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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
NUTRASTAR INCORPORATED
----------------------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 87-0673375
------------------------------- ------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) 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, 21,649,520 issued and outstanding as of July 31,
2002.
INDEX
Page
PART 1 - FINANCIAL INFORMATION................................................1
ITEM 1. FINANCIAL STATEMENTS.........................................1
Principles of Consolidation...........................................9
ITEM 2.MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS...19
PART II - OTHER INFORMATION..................................................25
ITEM 1. LEGAL PROCEEDINGS...........................................25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................25
SIGNATURES..............................................................26
i
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONTENTS
June 30, 2002 (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 - 18
2
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
June 30, 2002 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 10,816
Accounts receivable 79,876
Inventory, net 131,614
Prepaid expenses 17,564
--------
Total current assets 239,870
Property and equipment, net 220,009
Patents and trademarks, net 48,849
Goodwill 250,001
--------
Total assets $758,729
========
3
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
June 30, 2002 (unaudited)
-------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 664,241
Accrued salaries and benefits 80,029
Deferred compensation 93,462
Accrued expenses 128,722
Due to officer 10,251
Note payable to officer 100,000
-----------
Total current liabilities 1,076,705
Put option 130,000
-----------
Total liabilities 1,206,705
-----------
Commitments and contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,084,707 shares issued and outstanding 1,923,767
-----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
21,649,520 shares issued and outstanding 4,940,696
Common stock committed 686,674
Deferred compensation (915,207)
Accumulated deficit (7,083,906)
-----------
Total shareholders' deficit (2,371,743)
-----------
Total liabilities and shareholders' deficit $ 758,729
===========
4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30,
---------------------------------------------------------------------------------------------
For the Three Months Ended For the Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues
Net sales $ 536,370 $ 195,148 $ 830,727 $ 663,468
Commissions revenue -- 112,286 -- 112,286
------------ ------------ ------------ ------------
Total revenues 536,370 307,434 830,727 775,754
Cost of goods sold 371,526 165,772 553,998 570,197
------------ ------------ ------------ ------------
Gross profit 164,844 141,662 276,729 205,557
Operating expenses 772,864 410,012 1,954,332 830,005
------------ ------------ ------------ ------------
Loss from operations (608,020) (268,350) (1,677,603) (624,448)
------------ ------------ ------------ ------------
Other income (expense)
Interest income -- -- 204 --
Interest expense (5,024) (83,139) (5,368) (87,268)
------------ ------------ ------------ ------------
Total other income
(expense) (5,024) (83,139) (5,164) (87,268)
------------ ------------ ------------ ------------
Net loss (613,044) (351,489) (1,682,767) (711,716)
Cumulative preferred
dividend (36,483) -- (72,965) --
------------ ------------ ------------ ------------
Net loss available to
common shareholders $ (649,527) $ (351,489) $ (1,755,732) $ (711,716)
============ ============ ============ ============
Basic and diluted loss
available to common
shareholders per share $ (0.03) $ (0.02) $ (0.08) $ (0.04)
============ ============ ============ ============
Basic and diluted weighted-
average shares
outstanding 21,649,520 15,943,905 21,649,520 15,943,905
============ ============ ============ ============
5
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30,
-------------------------------------------------------------------------------------------
2002 2001
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $(1,682,767) $ (711,716)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 62,380 45,525
Inventory obsolescence 8,702 --
Loss reserve for patents and trademarks 66,678 --
Amortization of deferred compensation 155,980 --
Non-cash issuances of stock options 221,688 --
Non-cash issuances of warrants 850 --
Non-cash issuances of committed stock 162,500 --
(Increase) decrease in
Accounts receivable (78,283) (1,765)
Inventory (46,430) 443,204
Prepaid expenses (8,776) (78)
Deposits 316,071 100,525
Increase (decrease) in
Accounts payable 147,122 (193,588)
Accrued salaries and benefits 19,015 13,013
Deferred Compensation 93,462 --
Accrued expenses 41,353 (54)
Due to officer (21,778) 24,106
----------- -----------
Net cash used in operating activities (542,233) (280,828)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (66,149) (233,111)
Purchase of patents and trademarks (11,304) (5,862)
----------- -----------
Net cash used in investing activities (77,453) (238,973)
----------- -----------
Cash flows from financing activities
Proceeds from committed stock 125,000 --
Refunds of deposits payable -- (173,000)
Proceeds from note payable to officer 100,000 --
Proceeds from convertible note payable -- 776,195
----------- -----------
Net cash provided by financing activities 225,000 603,195
----------- -----------
Net increase (decrease) in cash $ (394,686) $ 83,394
Cash, beginning of period 405,502 5,865
----------- -----------
Cash, end of period $ 10,816 $ 89,259
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 2,875 $ --
=========== ===========
Income taxes paid $ -- $ --
=========== ===========
7
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 had 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. This license was terminated subsequent to
June 30, 2002 (see Note 10).
