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 JUNE 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
-------
NUTRACEA
--------
(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
--------------
NUTRASTAR INCORPORATED
----------------------
(Former name)
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, 28,087,721 issued and outstanding as of July 31,
2003.
INDEX
Page
----
PART I - FINANCIAL INFORMATION.................................................1
ITEM 1. FINANCIAL STATEMENTS.............................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.....24
ITEM 3. CONTROLS AND PROCEDURES........................................29
PART II - OTHER INFORMATION...................................................30
ITEM 1. LEGAL PROCEEDINGS..............................................30
ITEM 5. OTHER INFORMATION..............................................31
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................32
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheet 2
Condensed, Consolidated Statements of Operations 4
Condensed, Consolidated Statements of Cash Flows 5
Notes to Condensed, Consolidated Financial Statements 8
1
NUTRACEA
(formerly NUTRASTAR INCORPORATED)
AND SUBSIDIARIES
Condensed, Consolidated Balance Sheet
June 30, 2003 (unaudited)
ASSETS
Current assets
Cash $184,309
Accounts receivable 10,081
Inventory, net 98,850
Prepaid expenses 5,151
--------
Total current assets 298,391
Property and equipment, net 97,644
Patents and trademarks, net 48,964
Goodwill 250,001
Deposits 64,254
--------
Total assets $759,254
========
2
NUTRACEA
(formerly NUTRASTAR INCORPORATED)
AND SUBSIDIARIES
Condensed, Consolidated Balance Sheet
June 30, 2003 (unaudited)
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 742,045
Due to factor 103,066
Accrued salaries and benefits 34,047
Deferred salaries 376,677
Accrued expenses 101,740
Due to related parties 33,949
Customer deposits 179,132
Convertible notes payable 156,700
Notes payable - related parties 246,222
-----------
Total current liabilities 1,973,578
Put option 130,000
-----------
Total liabilities 2,103,578
-----------
Commitments and contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,144,707 shares issued and outstanding 2,135,995
-----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
26,633,547 shares issued and outstanding 5,721,095
Common stock committed 524,424
Deferred compensation (659,912)
Accumulated deficit (9,065,926)
-----------
Total shareholders' deficit (3,480,319)
-----------
Total liabilities and shareholders' deficit $ 759,254
===========
3
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Condensed, Consolidated Statements of Operations
For the Three and Six Months Ended June 30, 2003 and 2002 (unaudited)
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues
Net sales $ 349,441 $ 536,370 $ 575,432 $ 830,727
Cost of goods sold 195,721 371,526 323,120 553,998
------------ ------------ ------------ ------------
Gross profit 153,720 164,844 252,312 276,729
Operating expenses 461,849 772,864 924,456 1,954,332
------------ ------------ ------------ ------------
Loss from operations (308,129) (608,020) (672,144) (1,677,603)
------------ ------------ ------------ ------------
Other income (expense)
Interest income -- -- -- 204
Interest expense (22,686) (5,024) (39,877) (5,368)
------------ ------------ ------------ ------------
Total other income
(expense) (22,686) (5,024) (39,877) (5,164)
------------ ------------ ------------ ------------
Net loss (330,815) (613,044) (712,021) (1,682,767)
Cumulative preferred
dividend (37,532) (36,483) (75,064) (72,965)
------------ ------------ ------------ ------------
Net loss available to
common shareholders $ (368,347) $ (649,527) $ (787,085) $ (1,755,732)
============ ============ ============ ============
Basic and diluted loss
available to common
shareholders per share $ (0.01) $ (0.03) $ (0.03) $ (0.08)
============ ============ ============ ============
Basic and diluted weighted-
average shares
outstanding 25,222,801 21,649,520 24,708,709 21,649,520
============ ============ ============ ============
4
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flow
For the Six Months Ended June 30, 2003 and 2002 (unaudited)
2003 2002
----------- -----------
Cash flows from operating activities
Net loss $ (712,021) $(1,682,767)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 64,100 62,380
Inventory obsolescence -- 8,702
Loss reserve for patents and trademarks -- 66,678
Amortization of deferred compensation 44,006 155,980
Non-cash issuances of stock options 24,750 221,688
Non-cash issuances of warrants -- 850
Non-cash issuances of committed stock -- 162,500
(Increase) decrease in
Accounts receivable (2,808) (78,283)
Inventory (56,155) (46,430)
Prepaid expenses 22,029 (8,776)
Deposits (64,254) 316,071
Increase (decrease) in
Accounts payable 57,713 147,122
Due to factor 103,066 --
Accrued salaries and benefits (17,145) 19,015
Deferred salaries 282,869 93,462
Accrued expenses (10,104) 41,353
Customer deposits 134,816 --
Due to related parties 7,355 (21,778)
----------- -----------
Net cash used in operating activities (121,783) (542,233)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (1,103) (66,149)
