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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended Commission File Number
December 31, 2003 0-32565
NUTRACEA
(Name of Small Business Issuer in It Charter)
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California 87-0673375
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(State of Incorporation) (I.R.S. Employer Identification)
Principal Executive Offices:
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
Telephone: (916) 933-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
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None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
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Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $1,536,153.
As of May 13, 2004, the aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was approximately $13,566,736 based upon the
average price of $.94/share.
ISSUER INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PAST FIVE YEARS
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes X No
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As of May 13, 2004, the Registrant had outstanding 25,383,430 shares of common
stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
NUTRACEA
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PAGE
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PART I
1. Description of Business . . . . . . . . . . . . . . . . . . . . . . . 1
2. Description of Property . . . . . . . . . . . . . . . . . . . . . . . 9
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 10
PART II
5. Market for Common Equity and Related Stockholder Matters. . . . . . . 11
6. Management's Discussion and Analysis or Plan of Operations. . . . . . 13
7. Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . 16
8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . 43
8A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . 43
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act . . . . . . . . . . 44
10. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . 47
11. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters. . . . . . . . . . . . . . . . . . . 49
12. Certain Relationships and Related Transactions . . . . . . . . . . . 50
13. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . 51
14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . 52
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
NutraCea (referred to as "NutraCea" or the "Company") is a California
corporation formerly known as Alliance Consumer International, Inc. As a result
of the Exchange Transaction discussed below, NutraCea's business is now the
business previously carried on by NutraStarTechnologies Incorporated, a Nevada
corporation ("NTI"). NTI was formed and started doing business in February 2000.
NutraCea is a relatively new health science company focused on the development
and distribution of products based upon the use of stabilized rice bran and
proprietary rice bran formulations. Rice bran is the outer layer of brown rice
that, until recently, was a waste by-product of the commercial rice industry.
These products include food supplements that provide health benefits for humans
and animals (known as "nutraceuticals") as well as cosmetics and beauty aids
based on the rice bran oils. NutraCea believes that stabilized rice bran
products can deliver beneficial biological effects with fewer of the adverse
side effects commonly associated with many prescription drugs. As a result,
NutraCea believes that certain of its products may be used in place of, or as a
supplement to, some of the most commonly used pharmaceuticals. NutraCea has
conducted and is currently involved in ongoing clinical trials and third party
analysis in order to support the uses for and effectiveness of its products.
NutraCea has developed a number of product lines that are currently or soon will
be available for sale in the market through its four divisions: TheraFoods(R),
which provides health food supplements to the retail market; NutraCea(R), which
distributes food supplements through the medical community; NutraGlo(R), which
distributes animal food products; and NutraBeauticals(R), which will develop and
market cosmetics and beauty aids. NutraCea anticipates developing strategic
distribution and marketing agreements with well-known retail product and
pharmaceutical companies and medical practices and institutions.
NutraCea's corporate offices and operations are located at 1261 Hawk's Flight
Court, El Dorado Hills, California 95762. NutraCea's telephone number is (916)
933-7000. NutraCea has one wholly owned subsidiary, NTI, which in turn wholly
owns NutraGlo Incorporated, a Nevada corporation. Both of these subsidiaries
maintain business offices at NutraCea's principal business office in El Dorado
Hills, California.
HISTORY
NutraCea was originally incorporated on February 4, 2000 in California as
NutraStar Technologies Incorporated. On December 14, 2001, NutraStar
Technologies Incorporated effected a reorganization with the inactive
publicly-held company, Alliance Consumer International, Inc., and the name was
changed to NutraStar Incorporated.
On October 1, 2003, NutraStar Incorporated changed its name to NutraCea and the
common stock began trading on the OTCBB under the symbol "NTRC." On November 12,
2003, NutraCea declared a 1:10 reverse stock split. Post-split shares of
NutraCea trade on the OTCBB under the symbol "NTRZ."
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On April 27, 2000, NTI formed NutraGlo Incorporated ("NutraGlo"), a Nevada
corporation, which was owned 80% by NTI and 20% by NutraGlo Investors L.P.
During 2001, NutraGlo started marketing, manufacturing and distributing one of
NutraCea's products to the equine market. In 2002, NutraCea issued 250,001
shares of its common stock to the limited partnership in exchange for the
remaining 20% of the common stock of NutraGlo. The value of the shares was
$250,001. As a result, NutraGlo is now a wholly owned subsidiary of NTI.
INDUSTRY OVERVIEW
By definition, nutraceuticals are food constituents that have biologically
therapeutic effects in humans and mammals. These compounds include vitamins,
antioxidants, polyphenols, phytosterols, as well as macro and trace minerals.
Rice bran and rice bran oil are good sources for some of these compounds,
including tocotrienols, a newly discovered complex of vitamin E, and
gamma-oryzanol, which is found only in rice bran. These compounds act as
antioxidants. Stabilized rice bran and its derivatives and rice bran oil also
contain high levels of B-complex vitamins and beta-carotene which is a vitamin A
precursor. Stabilized rice bran also contains high levels of carotenoids and
phytosterols, both essential fatty acids, as well as a balanced amino acid
profile and both soluble and insoluble fiber which promote colon health.
Rice is one of the world's major cereal grains, although United States
production of rice is only a small fraction of total world production.