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 assets were not acquired
and liabilities were not 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.
The Company has four primary divisions through which it sells its products:
(1) TheraFoods(TM), which distributes consumer products including
RiSolubles(TM), RiceMucil(R), NutraFlex(TM), and StaBran(R), (2)
NutraCea(R), which was created to compliment medical food products, (3)
NeutraBeauticals(R), which provides natural products to improve skin
health, and (4) NutraGlo, which developed a derivative of the NutraFlex(TM)
product for horses.
8
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
General (Continued)
-------
For internal reporting purposes, management segregates the Company into two
segments: (1) NutraStar, including the transactions of TheraFoods(TM) ,
NutraCea(R), and NeutraBeauticals(R), and (2) NutraGlo.
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, Inc. and NutraGlo
(collectively, the "Company"). All significant inter-company accounts and
transactions are eliminated in consolidation.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles for interim financial information
and with the instructions to Form 10-QSB and Regulation S-B. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all normal, recurring adjustments considered
necessary for a fair presentation have been included. The financial
statements should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on
Form 10-KSB for the year ended December 31, 2001. The results of operations
for the six months ended June 30, 2002 are not necessarily indicative of
the results that may be expected for the year ended December 31, 2002.
Going Concern
-------------
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the uncertainty as to the
Company's ability to continue as a going concern. These consolidated
financial statements contemplate the ability to continue as such and do not
include any adjustments that might result from this uncertainty.
Revenue Recognition
-------------------
Revenue is generally recognized upon shipment of product with a provision
for estimated returns and allowances record at that time, if applicable.
Commissions revenue is generally recognized when earned and collection is
reasonably assured.
Deferred Compensation
---------------------
Deferred compensation consists of salaries payable to employees of the
Company that have been earned but not yet paid.
9
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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, 2002 and 2001 was $40,044 (unaudited) and $8,368
(unaudited), respectively.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risk
----------------------------
For the six months ended June 30, 2002, four customers accounted for 80%
and 26% of the Company's accounts receivable and total revenues,
respectively.
Reclassifications
-----------------
Certain amounts included in the prior period financial statements have been
reclassified to conform with the current period presentation. Such
reclassification did not have any effect on reported net loss.
Recently Issued Accounting Pronouncement
----------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 updates,
clarifies, and simplifies existing accounting pronouncements. This
statement rescinds SFAS No. 4, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria in Accounting Principles Board No. 30 will now be used to classify
those gains and losses.
SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has
been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease
modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-lease
transactions. This statement also makes technical corrections to existing
pronouncements. While those corrections are not substantive in nature, in
some instances, they may change accounting practice. The Company does not
expect adoption of SFAS No. 145 to have a material impact, if any, on its
financial position or results of operations.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncement (Continued)
----------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF") Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." This statement requires that a liability for a cost
associated with an exit or disposal activity be recognized when the
liability is incurred. Under EITF Issue 94-3, a liability for an exit cost,
as defined, was recognized at the date of an entity's commitment to an exit
plan. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002 with earlier
application encouraged. This statement is not applicable to the Company.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2002 consisted of the following:
Furniture and equipment $ 18,417
Software 352,773
--------
371,190
Less accumulated depreciation 151,181
--------
Total $220,009
========
Depreciation expense was $57,097 (unaudited) and $42,857 (unaudited) for
the six months ended June 30, 2002 and 2001, respectively.
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks at June 30, 2002 consisted of the following:
Patents $ 76,484
Trademarks 51,809
--------
128,293
Less accumulated amortization 12,766
Less loss reserve 66,678
--------
Total $ 48,849
========
11
NOTE 4 - PATENTS AND TRADEMARKS (Continued)
Amortization expense was $5,283 (unaudited) and $2,668 (unaudited) for the
six months ended June 30, 2002 and 2001, respectively.
