UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] 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
incorporation or organization) Identification Number)
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, 25,598,547 issued and outstanding as of May 16,
2003.
INDEX
Page
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.........................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS..17
ITEM 3. CONTROLS AND PROCEDURES.....................................22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...........................................23
ITEM 2. CHANGES IN SECURITIES.......................................23
ITEM 5. OTHER INFORMATION...........................................24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................24
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
NUTRASTAR INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
Page
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheet 3-4
Condensed, Consolidated Statements of Operations 5
Condensed, Consolidated Statements of Cash Flows 6-7
Notes to Condensed, Consolidated Financial Statements 8 - 16
2
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 37,982
Accounts receivable 123,091
Inventory 30,271
Prepaid expenses 5,417
--------
Total current assets 196,761
Property and equipment, net 125,857
Patents and trademarks, net 48,789
Goodwill 250,001
--------
Total assets $621,408
========
3
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 730,942
Accrued salaries and benefits 127,978
Deferred compensation 438,846
Accrued expenses 37,862
Customer deposits 50,112
Due to officer 19,517
Due to related party 26,772
Notes payable - related party 336,222
Note payable 50,000
-----------
Total current liabilities 1,818,251
Put option 130,000
-----------
Total liabilities 1,948,251
-----------
Commitments and contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,144,707 (unaudited) shares issued and outstanding 2,098,463
-----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
24,791,404 (unaudited) shares issued and outstanding 5,540,796
Committed common stock 571,674
Deferred compensation (840,197)
Accumulated deficit (8,697,579)
-----------
Total shareholders' deficit (3,425,306)
-----------
Total liabilities and shareholders' deficit $ 621,408
===========
4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31,
----------------------------------------------------------------------------------
2003 2002
------------ ------------
(unaudited) (unaudited)
Net sales $ 225,991 $ 294,357
Cost of goods sold 127,399 182,472
------------ ------------
Gross profit 98,592 111,885
Operating expenses 462,607 1,181,468
------------ ------------
Loss from operations (364,015) (1,069,583)
------------ ------------
Other income (expense)
Interest income -- 600
Interest expense (17,191) (740)
------------ ------------
Total other income (expense) (17,191) (140)
------------ ------------
Net loss (381,206) (1,069,723)
Cumulative preferred dividends 37,532 --
------------ ------------
Net loss attributable to common shareholders $ (418,738) $ (1,069,723)
============ ============
Basic and diluted loss attributable to common
shareholders per common share $ (0.02) $ (0.05)
============ ============
Weighted-average number of common shares
used to compute basic and diluted loss
attributable to common shareholders per share 24,190,849 21,649,520
============ ============
5
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
------------------------------------------------------------------------------------------
2003 2002
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $ (381,206) $(1,069,723)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 32,297 29,982
Non-cash issuances of committed stock -- 137,250
Non-cash issuances of stock options -- 342,702
Amortization of deferred compensation 33,076 --
(Increase) decrease in
Accounts receivable (115,818) (32,892)
Inventory 12,424 (100,080)
Prepaid expenses 21,763 (13,873)
Deposits -- 44,576
Increase (decrease) in
Accounts payable 16,611 142,280
Accrued salaries and benefits 24,392 27,563
Deferred compensation 112,884 --
Accrued expenses 8,800 (1,715)
Customer deposits 5,796 --
Due to officer (7,077) (19,270)
Due to related party (3,617) --
----------- -----------
Net cash used in operating activities (239,675) (513,200)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment -- (41,124)
Purchase of patents and trademarks (2,483) (7,558)
----------- -----------
Net cash used in investing activities (2,483) (48,682)
----------- -----------
Cash flows from financing activities
Proceeds from notes payable - related party 240,422 100,000
Principal payments on notes payable - related party (85,000) --
Proceeds from the issuance of common stock 90,000 --
Proceeds from the issuance of committed common stock -- 100,000
----------- -----------
6
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31,
------------------------------------------------------------------------------------------
Net cash provided by financing activities 245,422 200,000
----------- -----------
Net increase (decrease) in cash $ 3,264 $ (361,882)
Cash, beginning of period 34,718 405,502
----------- -----------
Cash, end of period $ 37,982 $ 43,620
=========== ===========
Supplemental disclosures of cash flow information
Interest paid -- --
=========== ===========
Income taxes paid -- $ 1,600
=========== ===========
7
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (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 (as defined in Note 2) 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(R).