Purchase of patents and trademarks (5,145) (11,304)
----------- -----------
Net cash used in investing activities (6,248) (77,453)
----------- -----------
5
NUTRACEA
(formerly NUTRASTAR INCORPORATED)
AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flow
For the Six Months Ended June 30, 2003 and 2002 (unaudited)
2003 2002
--------- ---------
Cash flows from financing activities
Principal payments on notes payable $ (50,000) $ --
Proceeds from convertible note payable 156,700 --
Proceeds from notes payable - related parties 275,422 100,000
Payments on notes payable - related parties (210,000) --
Proceeds from issuance of common stock 104,500 125,000
Proceeds from exercise of stock options 1,000 --
--------- ---------
Net cash provided by financing activities 277,622 225,000
--------- ---------
Net increase (decrease) in cash 149,591 (394,686)
Cash, beginning of period 34,718 405,502
--------- ---------
Cash, end of period $ 184,309 $ 10,816
========= =========
Supplemental disclosures of cash flow information
Interest paid $ 2,524 $ 2,875
========= =========
Income taxes paid $ -- $ --
========= =========
6
NUTRACEA
(formerly NUTRASTAR INCORPORATED)
AND SUBSIDIARIES
Condensed, Consolidated Statements of Cash Flow
For the Six Months Ended June 30, 2003 and 2002 (unaudited)
Supplemental schedule of non-cash financing activities
During the six months ended June 30, 2003, the Company issued 35,000 shares of
common stock from committed stock totaling $47,250.
During the six months ended June 30, 2003, the Company issued options to
purchase 2,745,000 shares of common stock at exercise prices ranging from $0.001
to $0.07 per share to employees in lieu of deferred salaries totaling $232,154.
Due to the termination of certain employees during the six months ended June 30,
2003, the Company recorded a reversal of deferred compensation totaling
$243,605.
In June 2003, the Company issued options to purchase 329,000 shares of common
stock at an exercise price of $0.001 to a consultant as payment on accounts
payable totaling $23,000
7
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 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) distributes
certain derivatives of RiceX's stabilized rice bran, as well as
valued-added rice bran products.
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.
Effective August 12, 2003, NutraStar's name was changed to NutraCea
("NutraCea").
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
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of NutraCea
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 six months ended June 30, 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.
Deferred Salaries
-----------------
Deferred salaries at June 30, 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 six
months ended June 30, 2003 and 2002 was $1,973 and $40,044,
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.
9
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 six months ended June 30, 2003, sales to this customer totaled
$466,477 (81% of net sales). During the six months ended June 30, 2002,
sales to this customer totaled $303,806 (37% of net sales).
Major Customers
---------------
During the six months ended June 30, 2003, the Company conducted
business with two customers whose sales comprised of 81% and 10% of net
sales. During the six months ended June 30, 2002, the Company conducted
business with one customer whose sales comprised 10% of net sales. As
of June 30, 2003, three customers accounted for 38%, 30%, and 17% of
total accounts receivable. As of June 30, 2002, three customers
accounted for 41%, 16%, and 13% of total accounts receivable.
Recently Issued Accounting Pronouncements
-----------------------------------------
In April 2003, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149 amends and clarifies
accounting and reporting for derivative instruments and hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 149 is effective for derivative
instruments and hedging activities entered into or modified after June
30, 2003, except for certain forward purchase and sale securities. For
these forward purchase and sale securities, SFAS No. 149 is effective
for both new and existing securities after June 30, 2003. Management
does not expect adoption of SFAS No. 149 to have a material impact on
the Company's statements of earnings, financial position, or cash
flows.
10
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements
-----------------------------------------
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and
equity. In accordance with the standard, financial instruments that
embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments
entered into or modified after May 31, 2003 and otherwise will be
effective at the beginning of the first interim period beginning after
June 15, 2003. Upon adoption of SFAS No. 150, the Company will
reclassify its redeemable preferred stock as a liability.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2003 consisted of the following:
Furniture and equipment $ 19,520
Software 347,773
----------------
367,293
Less accumulated depreciation 269,649
----------------
Total $ 97,644
================
Depreciation expense was $59,171 and $57,097 for the six months ended
June 30, 2003 and 2002, respectively.
