 7, 2002, revising the Item 4 information previously
filed and including additional exhibits under Item 7.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRASTAR INCORPORATED
Dated: June 5, 2002 By: /s/ James Kluber
---------------------------------
James Kluber
Chief Financial Officer
(Principal Accounting Officer)
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