8
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 2 - 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(R) (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 accounting principles generally accepted in the United States of
America 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 accounting principles
generally accepted in the United States of America 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,
2002. The results of operations for the three months ended March 31,
2003 are not necessarily indicative of the results that may be expected
for the year ended December 31, 2003.
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.
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.
Deferred Compensation
---------------------
Deferred compensation at March 31, 2003 consisted of salaries payable
to employees of the Company that have been earned, but not paid.
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, 2003 and 2002 was $1,973 and $20,346,
respectively.
9
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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
reclassifications did not have any effect on reported net loss.
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 collectibility 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 three months ended March 31, 2003, sales to this customer totaled
$203,574 (90% of net sales). During the three months ended March 31,
2002, sales to this customer totaled $153,546 (52% of net sales).
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2003 consisted of the following:
Furniture and equipment $ 18,417
Software 347,773
----------------
366,190
Less accumulated depreciation 240,333
----------------
Total $ 125,857
================
Depreciation expense was $29,855 and $26,946 for the three months
ended March 31, 2003 and 2002, respectively.
10
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks at March 31, 2003 consisted of the following:
Patents $ 91,882
Trademarks 52,259
----------------
144,141
Less loss reserve 75,359
Less accumulated amortization 19,993
----------------
Total $ 48,789
================
At March 31, 2003, $505 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 March 31,
2003 related to the impairment of certain patents.
Amortization expense was $2,442 and $3,036 for the three months ended
March 31, 2003 and 2002, respectively. Future estimated, aggregate
amortization expense at March 31, 2003 was as follows:
12 Months
Ended
March 31,
---------
2004 $ 9,696
2005 9,696
2006 9,696
2007 9,696
-------------
Total $ 38,784
=============
NOTE 5 - 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.
11
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 5 - GOODWILL (Continued)
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 6 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at March 31, 2003 consisted of the
following:
Notes payable to the Chief Executive Officer, bearing interest
at 10% per annum and due on demand. $ 201,222
Notes payable to a related party, bearing interest at 8% per
annum, collateralized by all of the assets of the Company,
and due on May 6, 2003. 90,000
Notepayable to a related party, bearing interest at 2% per
month, collateralized by 400,000 shares of the Company's
common stock, and due on June 3, 2003. 40,000
Notepayable to a related party, bearing interest at 2% per
month, collateralized by 50,000 shares of the Company's
common stock, and due on June 8, 2003. 5,000
------------
Total $ 336,222
============
NOTE 7 - NOTE PAYABLE
The note payable at March 31, 2003 amounted to $50,000 to a third
party, bearing interest at 2% per month, secured by 634,121 shares of
preferred stock, and due on September 20, 2003.
12
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 8 - 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 9 - COMMITMENTS AND CONTINGENCIES
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.
Consulting Agreement
--------------------
On March 5, 2003, the Company entered into a consulting agreement for
certain consulting services. As compensation for any funding, the
consultants are to be paid 7.5% of any cash received, 2.5% in value of
such funding in 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 $0.50 per share on or before three years from the
anniversary of any funding.
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 worth $236,436,
pending the resolution of the lawsuit. This Writ of Attachment was
granted on April 10, 2002.
13
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
Certain of the Company's accounts receivable as of March 31, 2003 have
been attached to secure an accounts payable balance to MISI of $186,666
as of March 31, 2003. Management believes that the settlement of this
case may have a material effect on the Company's cash flows, but is
unable to quantify such effect at this time.
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.
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. As of
March 31, 2003, 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 March 31, 2003,
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.
14
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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 10 - SHAREHOLDERS' DEFICIT
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 March 31, 2003, cumulative
dividends totaled $187,661.
Common Stock
------------
During the three months ended March 31, 2002, the Company issued
1,033,333 shares of common stock for cash totaling $90,000.
15
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2003 (unaudited)
--------------------------------------------------------------------------------
NOTE 10 - SHAREHOLDERS' DEFICIT (Continued)
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.