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks at June 30, 2003 consisted of the following:
Patents $ 94,544
Trademarks 52,259
----------------
146,803
Less loss reserve 75,359
Less accumulated amortization 22,480
----------------
Total $ 48,964
================
11
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 4 - PATENTS AND TRADEMARKS (continued)
At June 30, 2003, $713 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 June 30,
2003 related to the impairment of certain patents.
Amortization expense was $4,929 and $5,283 for the six months ended
June 30, 2003 and 2002, respectively. Future estimated, aggregate
amortization expense at June 30, 2003 was as follows:
12 Months
Ended
June 30,
----------
2004 $ 9,696
2005 9,696
2006 9,696
2007 9,696
2008 9,696
Thereafter 484
-----------
Total $ 48,964
===========
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.
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.
12
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 6 - DUE TO FACTOR
During the six months ended June 30, 2003, the Company entered into a
non-recourse factoring agreement with a financial institution to factor
certain of its accounts receivable. According to the agreement, the
purchase price of qualifying accounts receivable will be up to 75% of
the total outstanding purchase orders, plus a bonus based upon a
certain percentage applied to the amount borrowed from the factor,
depending on when the invoice is paid. A contingent reserve of 25% of
the purchase price represents a hold-back to secure the performance,
and the Company must meet various other conditions in accordance with
the agreement. As of June 30, 2003, the Company recorded a due to
factor of $103,066, which represents 29% of certain purchase orders
factored.
NOTE 7 - CONVERTIBLE NOTES PAYABLE
Convertible notes payable at June 30, 2003 consisted of the following:
Note payable - third party investor (a) $ 106,700
Note payable - shareholder (b) 50,000
----------------
Total $ 156,700
================
(a) At June 30, 2003, the Company maintained a note payable to a
third party investor. The note payable is convertible at the
option of the holder into shares of the Company's common stock
at a conversion price of $0.20 per share, bearing interest at
10% per annum and due on July 4, 2004. Upon conversion of the
note payable, the holder will be entitled to receive one
warrant to purchase common stock for each common share issued.
The warrant will have an exercise price of $0.20 per share and
will expire five years from the date of issuance.
(b) At June 30, 2003, the Company maintained a note payable to a
shareholder. The note payable is convertible at the option of
the holder into shares of the Company's common shares at a
conversion price of $0.20 per share, bearing interest at 10%
per annum and due on July 19, 2004. Upon conversion of the
note payable, the holder will be entitled to receive one
warrant to purchase common stock for each common share issued.
The warrant will have an exercise price of $0.20 per share and
will expire five years from the date of issuance.
13
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 8 - NOTES PAYABLE - RELATED PARTIES
Notes payable - related parties at June 30, 2003 consisted of the
following:
Notes payable to the Chief Executive Officer, bearing interest
at 10% per annum and due on demand. $ 196,222
Note payable to a related party, bearing interest at 10% per
annum and due on demand. 5,000
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 demand. 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 demand. 5,000
------------
Total $ 246,222
============
NOTE 9 - 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 10 - 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
14
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (continued)
Registration Statement (continued)
----------------------------------
expenses of the holders' legal counsel or accountants, if any. This
registration statement was withdrawn on June 10, 2003.
Consulting Agreement
--------------------
On March 5, 2003, the Company entered into a consulting agreement for
certain consulting services. As compensation for any funding, the
consultant is to be paid 7.5% of any cash received, 2.5% in value of
such funding in 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.
Employment Agreements
---------------------
In April 2003, the Company entered into a three-year employment
agreement with its Chief Operating Officer, whereby the Company is to
pay the officer a base salary of $10,000 per month. The agreement
states that the first four months salary will be deferred, except for a
10% percentage bonus to be paid to the officer dependent upon certain
reductions in monthly operation costs or conversion of debt into
equity. The agreement also provides that the officer is entitled to an
annual bonus based upon performance and a monthly car allowance of
$500, beginning on the seventh month of employment. In addition, the
officer was issued stock options to purchase 1,000,000 of the Company's
common stock.
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 (see Note 13).
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 July 1, 2003, the case was settled out of court.
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
15
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 10 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
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. On
August 29, 2002, NutraStar filed a motion to dismiss the compliant due
to lack of personal jurisdiction for both itself and the Chief
Executive Officer. On November 27, 2002, NutraStar's motion to dismiss
was denied.
Since the case is in an early stage, management is not able to
determine the impact on NutraStar's financial condition at this time.
However, as of June 30, 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 June 30, 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.
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.
16
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 11 - 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 June 30, 2003, cumulative
dividends totaled $75,064.
Common Stock
------------
During the six months ended June 30, 2003, the Company issued 35,000
shares of common stock from committed stock totaling $47,250.