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.
NOTE 6 - PROMISSORY NOTES PAYABLE
During the years ended December 31, 2001 and 2000, the Company raised an
aggregate of $2,080,000 through the issuance of short-term promissory notes
and convertible promissory notes.
Activities related to the promissory notes are as follows:
o The promissory notes, with an aggregate principal balance of
$1,180,000, bore interest ranging from 8% to 12% per annum. As of
December 31, 2001, all of the promissory notes had been retired.
o The convertible notes, with an aggregate principal balance of
$900,000, were immediately converted into shares of the Company's
preferred stock at $1 per share and bore interest ranging from 8% to
15% per annum. As the convertible notes were convertible at rates that
approximated market value, no discount was recorded relative to a
beneficial conversion feature.
12
NOTE 6 - PROMISSORY NOTES PAYABLE (Continued)
o As of December 31, 2001, the Company had paid notes in the amount of
$490,000 in cash. Notes with a principal balance of $1,340,000 and
accrued interest of $90,196 had been converted into 1,430,196 shares
of the Company's Series A preferred stock. Related to these
conversions, the Company issued an additional 345,511 shares of Series
A preferred stock to certain of the note holders and recorded related
interest charges of $345,511. The remaining notes with a principal
balance of $250,000 and accrued interest of $18,687 had been converted
into committed common stock. Related to the conversion, the Company
recorded interest charges of $130,487 for additional shares that will
be issued.
o In connection with certain of the notes, the Company issued warrants
to purchase 350,000 shares of the Company's common stock at an
exercise price of $1 per share. The warrants expire on June 25, 2006
and are immediately exercisable. The Company recorded a discount
related to the detachable warrants of $114,083, which represented the
portion of the proceeds allocated to the warrants based on the
relative fair values of the debt and warrants. At the date of
conversion, $103,905 of the discount remained unamortized and has been
debited to convertible Series A preferred stock as part of the
conversion. In relation to these issuances, interest expense of
$10,178 was recorded.
NOTE 7 - NOTE PAYABLE TO OFFICER
On March 4, 2002, the Company entered into a note payable agreement with an
officer of the Company, which bears interest at 10% per annum and is due on
March 3, 2003. As of June 30, 2002, the note payable balance was $100,000.
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.
13
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Agreements
----------
On April 12, 2002, the Company entered into a two-year marketing agreement,
whereby the Company is to pay a commission of 10% of gross receipts on
sales from customers introduced to the Company by the consultant, subject
to certain requirements. In relation to this agreement, the Company granted
to the consultants five-year options to purchase up to 150,000 shares of
the Company's common stock at an exercise price of $0.75 per share, vesting
according to the achievement of certain levels of gross receipts. The
agreement automatically renews after the initial two-year term.
On May 6, 2002, the Company entered into a one-year finder's and advisory
agreement, whereby the finder is to seek businesses that are consistent
with the Company's business and strategic plans or to introduce the Company
to investors. The fees paid to the finder for finding investors to fund the
Company are based upon certain percentages, ranging from 2% to 10%, plus
unaccountable expenses, depending on the amount funded by the investors. In
addition, 10% of the transaction value will be paid in cashless warrants.
If the finder arranges a credit line or other types of debt placement, the
fees paid to the finder will be 2% of the total debt placement.
If the finder introduces a business or entity and the Company engages in a
merge-type transaction or other similar transactions, the fees paid to the
finder are based upon certain percentages, ranging from 3% to 7%, depending
on the transaction value. In addition, 10% of the transaction value will be
paid in cashless warrants. This agreement is automatically renewed after
the initial one-year term.
On June 10, 2002, the Company entered into a one-year finder's fee
agreement, whereby the Company is to pay the finder 5% of the gross
revenues generated from a commercial transaction other than financing, a
merger, or some other form of business combination. For every $100,000 in
gross revenues that are generated by the finder, the Company will issue
warrants to the finder to purchase 5,000 shares of common stock, which will
be exercisable immediately, at the then current market price on a cashless
basis, subject to certain limitations.
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.