NOTE 11 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two segments as follows for the three months ended March 31, 2003 and
2002:
2003
--------------------------------------------------
NutraStar NutraGlo Eliminations Total
--------------- ---------------- --------------- ----------------
Net sales $ 13,304 $ 212,687 $ - $ 225,991
Income (loss) from
operations $ (416,017) $ 52,002 $ - $ (364,015)
Identifiable assets $ 230,299 $ 619,912 $ (228,803) $ 621,408
Capital expenditures $ - $ - $ - $ -
Depreciation and
amortization $ 32,297 $ - $ - $ 32,297
2002
--------------------------------------------------
NutraStar NutraGlo Eliminations Total
--------------- ---------------- --------------- ----------------
Net sales $ 271,615 $ 22,742 $ - $ 294,357
Loss from operations $ (1,007,415) $ (62,168) $ - $ (1,069,583)
Identifiable assets $ 659,393 $ 543,132 $ (182,137) $ 1,020,388
Capital expenditures $ 41,124 $ - $ - $ 41,124
Depreciation and
amortization $ 29,982 $ - $ - $ 29,982
NOTE 12 - SUBSEQUENT EVENT
In April 2003, the Company sold 307,143 shares of common stock for cash
totaling $21,500.
16
ITEM 2. MANAGEMENT'S DISCUSSION 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 the Company "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from the Company's 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.
Results of Operation
Three Month Period Ended March 31, 2003 versus 2002
---------------------------------------------------
During the quarter ended March 31, 2003, NutraStar generated net sales of
$225,991 compared to $294,357 for the same quarter of 2002, a decrease of 23% in
comparison to the first quarter of last year. The decrease was caused by several
factors including certain key customers deferring purchases to a later date, a
loss of certain customers choosing to obtain their stabilized rice brand from
the RiceX Company ("RiceX") and an overall lack of working capital which
prevented the Company from aggressively pursuing its marketing plan. Since July
2002 the Company's primary supplier, RiceX, has required cash on delivery for
products sold to the Company.
The cost of goods sold for the quarter ended March 31, 2003 decreased 30% to
$127,399 to $182,472 for the quarter ended March 31, 2002. This decrease
reflects the reduced production of products for resale during the first quarter
of 2003 due to the lack of adequate rice soluble inventory caused by the COD
nature of purchases from RiceX. The Company's gross profit decreased to $98,592
for the quarter ended March 31, 2003 compared to $111,885 for the quarter ended
March 31, 2002; while the gross profit margin increased from 38% in the first
quarter of 2002 to 43.6% in the same period of 2003. This increase reflects the
Company's focus on selling its own higher margin products as compared to the
cross-selling of RiceX products.
Operating expenses declined 61% to $462,607 in the first quarter of 2003
compared to the same quarter in fiscal year 2002 which had operating expenses of
$1,181,468. This decrease reflects the Company's decrease in employee related
expenses of $55,000 compared to the same quarter of 2002 and a decrease of
approximately $700,000 in cash and non-cash payments of professional and
consulting fees and non-cash employee compensation. The higher professional and
consulting fees in the first quarter of 2002 relate to the Company's exchange
reorganization and associated expenses.
The Company incurred an operating loss of $364,015 during the quarter ended
March 31, 2003 compared to an operating loss of $1,069,583 during the quarter
ended March 31, 2002. This 66% decrease in operating loss reflects the
significant decrease in operating expenses relating to the Company's reduced
business operations, coupled with the Company's cost cutting initiatives during
the most recent quarter.
17
During the quarter ended March 31, 2003, the Company recognized a sharp increase
in interest expense to $17,191, which reflects interest paid on short-term
promissory notes and other debt instruments outstanding during the quarter
compared to only $740 for the quarter ended March 31, 2002. This expense
resulted in the Company's overall net loss for the first quarter of 2003 to
$381,206 compared to a net loss of $1,069,723 recorded for the comparable
quarter of 2002. NutraStar also recognized accrued cumulative preferred
dividends of $37,532 which increased the net loss attributable to common
shareholders to $418,738 for the quarter ended March 31, 2003.
During the three months ended March 31, 2003, the Company sold approximately 90%
of its net sales to one customer. During the same period of 2002, this customer
represented approximately 52% of net sales.