From January 2003 to March 2003, the Company issued 1,033,333 shares of
common stock for cash totaling $90,000.
In April 2003, the Company sold 307,143 shares of common stock for cash
totaling $21,500.
In June 2003, the Company issued 1,000,000 shares of common stock to
two employees for the exercise of stock options with cash totaling
$1,000.
17
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 11 - SHAREHOLDERS' DEFICIT (continued)
Options
-------
During the six months ended June 30, 2003, the Company issued options
to purchase 2,745,000 shares of common stock at exercise prices ranging
from $0.001 to $0.07 per share to employees in lieu of deferred
salaries totaling $232,154.
Due to the termination of certain employees during the six months ended
June 30, 2003, the Company recorded a reversal of deferred compensation
totaling $243,605.
In June 2003, the Company issued options to purchase 329,000 shares of
common stock at an exercise price of $0.001 per share to a consultant
as payment on accounts payable totaling $23,000.
During the six months ended June 30, 2003, the Company recorded
amortization expense for deferred compensation totaling $44,006.
In April 2003, the Company issued options to purchase 1,000,000 shares
of common stock to an employee in accordance with an employment
agreement dated April 15, 2003. The options have an exercise price of
$0.001 per share and vest as follows:
o 250,000 on April 15, 2003
o 250,000 upon the fourth month of employment
o 250,000 upon the eighth month of employment
o 250,000 upon the achievement by the Company of two successive
calendar quarters of positive earnings before interest, tax, and
depreciation and amortization
In relation to this transaction, the Company recorded compensation
expense totaling $24,750 and deferred compensation totaling $74,250 as
of June 30, 2003.
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.
18
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 12 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two segments as follows for the six months ended June 30, 2003 and
2002:
2003
--------------------------------------------------------------------
NutraCea NutraGlo Eliminations Total
--------------- ---------------- --------------- ----------------
Net sales $ 63,073 $ 512,359 $ - $ 575,432
Income (loss) from
operations $ (855,858) $ 183,714 $ - $ (672,144)
Identifiable assets $ 432,402 $ 1,089,831 $ (762,979) $ 759,254
Capital expenditures $ 1,103 $ - $ - $ 1,103
Depreciation and
amortization $ 64,100 $ - $ - $ 64,100
2002
--------------------------------------------------------------------
NutraCea NutraGlo Eliminations Total
--------------- ---------------- --------------- ----------------
Total revenues $ 475,139 $ 355,588 $ - $ 830,727
Income (loss)
from operations $ (1,788,030) $ 110,427 $ - $ (1,677,603)
Identifiable assets $ 433,283 $ 701,682 $ (376,236) $ 758,729
Capital expenditures $ 66,149 $ - $ - $ 66,149
Depreciation and
amortization $ 62,380 $ - $ - $ 62,380
NOTE 13 - SUBSEQUENT EVENTS
Convertible Notes Payable
-------------------------
On July 8, 2003, the Company entered into a convertible note payable
agreement with a third party investor for $53,250, including $4,800 in
finder's fees. The note bears interest at 10% per annum and is due on
July 8, 2004. The note is convertible at the option of the holder into
shares of the Company's common stock at a conversion price of $0.20 per
share. Upon conversion of the note, the holder is entitled to receive
one warrant to purchase one share of common stock for each share of
common stock issued. The warrant will have an exercise price of $0.20
per share and will expire five years from the date of the issuance.
19
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 13 - SUBSEQUENT EVENTS (continued)
Convertible Notes Payable (continued)
-------------------------------------
During July 2003, the Company entered into a convertible note payable
agreement with a third party totaling of $15,000. The note bears
interest at 10% per annum and is due on July 28 2004. The note is
convertible at the option of the holder into shares of the Company's
common stock at a conversion price of $0.20 per share. Upon conversion
of the note, the holder will be entitled to receive one warrant to
purchase one share of common stock for each share of common stock
issued. The warrant will have an exercise price of $0.20 per share and
will expire five years from the date of issuance.
During August 2003, the Company entered into a convertible note payable
agreement with a third party totaling $15,000. The note bears interest
at 10% per annum and is due on August 1, 2004. The note is convertible
into at the option of the holder into shares of the Company's common
stock at a conversion price of $0.20 per share. Upon conversion of the
note, the holder is entitled to receive one warrant to purchase one
share of common stock for each share of common stock issued. The
warrant will have an exercise price of $0.20 per share and will expire
five years from the date of issuance.