14
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------
Certain of the Company's accounts receivable totaling $20,245 as of June
30, 2002 have been attached to secure an accounts payable balance to MISI
of $210,235 as of June 30, 2002. The Company believes that the settlement
of this case may have a material effect on the Company's cash flows.
In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does not
believe that the outcome of these matters will have a material effect on
the Company's financial position or results of operations.
NOTE 10 - SHAREHOLDERS' DEFICIT
Common Stock Committed
----------------------
On March 15, 2002, the Company committed to issue 153,333 shares of common
stock with a detachable purchase warrant to purchase 153,333 shares of
common stock at an exercise price of $1.20 per share in exchange for
$100,000. As of June 30, 2002, the Company had not issued the stock and has
recorded the transaction as committed stock.
On April 1, 2002, the Company committed to issue 25,000 shares of common
stock to a consultant for consulting expenses totaling $25,250.
On June 10, 2002, the Company committed to issue 60,606 shares of common
stock with detachable purchase warrants to purchase 60,606 shares of common
stock at an exercise price of $0.50 per share in exchange for cash totaling
$25,000.
The following table reconciles total shares and amount recorded as common
stock committed:
Shares Amount
-------- --------
Committed upon conversion of debt and accrued
interest 399,174 $399,174
Committed upon receipt of cash 213,939 125,000
Committed for consulting services 260,000 162,500
-------- --------
Total 873,113 $686,674
======== ========
15
NOTE 10 - SHAREHOLDERS' DEFICIT (Continued)
Common Stock and Stock Options
------------------------------
On January 7, 2002, the Company entered into a five-year employment
agreement with an employee. In relation to this agreement, the Company
issued options to purchase 155,000 shares of common stock. The options vest
over four years in increments of 80,000, 25,000, 25,000, and 25,000, have
an exercise price of $1 per share, and expire on January 7, 2012. As of
June 30, 2002, the Company recorded compensation expense and deferred
compensation totaling $48,438 and $145,312, respectively, in relation to
this transaction.
On January 10, 2002, the Company entered into a six-month consulting
services agreement for marketing services. In relation to this agreement,
the Company issued options to purchase 25,000 shares of common stock at an
exercise price of $1 per share. The options expire in 10 years. The Company
recorded consulting expense of $47,250 in relation to this transaction.
On February 4, 2002, the Company entered into a six-month marketing
services agreement for public relations and advertising services. In
relation to this agreement, the Company paid a retainer of $35,000 upon
execution of the agreement, issued 35,000 shares of restricted common
stock, and issued options to purchase 50,000 shares of the Company's common
stock at an exercise price of $3 per share. The options expire in two
years. The Company recorded consulting expense totaling $90,250 in relation
to this transaction.
On February 21, 2002, the Company entered into a one-year financial
advisory services agreement. In relation to this agreement, the Company
paid a non-refundable retainer of $20,000, issued 200,000 restricted shares
of common stock, and issued options to purchase 100,000 restricted shares
of common stock at $1 per share, 100,000 at $2.50 per share, and 100,000 at
$4 per share. The Company recorded consulting expense totaling $159,000 in
relation to this transaction.
On June 10, 2002, the Company issued warrants to purchase shares of common
stock at $0.50 per share to a consultant for consulting expenses valued at
$850.
On June 19, 2002, the Company issued options to purchase 50,000 shares of
common stock at an exercise price of $1 per share to a consultant for
consulting expenses valued at $14,000.
NOTE 11 - RELATED PARTY TRANSACTIONS
During the six months ended June 30, 2002, certain expenses of the Company
totaling $21,027 were paid by RiceX. Certain of these expenses were
reimbursed by the Company, and at June 30, 2002, $3,566 was owed to RiceX.
16
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, 2002:
NutraStar 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
Operations of NutraGlo were insignificant during the six months ended June
30, 2001 and therefore are not presented.
NOTE 13 - SUBSEQUENT EVENTS
Litigation
----------
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. Faraday has filed its fourth
claim for relief for a judgment against the Company for $500,000, plus
accrued, but unpaid interest, attorneys' fees and costs, and other such
costs. Management does not believe that the outcome of this matter will
result in a material impact on the financial condition of the Company.
Note Payable
------------
On July 9, 2002, the Company entered into a promissory note agreement with
the Chief Executive Officer of the Company for $12,000. Interest accrues at
10% per annum, and the note payable is due on August 9, 2002. The due date
was subsequently extended to September 9, 2002.