Liquidity and Sources of Capital
NutraStar has incurred significant operating losses since its inception, and, as
of March 31, 2003 NutraStar has an accumulated deficit of $8,697,579. At March
31, 2003, NutraStar had cash and cash equivalents of $37,982 and a net working
capital deficit of $1,621,490.
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. During the quarter ended March 31, 2003, NutraStar raised a
total of $240,422 from promissory notes. The interest rate on these promissory
notes ranged from 8% to 24% per annum with two of the notes also being
collateralized by a total of 450,000 shares of the Company's common stock. The
Company also raised $90,000 from the sale of 1,033,333 shares of its common
stock. During the quarter, NutraStar also agreed to collateralize a previous
loan of $50,000 (plus $13,412 of accrued interest) with 634,121 shares of the
Company's Series A preferred stock. For the three months ended March 31, 2003,
NutraStar also changed the due dates on $180,800 of promissory notes from a
specified due date to due-on-demand. This change was deemed necessary to avoid a
default on some maturing notes. All of the loans made to the Company came from
proceeds of notes payable to the Chairperson of NutraStar or other related
parties. The Company has also conserved cash by deferring approximately $113,000
of compensation expenses. The Company will continue to pursue cost cutting or
expense deferral strategies in order to conserve working capital. These
strategies will limit the Company's implementation of its business plan and
increase the future liabilities of the Company.
The Company is dependent on the proceeds from future debt or equity investments
to fund 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 will 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.
18
On March 5, 2003, the Company entered into a consulting agreement with Recap
Marketing for the purpose of assisting the Company in identifying and
negotiating additional sources of capital to fund the Company's operations. The
consultants will receive compensation of 7.5% of any cash proceeds received and
an additional 2.5% of any proceeds received in the form of common stock of the
Company. In addition, the consultants will receive one warrant for each dollar
raised. The warrants are exercisable at $0.50 per share with a term of three
years.
Due to the Company's need for outside capital and its operating losses, the
financial statements include a going concern footnote explaining the
uncertainties relating to the Company's ability to continue operations.
Contract With Key Supplier
NutraStar had entered into an agreement with The RiceX Company ("RiceX"),
whereby RiceX would sell NutraStar its rice bran solubles and rice bran fiber
complex at prices equal to the lower of RiceX's standard price or the price
negotiated by other customers for like quantities and products (the "RiceX
Agreement"). The RiceX Agreement also provided that RiceX would not sell any
rice bran solubles or rice bran fiber concentrate products in the United States
except to NutraStar. On July 9, 2002, this Agreement was terminated. As a result
of this termination, NutraStar no longer has the right to be the exclusive
distributor of the RiceX rice solubles and rice bran fiber concentrates in the
United States; however, NutraStar has continued to buy such products from RiceX
on a nonexclusive basis.
The RiceX Agreement also provided for a license from RiceX to NutraStar for the
domestic use of four patents relating to the use of rice bran supplements to
help treat diabetes and hyperlipidemia. Due to the fact that Ms. McPeak is a
co-inventor of these patents and NutraStar has been primarily responsible for
prosecuting such patents during the past two years, NutraStar has raised the
issue of possible ownership rights in such patents. Although discussions have
been held with RiceX regarding NutraStar's possible competing ownership rights,
no resolution or formal action has yet occurred. NutraStar will continue to be
allowed to utilize these patents until a new use arrangement can be negotiated.
In addition to the risks associated with the termination of the RiceX Agreement,
the potential inability of RiceX to deliver the amount of product that NutraStar
requires or the possible interruption in product delivery for any reason, would
all have a material adverse effect on NutraStar's business, results from
operations, and financial condition, because 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 may not be sufficient to meet
NutraStar's long-term sales goals. NutraStar and RiceX are exploring ways to add
production capacity during the next year.
19
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 accounting principles generally accepted 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.
Revenue recognition
-------------------
NutraStar is required to make judgments based on historical experience and
future expectations, as to the reliability 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.
20
Recently Issued Accounting Pronouncements
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.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-QSB, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
21
recording, processing summarizing and reporting material information relating to
the Company required to be disclosed in this Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
22
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time the Company is subject to legal proceedings and claims in the
ordinary course of business including claims by certain of its vendors.