During July 2003, the Company entered into a convertible note payable
agreement with a third party totaling $5,000. The note bears interest
at 10% per annum and is due on July 21, 2004. The note is convertible
into at the option of the holder into shares of the Company's common
stock at a conversion price of $0.20 per share. Upon conversion of the
note, the holder is entitled to receive one warrant to purchase common
stock for each common stock issued. The warrant will have an exercise
price of $0.20 per share and will expire five years from the date of
issuance. On July 23, 2003, the note payable was converted by the
holder, and the Company issued 25,000 shares of common stock in
relation to this conversion.
Agreements
----------
During July 2003, the Company entered into a settlement agreement with
a consultant for $60,000 as payment on accounts payable. Per the
agreement, the Company issued options to purchase 150,000 shares of the
Company's common stock at a price of $0.001 per share. Those shares
along with a convertible promissory note for $60,000, bearing interest
of 10%, due on July 21, 2004, represent the full settlement amount. The
note is convertible at the option of the holder into shares of the
Company's common stock at a conversion price of $0.20 per share. Upon
conversion of the note, the holder is entitled to receive one warrant
to purchase one share of common stock for each share of common stock
issued. The warrant will have an exercise price of $0.20 per share and
will expire
20
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 13 - SUBSEQUENT EVENTS (continued)
Agreements (continued)
----------------------
five years from the date of issuance. As part of this transaction, the
Company also issued warrants to purchase 150,000 shares of common stock
at an exercise price of $0.001 per share. The warrants expire on the
earlier date of July 12, 2008 or upon the Company's change of control
through acquisition or sale of substantially all of its assets. On
August 6, 2003 all the warrants had been exercised.
During July 2003, the Company entered into a compensation agreement
with a terminated employee, whereby the Company will pay total of
$15,592 of deferred compensation due to the employee in monthly
payments of $2,000, payable on the first of the month beginning October
1, 2003. Per the agreement, the Company will also issue stock options
to purchase 400,000 shares of common stock at an exercise price of
$0.001 per share.
During July 2003, the Company entered into an agreement with a
consultant to provide research and development services for an
arthritis clinical trial to the Company for a total of $5,500.
Litigation
----------
On May 27, 2003, the Company entered into a settlement agreement with
MISI for $148,000. Per the agreement, approximately $30,000 of this
amount had been levied by the Writ of Attachment (see Note 10) and
attached to a bank account and accounts receivable. Subsequent to June
30, 2003, the Company paid a total of $118,000 in cash.
Preferred Stock
---------------
Subsequent to June 30, 2003, the Company cancelled 634,121 shares of
preferred stock previously issued to a shareholder as collateral and
issued 200,000 shares of preferred stock for accrued interest totaling
$8,351 on a promissory note dated September 23, 2002.
Common Stock
------------
On July 30, 2003, the Company issued 1,000,000 shares of common stock
from committed stock and entered into a promissory note agreement with
a consultant as payment on accounts payable totaling $24,000. The note
is for $19,000 and is payable at $2,000 a month beginning November 1,
2003.
21
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Common Stock (continued)
------------------------
On August 5, 2003, the Company was committed to issue 749,427 shares of
common stock to two consultants as a dividend payment on preferred
stock earned by the consultants totaling $56,207. The Company also
committed to issue 507,500 shares of common stock to the consultants
upon conversion of the consultants' preferred stock into shares of the
Company's common stock.
On August 6, 2003, the Company issued 30,000 shares of common stock to
a consultant for services totaling $2,395. In addition, the Company was
committed to issue 10,000 shares of common stock per month up to a
value of $2,000, plus an additional $2,000 per month in cash, for
future services.
During August 2003, the Company issued 399,174 shares of common stock
to two shareholders from committed stock totaling $399,174.
During August 2003, the Company issued 25,000 shares of common stock to
a consultant from committed stock totaling $25,250.
Stock Options
-------------
On July 7, 2003, the Company issued stock options to purchase 500,000
shares of common stock to an officer as interest on accounts payable at
an exercise price of $0.08 per share. The stock options vest
immediately and will expire on the earlier date of July 7, 2008 or upon
the Company's change of control through acquisition or sale of
substantially all of its assets.
On August 15, 2003, the Company issued stock options to purchase
375,000 shares of common stock to a vendor as payment for royalties
payable at an exercise price of $0.001 per share. The options vest
immediately and expire on July 14, 2008.
On July 31, 2003, the Company issued stock options to purchase 71,429
shares of common stock to a vendor as payment on accounts payable
totaling $6,000. The options have an exercise price of $0.001 per share
and expire June 12, 2008. In addition, the Company entered into a note
payable agreement with the consultant totaling $4,000, payable at
$1,000 a month beginning October 1, 2003.