17
NOTE 13 - SUBSEQUENT EVENTS (Continued)
Termination of Agreement
------------------------
During the six months ended June 30, 2002, the Company received notice from
RiceX, stating that the Company was in default under the terms of its
distribution agreement with RiceX dated December 12, 2001. On July 9, 2002,
RiceX exercised its right to terminate the exclusive distribution agreement
and the related license agreements with the Company due to the Company's
default. Purchase of inventory from RiceX as of June 30, 2002 totaled
$206,786. The Company has recorded a loss reserve for the license agreement
totaling $66,678 as of June 30, 2002.
18
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF OPERATIONS
Caution About Forward-Looking Statements
This Form 10-QSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred. For
example, statements like 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.
Plan of Operation for the Next Twelve Months
NutraStar Technologies, Inc. ("NTI") was formed on February 4, 2000 and became
the wholly-owned subsidiary of NutraStar Incorporated (the "Company") on
December 14, 2001. To date, the Company has focused on new product development
and its relationship with the producer of its raw materials, RiceX, and on its
strategic alliances. The Company has commenced the limited distribution of its
stabilized rice bran and rice bran products on the Internet and through
direct-to-consumer response advertising campaigns. In the near future, the
Company intends to commence the full distribution of its products as private
label brands through strategic distributors on the occurrence of certain events,
including the raising of additional capital required to implement the Company's
business plan.
The Company anticipates that in the next 12 to 24 months, it will need an
additional $10 to $20 million in financing. The Company anticipates that it will
need $5 to $15 million to make certain acquisitions, $2.5 million to further
increase production capacity, and $2.5 million for additional working capital,
including the purchase of inventory for anticipated sales growth. The Company
expects to obtain this additional funding from private placements of debt and/or
equity securities, or possibly through a public offering of its common stock.
Results of Operation
Second Quarter 2002 versus Second Quarter 2001
----------------------------------------------
During the second quarter 2002, NutraStar generated net sales of $536,370
compared to $195,148 for the second quarter 2001, an increase of 175% in
comparison to 2001. Reasons for the increase include the ramp-up of the
Company's e-commerce sales program as well as increased sales through strategic
alliances. The increase in net sales also reflects the Company's focus on the
marketing of its own products, as opposed to cross-selling RiceX products which
explains the lack of commission revenues from the sale of RiceX products during
the most recent quarter.
19
During the second quarter of 2001, the Company also recognized commission
revenues from RiceX of $112,286. This commission revenue resulted in total
revenues of $307,434 for the second quarter of 2001 compared to total revenues
of $536,370 for the second quarter of 2002, representing a 74% increase in total
revenue.
The cost of goods sold for the quarter ended June 30, 2002 increased 124% to
$371,526 compared to $165,772 for the quarter ended June 30, 2001. This increase
reflects the increase in production of products for resale during the second
quarter of 2002. The Company's gross profit increased to $164,844 from $141,662
for the quarter ended June 30, 2002 compared to the quarter ended June 30, 2001;
however, the gross profit margin decreased from 46% in the second quarter of
2001 to 31% in the same period of 2002. Operating expenses of $772,864 in the
second quarter of 2002 reflects an increase of 88% over the comparable period in
fiscal year 2001 which had operating expenses of $410,012. This increase
reflects the Company's accrual of non-cash compensation and consulting fees as
well as establishment of a reserve for inventory. Professional fees increased
approximately $118,531 to $185,651 in the second quarter of 2002 as the Company
is using outside consultants in such areas as legal, financial and marketing in
an attempt to limit direct hires until additional funding is obtained. This
increase also reflects the professional costs related to the preparation and
filing of the Company's SB-2 Registration Statement during the quarter.
The Company incurred an operating loss of $608,020 during the quarter ended June
30, 2002 compared to an operating loss of $268,350 during the quarter ended June
30, 2001. This 127% increase in operating loss reflects the significant increase
in operating expenses relating to the Company's expanded business operations,
increased cost of product inventory and increased expenditures for product
marketing and development during the most recent quarter.