Information regarding current litigation is set forth in Note 9 of the Notes to
Condensed, Consolidated Financial Statements included in Part I, Item 1 of this
report.
ITEM 2. CHANGES IN SECURITIES
During the quarter, NutraStar agreed to collateralize a previously unsecured
loan of $50,000 (plus $13,412 of accrued interest) with 634,121 shares of the
Company's Series A Preferred Stock. During the quarter NutraStar also changed
the due dates on $180,800 of promissory notes from a specified due date to
due-on-demand.
Sales of Unregistered Securities During the Quarter
On January 30, 2003, the Company entered into a promissory note agreement for
$20,422 with the Chief Executive Officer of the Company. The note bears interest
at 10% per annum and is due on demand.
On February 7, 2003, the Company entered into a promissory note agreement for
$90,000 with the Chief Executive Officer of the Company. The note bears interest
at 8% per annum, is collateralized by all of the assets of the Company, and is
due on May 6, 2003.
On February 18, 2003, the Company entered into a promissory note agreement for
$60,000 with the Chief Executive Officer of the Company. The note bears interest
at 10% per annum and is due on March 18, 2003.
On March 5, 2003, the Company entered into a promissory note agreement for
$40,000 with a related party. The note bears interest at 2% per month, is
collateralized by 400,000 shares of the Company 's common stock, and is due on
June 3, 2003.
On March 10, 2003, the Company entered into a promissory note agreement for
$5,000 with a related party. The note bears interest at 2% per month, is
collateralized by 50,000 shares of the Company 's common stock, and is due on
June 8, 2003.
On March 31, 2003, the Company sold 1,033,333 shares of its common stock to two
individuals for total proceeds of $90,000.
All of the above issuances of promissory notes or stock were made without any
public solicitation, to a limited number of accredited investors or related
individuals or entities and were acquired for investment purposes only. Each of
the individuals or entities had access to information about the Company and were
23
deemed capable of protecting their own interests. The notes and stock were
issued pursuant to the private placement exemption provided by Section 4(2) of
the Securities Act of 1933. These are deemed to be "restricted securities" as
defined in Rule 144 under the 1933 Act and the notes evidencing the loans and
the stock certificates bear a legend stating the restrictions on resale.
ITEM 5. OTHER INFORMATION
Subsequent to Mr. Ferrara's resignation, in November 2002, an "Office of the
President" was created which included Patricia McPeak (the CEO) and two outside
consultants, Etienne Taylor and Brian Jones. Messrs. Taylor and Jones specialize
in managing corporate restructuring. The Office of the President was responsible
for the management of the day-to-day operations of NutraStar. The Office of the
President was disbanded on January 31, 2003 and Messrs. Taylor and Jones were
terminated as consultants to NutraStar. As of January 31, 2003, Ms. McPeak
assumed the duties of President of NutraStar.
Due to financial constraints, Danny Lowell, the Company's Chief Information
Officer, was laid-off effective February 18, 2003.
Subsequent to the end of the quarter reported herein, the Company hired John
Howell as its new President and Chief Operating Officer. Mr. Howell brings
extensive experience in corporate restructuring most recently having worked with
Kingdom Ventures, Inc. in Nevada. These positions were assumed from Patricia
McPeak who remains Chairperson of the Board of Directors and Chief Executive
Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(i) 99.1 - Certification by CEO and CFO pursuant to Sections 906
of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
24
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: May 19, 2003 s/s James Kluber
----------------------------------
James Kluber, Authorized Officer and
Chief Financial Officer
(Principal Accounting Officer)
25
CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-QSB
I, Patricia M. Peak, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of NutraStar
Incorporated ("Registrant");
2 Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 19, 2003
/s/ Patricia McPeak
----------------------------------------
Patricia McPeak, Chief Executive Officer
CERTIFICATION FOR QUARTERLY REPORTS ON FORM 10-QSB
I, James Kluber, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of NutraStar
Incorporated ("Registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the audit committee of
Registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to record,
process, summarize and report financial data and have identified for the
Registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 19, 2003
/s/ James Kluber
-------------------------------------
James Kluber, Chief Financial Officer