22
NUTRACEA
(formerly NUTRASTAR INCORPORATED )
AND SUBSIDIARIES
Notes to Condensed, Consolidated Financial Statements
June 30, 2003 (unaudited)
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Stock Options (Continued)
-------------
In July 2003, the Company issued stock options to purchase 600,000
shares of common stock to consultants for consulting expense at a
purchase price of $0.05 per share. The options have an exercise price
of $0.05 per share, vest immediately, and expire on the earlier of July
2, 2008 or upon the Company's change of control through acquisition or
sale of substantially all of its assets.
In July 2003, the Company issued warrants to purchase 48,500 shares of
common stock to a consultant for services rendered. The warrants have
an exercise price of $0.001 per share and expire on July 10, 2008.
These warrants were exercised with cash. In addition, the Company
issued warrants to purchase 155,200 shares of common stock to the same
consultant for services rendered. The warrants have an exercise price
of $0.50 per share and expire on July 10, 2008.
23
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 June 30, 2003 versus 2002
--------------------------------------------------
During the quarter ended June 30, 2003, NutraCea generated net sales of $349,441
compared to $536,370 for the same quarter of 2002, a decrease of 35% in
comparison to the second quarter of last year. The decrease was caused by
several factors including the 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 prepayment for products sold to the Company. This requirement has
reduced the Company's ability to secure its raw materials in a timely manner.
The cost of goods sold for the quarter ended June 30, 2003 decreased by 47% to
$195,721 from $371,526 for the quarter ended June 30, 2002. This decrease
reflects the reduced production of products for resale during the second 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 $153,720
for the quarter ended June 30, 2003 compared to $164,844 for the quarter ended
June 30, 2002; while the gross profit margin increased from 31% in the second
quarter of 2002 to 44% 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 40% to $461,849 in the second quarter of 2003
compared to the same quarter in fiscal year 2002 which had operating expenses of
$772,864. This decrease reflects the Company's decrease in employee related
expenses of $94,111 compared to the same quarter of 2002 and a decrease of
$206,464 in cash payments of professional and consulting fees, non-cash
compensation and a loss reserve for licenses.
The Company incurred an operating loss of $308,129 during the quarter ended June
30, 2003 compared to an operating loss of $608,020 during the quarter ended June
30, 2002. This 49% decrease in operating loss reflects the significant decrease
in operating expenses relating to the Company's reduced business operations,
24
coupled with the Company's lower costs of goods sold during the most recent
quarter.
During the quarter ended June 30, 2003, the Company recognized a sharp increase
in interest expense to $22,686, which reflects interest paid on short-term
promissory notes and other debt instruments outstanding during the quarter
compared to only $5,024 for the quarter ended June 30, 2002. The Company's
overall net loss for the second quarter of 2003 decreased to $330,815 compared
to a net loss of $613,044 recorded for the comparable quarter of 2002. NutraCea
also recognized accrued cumulative preferred dividends of $37,532 which
increased the net loss attributable to common shareholders to $368,347 for the
quarter ended June 30, 2003 compared to a net loss of $649,527 to common
shareholders as of June 30, 2002.
During the three months ended June 30, 2003, the Company sold approximately 74%
of its net sales to one customer. During the same period of 2002, this customer
represented approximately 52% of net sales.
Six Month Period Ended June 30, 2003 versus 2002.
------------------------------------------------
Total revenue for the six month period ended June 30, 2003 was $575,432 compared
to $830,727 for the six months ended June 30, 2002. This 30% decrease reflects
the Company's decreased sales, marketing and product selection primarily for the
cross selling of RiceX products. 81% and 10% of Nutracea's net sales,
respectively, were made to two customers. Cost of sales decreased from $323,120
for the six months ended June 30, 2003 compared to $553,998 for the same period
in 2002 due to increased production of higher margin products for resale as well
as a higher amount of costs included in the six month period of 2002. Operating
expenses decreased 53% representing the Company's reduced cash payments of
professional fees and consultants and non-cash consultant and employee
compensation and the allocation to loss reserve for licenses during the six
month period ended June 30, 2003. During the six months ended June 30, 2003
employee related expenses declined $527,200 to $378,142 as a result of lay-offs
and reduced employee benefits paid during the first six months of 2003.
Gross profits decreased slightly to $252,312 for the six months ended June 30,
2003 from $276,729 in the similar period of 2002.
Factoring in the interest expense for the six months ended June 30, 2003 and
2002 of $39,877 and $5,368 respectively, resulted in a net loss of $712,021 for
the six months ended June 30, 2003 which is a 58% decrease compared to a loss of
$1,682,767 for the same period in 2002. The reduced net loss was due primarily
to the reduced operating expenses incurred during the first six months of 2003.