During the quarter ended June 30, 2002, the Company recognized interest expense
of $5,024, which reflects interest paid on short-term promissory notes
outstanding during all or part of the second quarter and represents a decrease
from interest expense of $83,139 for the quarter ended June 30, 2001. This
decrease in interest expense reflects the significant reduction in the amount of
promissory notes outstanding as a result of conversion of debt to equity. This
expense increased the Company's overall net loss to $613,044 compared to a net
loss of $351,489 recorded in the quarter ended June 30, 2001.
Due to the December 14, 2001 share exchange with Alliance, for accounting
purposes, the acquisition has been treated as a recapitalization of NutraStar
(formerly Alliance) with NTI as the acquirer (reverse acquisition).
Consequently, the financial statements of NTI are presented as those of the
Company. As a result, a comparison of the current financial statements as
compared to those of Alliance as previously reported in its Form 10-SB may not
be deemed relevant.
Six Month Period Ended June 30, 2002 v. 2001
--------------------------------------------
Total revenue for the six months ended June 30, 2002 was $830,727 compared to
$775,754 for the six months ended June 30, 2001. This 7% increase reflects the
Company's increased marketing and product selection primarily for the retail
consumer. Cost of sales decreased slightly due to increased production of higher
20
margin products for resale as well as a higher amount of start-up costs included
in the six month period of 2001. The increase in operating expenses represents
the Company's continued expansion of operations during fiscal year 2002 in a
number of areas. During the six months ended June 30, 2002 employee related
expenses rose $390,336 to $474,816 as a result of additional hired employees
both after the second quarter of 2001 and during the first quarter of 2002.
The 35% increase in gross profits to $276,729 for the six months ended June 30,
2002 from $205,557 in the similar period of 2001 was offset by the 135% increase
in operating expenses of $1,954,332 for the six months ended June 30, 2002
compared to 2001. This increase in operating expenses reflects the Company's
expanded operations and increase in personnel. These higher costs resulted in a
loss from operations of $1,677,603 for the six month period ended June 30, 2002
compared to an operating loss of $624,448 for the same period in 2001.
Factoring in the interest expense for the six months ended June 30, 2002 and
2001 of $5,368 and $87,268 respectively, resulted in a net loss of $1,682,767
for the six months ended June 30, 2002 which is a 136% increase compared to a
loss of $711,716 for the same period in 2001.
Liquidity and Sources of Capital
NutraStar has incurred significant operating losses since its inception, and, as
of June 30, 2002 NutraStar has an accumulated deficit of $7,083,906. At June 30,
2002, NutraStar had cash and cash equivalents of $10,816 and a net working
capital deficit of $836,835.
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 six months ended June 30, 2002, NutraStar raised a
total of $100,000 from the sale of 153,333 Units (each Unit representing one
common share and one warrant), as well as received proceeds of $100,000 from a
note payable to the Chairperson of NutraStar.
The Company is dependent on the proceeds from future debt or equity investments
to expand its operations and fully implement the Company's business plan. If the
Company is unable to raise sufficient capital, the Company will be required to
delay or forego some portion of its business plan, which 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
NutraStar had entered into an agreement with The RiceX Company ("RiceX"),
whereby RiceX would sell NutraStar its rice bran solubles and rice bran fiber
concentrates at prices equal to the lower of RiceX's standard price or the price
21
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 concentrates products in the United States
except to NutraStar. Subsequent to the end of the second quarter, this Agreement
was terminated by RiceX due to NutraStar's inability to meet increasing volume
purchase requirements and to maintain the required security deposit with RiceX.
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 will continue to buy such
products from RiceX on a nonexclusive basis. NutraStar will continue to purchase
RiceX products in sufficient amounts to support its sales of dietary supplements
for its e-commerce direct sales programs, products for its strategic alliances
and for new product research and development needs.
Unless and until other competitors seek to acquire rice solubles and rice bran
fiber concentrates from RiceX, NutraStar does not anticipate a material adverse
impact on its business operations resulting from the termination of the RiceX
Agreement. The RiceX Agreement also provided for a license from RiceX to
NutraStar to utilize three patents relating to the use of rice bran supplements
to treat diabetes and hyperlipidemia. NutraStar will continue to be allowed to
utilize these patents until a new use agreement 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.