The Company recognized accrued cumulative preferred dividends of $75,064 which
increased the net loss attributable to common shareholders to $787,085 for the
six months ended June 30, 2003 compared to a net loss of $1,755,732 to common
shareholders for the similar period ended June 30, 2002.
25
Liquidity and Sources of Capital
NutraCea has incurred significant operating losses since its inception, and, as
of June 30, 2003 NutraCea had an accumulated deficit of $9,065,926. At June 30,
2003, NutraCea had cash and cash equivalents of $184,309 and a net working
capital deficit of $1,675,187.
To date, NutraCea 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 six months ended June 30, 2003, NutraCea raised a
total of $246,222 from promissory notes and $156,700 from the issuance of
convertible 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 $47,250
from the sale of 35,000 shares of its common stock during the quarter ended June
30, 2003. During the first six months of 2003, NutraCea agreed to collateralize
a previous loan of $50,000 (plus $8,351 of accrued interest) with 634,121 shares
of the Company's Series A preferred stock. All of the loans made to the Company
came from proceeds of notes payable to the Chairperson of NutraCea or other
related parties. The Company has also conserved cash by deferring $376,677 of
compensation expenses and issuing options to purchase 2,745,000 shares of common
stock at exercise prices ranging from $0.001 to $0.07 per share to employees in
lieu of deferred salary totaling $232,154 during the six months ended June 30,
2003. 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.
On April 29, 2003, the Company entered into a non-recourse factoring agreement
with a financial institution to factor certain of its accounts receivable. As of
June 30, 2003, the Company had a due-to-factor of $103,066.
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.
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
NutraCea had entered into an agreement with The RiceX Company ("RiceX"), whereby
RiceX would sell NutraCea its rice bran solubles and rice bran fiber complex at
26
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 NutraCea.
On July 9, 2002, this Agreement was terminated. As a result of this termination,
NutraCea 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,
NutraCea has continued to buy such products from RiceX on a nonexclusive basis.
The RiceX Agreement also provided for a license from RiceX to NutraCea 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 NutraCea has been primarily responsible for
prosecuting such patents during the past two years, NutraCea has raised the
issue of possible ownership rights in such patents. Although discussions have
been held with RiceX regarding NutraCea's possible competing ownership rights,
no resolution or formal action has yet occurred. NutraCea will continue to be
allowed to utilize these patents until a new use arrangement can be negotiated.
NutraCea currently purchases all of its stabilized rice bran from RiceX.
However, NutraCea believes its special rice bran requirements could be met by
other suppliers. If NutraCea were unable to acquire the amount of raw product it
requires or if there were an interruption in product delivery for any reason,
Nutracea's business, results from operations, and financial condition, would be
adversely effected.
Critical Accounting Policies
NutraCea'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, NutraCea 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. NutraCea
believes that the following critical accounting policies affect its more
significant judgments and estimates in the preparation of its consolidated
financial statements.
Revenue recognition
-------------------
NutraCea 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. NutraCea makes these assessments based on the following
factors: i) customer-specific information, ii) return policies, and iii)
historical experience for issues not yet identified.
27
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 NutraCea considers important that could trigger a review for impairment
include the following:
(a) significant underperformance relative to expected historical or
projected future operating results,
(b) significant changes in the manner of its use of the acquired
assets or the strategy of its overall business, and
(c) significant negative industry or economic trends.
When the Company determines that the carrying value of patents and trademarks,
long-lived assets and related goodwill and enterprise-level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, it measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with the risk inherent in its current business model.
Recently Issued Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 will be effective for financial instruments entered
into or modified after May 31, 2003 and otherwise will be effective at the
beginning of the first interim period beginning after June 15, 2003. Upon
adoption of SFAS No. 150, the Company will reclassify its redeemable preferred
stock as a liability
In April 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 amends and clarifies accounting and reporting for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS No. 149 is effective
28
for derivative instruments and hedging activities entered into or modified after
June 30, 2003, except for certain forward purchase and sale securities. For
these forward purchase and sale securities, SFAS No. 149 is effective for both
new and existing securities after June 30, 2003. Management does not expect
adoption of SFAS No. 149 to have a material impact on the Company's statements
of earnings, financial position, or cash flows.
ITEM 3. CONTROLS AND PROCEDURES
The Company's principal executive and financial officers have evaluated our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934) as of June 30, 2003. They have
determined that such disclosure controls and procedures are effective to ensure
that information required to be disclosed in our filings under the Securities
Exchange Act of 1934 with respect to the Company is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms and is accumulated and communicated to our
management, including the Company's principal executive officer and principal
financial officer, as appropriate, to allow timely decisions regarding required
disclosures.