NutraStar has lost the exclusive right to distribute certain of RiceX's products
in the United States. Although NutraStar is negotiating with RiceX to reacquire
those exclusive rights, there is no assurance that it will be successful or that
NutraStar may lose this exclusive right again if it does not meet the terms of
any subsequent agreement. 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 later part of the
current year.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, the accounting and reporting provisions
of APB No. 30, Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
22
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business, and amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The adoption of SFAS No.
144 has not had a material impact, if any, on its financial position or results
of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.
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 to 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.
Critical Accounting Policies
Our discussion and analysis of our financial conditions and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements require
managers to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and disclosures on the date of the
financial statements. On an on-going basis, we evaluate our estimates,
including, but not limited to, those related to revenue recognition. We use
authoritative pronouncements, historical experience and other assumptions as the
basis for making judgments. Actual results could differ from those estimates. We
believe that the following critical accounting policies affect our more
significant judgments and estimates in the preparation of our consolidated
financial statements.
23
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of provisions for
returns in accordance with interpretative guidance provided by Staff Accounting
Bulletin (SAB) No. 101. The majority of the Company's sales are to distributors
and these distributors generally have no right to return products. Commission
revenue is generally recognized when earned and collection is reasonably
assured.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 2002, a Complaint was filed against NTI by Millennium Integrated
Services, Inc. ("MISI") in Superior Court, Sacramento County, (Case No.
02A502006). MISI provided website development services to NTI, at a cost of
$204,405. MISI is seeking contract payment of $204,405 plus interest of $32,031
as well as damages for alleged conversion and misappropriation of trade secrets.
On April 9, 2002, MISI filed a Motion for a Writ of Attachment which would allow
MISI to seize and hold NTI assets worth $236,436 pending the resolution of the
lawsuit. On April 10, 2002, a Writ of Attachment was granted by the Court. As of
June 30, 2002, Company accounts receivable totaling $20,245 had been attached
pursuant to the Writ of Attachment. NTI believes it has valid defenses and
offsets to the payment for these services and either will appeal the Court's
action or attempt to settle this matter. Settlement of this case could have a
material affect on the Company's cash flow depending on how quickly any
settlement would need to be paid. Conversely, litigating this matter could also
have a material adverse affect on NutraStar's operations and financial results.
Subsequent to the quarter ended June 30, 2002, a Complaint was filed against NTI
by Faraday Financial, Inc. ("Faraday"), in the Third Judicial District Court,
Salt Lake County, Utah (Case No. 020906477). The lawsuit stems from a settlement
agreement entered into in December, 2001, pursuant to which Faraday converted
$500,000 of debt into 735,730 shares of NutraStar preferred stock. Among other
terms, the settlement agreement required that a registration statement covering
the resale of the 735,730 shares be in effect by June 30, 2002. Although
NutraStar filed a registration statement on June 4, 2002, such registration
statement has not been declared effective. In the event that NutraStar failed to
effect a registration statement by June 30, 2002, NutraStar's Chief Executive
Officer, Ms. Patricia McPeak, was to transfer to Faraday an additional 735,730
shares of her common stock and become personally liable to Faraday for the
original $500,000 debt amount plus 12% interest per annum. Faraday is also
claiming attorneys' fees and other costs related to the lawsuit. Management does
not believe that the resolution of this matter will have a material adverse
impact on NutraStar's financial condition.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 99.1 - Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None.
25
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: August 16, 2002 /s/ James Kluber
------------------------------------
James Kluber, Authorized Officer and
Chief Financial Officer
(Principal Accounting Officer)
26
Exhibit 99.1
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (a) AND (b) OF SECTION 1350, CHAPTER 63 OF
TITLE 18, UNITED STATES CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of section 1350, chapter 63 of Title 18, United States Code), each of
the undersigned officers of NutraStar Incorporated, a California corporation
(the "Company"), does hereby certify with respect to the Quarterly Report of the
Company on Form 10-QSB for the quarter ended June 30, 2002 as filed with the
Securities and Exchange Commission (the "10-QSB Report") that:
(1) the 10-QSB Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the 10-QSB Report fairly presents,
in all material respects, the financial condition and results of
operations of the Company.
Dated: August 16, 2002 NUTRASTAR INCORPORATED
/s/ Patricia McPeak
-------------------------------------
Patricia McPeak
President and Chief Executive Officer
/s/ James Kluber
-------------------------------------
James Kluber
Chief Financial Officer
EXHIBIT 99.1