The Company has made no significant changes in its internal controls over
financial reporting during the most recent fiscal quarter covered by this Report
that materially affected or are reasonably likely to materially affect our
internal controls over financial reporting.
29
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 10 of the Notes to
Condensed, Consolidated Financial Statements included in Part I, Item 1 of this
Report.
In June 2003, the Company reached a settlement agreement in the litigation
between the Company and Millennium Integrated Services, Inc. ("MISI"). The terms
of the settlement include the Company making two payments of $100,000 and
$18,000 to be paid on July 11, 2003 and August 11, 2003. Subsequent to the end
of the quarter, both of those payments were made. In addition, MISI will collect
$26,342 through its previously served Writs of Attachment and will collect a
refund of $3,657 from a third party vendor. Upon payment of the second
installment, MISI has agreed to dismiss its complaint against the Company.
ITEM 2. CHANGES IN SECURITIES
Sales of Unregistered Securities During the Quarter
In April 2003, the Company sold 307,143 shares of its common stock to one
individual for total proceeds of $21,500.
In June 2003, the Company sold 35,000 shares of its common stock to one
individual for total proceeds of $47,250.
During the quarter ended June 30, 2003, the Company issued 1,000,000 shares of
its common stock to two employees for the exercise of stock options with cash
totaling $1,000.
During the quarter ended June 30, 2003, the Company issued options to purchase
2,745,000 shares of common stock at exercise prices ranging from $0.001 to $0.07
per share to employees in lieu of deferred salaries totaling $232,154.
In June 2003, the Company issued options to purchase 329,000 shares of common
stock at an exercise price of $0.001 per share to a consultant as payment of
accounts payable of $23,000.
In April 2003, the Company issued options to purchase 1,000,000 shares of common
stock to an employee in accordance with an employment agreement dated April 15,
2003. The options have an exercise price of $0.001 per share and vest as
follows:
30
o 250,000 on April 15, 2003
o 250,000 upon the fourth month of employment
o 250,000 upon the eighth month of employment
o 250,000 upon the achievement by the Company of two successive
calendar quarters of positive earnings before interest, tax, and
depreciation and amortization
Subsequent to the quarter ended June 30, 2003, the Company issued convertible
promissory notes for $156,700. The notes are convertible into shares of common
stock at a conversion rate of $0.20 per share. The notes bear interest at 10%
per annum and have a term of one year.
Subsequent to the quarter ended June 30, 2003, the Company issued 1,000,000
shares of common stock and entered into a promissory note agreement with a
consultant as payment on accounts payable totaling $24,000. The note is for
$19,000 and is payable at $2,000 a month beginning November 1, 2003.
All of the above issuances of promissory notes, stock or stock options were made
without any public solicitation, to a limited number of 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
deemed capable of protecting their own interests. The notes, stock and options
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
In April 2003, the Company entered into a three-year employment agreement with
John Howell to serve as its President and Chief Operating Officer, pursuant to
which the Company is to pay Mr. Howell a base salary of $10,000 per month. The
agreement provides for certain bonuses based on (i) certain reductions in
monthly operating costs a conversion of debt to equity and (ii) future
performance of the Company. He will also receive a $500 car allowance and stock
options to purchase up to 1,000,000 shares of the Company's common stock. 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.
On June 10, 2003, NutraCea withdrew its SB-2 registration statement which had
been on file with the Securities and Exchange Commission since July, 2002. The
withdrawal was due to the fact that due to the passage of time, many of the
shares being registered for selling shareholders were now eligible for resale by
other means.
Subsequent to the end of the quarter ended June 30, 2003, the Company charged
its name from "Nutrastar Incorporated" to "NutraCea."
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1.1 Revisions to Employment Agreement for Patricia McPeak
10.4 Employment Agreement for Dr. Rukmini Cheruvanky
10.5 Employment Agreement for Dr. Sastry Cherkuri
10.6 Employment Agreement for John Howell
10.7 Contract with W.F. Young, Inc.
10.8 Contract with World Nutriceuticals, Inc.
10.9 Contract with vSource I, Inc.
10.10 License Agreement from the RiceX Company
10.11 Sublease from the RiceX Company
10.12 Put/Call Agreement with the RiceX Company
21 Subsidiaries of NutraCea
33.1 Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
33.2 Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
32
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.
NUTRACEA
Dated: August 19, 2003 /s/ James Kluber
------------------------------------
James Kluber, Authorized Officer and
Chief Financial Officer
(Principal Accounting Officer)
33