Approximately 60% of the nutritional value of rice is contained in the rice
bran, the outer brown layer of the rice kernel that is removed during the
milling process. However, unstabilized rice bran deteriorates rapidly. Because
of the rapid degradation and short shelf life, rice bran has not been widely
accepted as a component of nutrition, health or beauty products notwithstanding
the known benefits. The RiceX Company ("RiceX"), one of NutraCea's primary
suppliers, has developed a method of stabilizing rice bran that NutraCea
believes is superior to other methods, and provides a shelf life of
approximately two years, which NutraCea believes is longer than any other
stabilized rice bran. Using stabilized rice bran as an ingredient provides the
longer shelf life necessary for economical production of nutrition products that
incorporate rice bran ingredients.
In 1999, the Alliance for Aging Research in Washington D.C. reported that
incidence of initial diagnosis for hypertension, arthritis or diabetes triples
between the 50th and 60th birthdays. As the population of the United States
ages over the next 30 years, the Company believes demand for its products will
grow dramatically. Since stabilized rice bran is a safe food product, the
Company believes that its beneficial effects can be obtained with a minimum of
known deleterious side effects, such as those that may be present in
pharmaceuticals. Many physicians have taken an interest in NutraCea's
nutraceutical products as a means of offering alternative or complementary
approaches for treating serious health care problems. If further clinical
trials support the beneficial effects of NutraCea's neutraceutical products and
if the medical community widely endorses such use of its products, NutraCea
believes that its products may be used as a nutritional therapy either prior to
or as a compliment to traditional pharmaceutical therapies for the treatment of
a variety of ailments including diabetes and coronary heart disease.
PRODUCTS
NUTRACEA HAS TWO SEGMENTS WITH FOUR PRIMARY DIVISIONS THROUGH WHICH IT SELLS ITS
PRODUCTS.
PRODUCTS OF NUTRASTAR TECHNOLOGIES INCORPORATED:
- TheraFoods(R) Nutrition Supplements. NutraCea distributes its consumer
products through its TheraFoods(R) Nutritional Supplements division. The
primary products currently sold through this division are RiSolubles(R),
RiceMucil(R), CeaFlex(TM), FlexBoost(TM), Cea100(TM), NutraImmune(TM), and
StaBran(R) Nutritional Supplements. All the products are currently
available in either capsule or powdered form for use as food supplements.
The powdered form can also be used as a food additive in breads, cookies,
snacks, beverages, and similar foods. The Company has also developed and
currently produces a topical, cream product for arthritic joint and muscle
pain. Consumer products are sold directly to consumers through toll-free
telephone sales and Internet sales.
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- NutraCea(R) Medical Foods. NutraCea distributes its medical foods products
to doctors, clinics and health care providers through its NutraCea(R)
Medical Foods division. In addition to certain consumer products, the
primary products to be distributed through this division are SynBiotics
1(TM) Medical Food to support treatment of Irritable Bowel Syndrome,
SynBiotics 2(TM) Medical Food to support treatment of Inflammatory Bowel
Disease, SynBiotics 3(TM) Medical Food to support treatment of
antibiotic-induced diarrheal conditions, and LiverBoost(R) to support liver
health. Medical foods will be marketed to health care providers through the
same distribution systems that market pharmaceutical and medical supplies.
- NutraBeauticals(R) Beauty Products. NutraCea distributes its natural beauty
products through its NutraBeauticals(R) Beauty Products division. The
principal product sold through this division is NutraBeauticals(R) Skin
Cream, a topical emollient containing rice bran oil and other natural
products to support the health and improve the appearance of skin. NutraCea
does not have an established distribution system for its beauty and skin
care products.
PRODUCTS OF NUTRAGLO INCORPORATED:
- NutraGlo(R) Animal Products. NutraCea developed a derivative of its
NutraFlex(TM) Nutritional Supplement to prevent and rehabilitate joint
degeneration in horses and markets NutraFlex(TM) Equine Nutritional
Supplements and Absorbine Flex+(TM) Equine Pain Relief Cream though its
NutraGlo(R) Animal Products division. NutraCea's Absorbine Flex+(TM) Equine
Pain Relief Cream is distributed exclusively through W. F. Young, Inc.
pursuant to a distribution agreement in the United States and 36 foreign
countries. Other equine and animal health products will be distributed
through this or other channels.
MARKETING
The Company's TheraFoods(R) division is currently marketing its products
domestically through various distribution channels including NutraCea's
toll-free phone number and through the Internet at
http://www.nutracea.com/products.html.
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NutraCea's equine product is distributed under the name "Absorbine Flex+" by
W.F. Young, Inc. pursuant to a distribution agreement with NutraCea dated May 1,
2001 pursuant to which the Company's Absorbine Flex+ is being marketed
nationwide and will be introduced into the international market in 36 countries.
The distribution agreement provides for the NutraGlo division to manufacture,
package and ship all W.F. Young's sales requirements while W.F. Young is granted
a license to use and market NutraCea's products and brand names. NutraGlo has
agreed to sell its equine products exclusively through W.F. Young at preferred
product prices. W.F. Young has agreed to use its best efforts to promote
NutraGlo's current and future equine products and make minimum product
purchases. In May of 2003 the purchase requirements for the three-year contract
had been met. The distribution agreement is for a term of three years ending on
August 31, 2004 and may be renewed for subsequent one-year terms. NutraCea has
developed a number of other animal products that it is seeking to distribute
through various distribution channels such as the Internet and strategic joint
ventures in the large animal, pet and veterinarian industries.
NutraCea also intends to distribute many of its consumer products through direct
response marketing channels such as infomercials and catalogue sales. NutraCea
expects its Absorbine(R) branded products to be sold initially through
television and radio infomercial campaigns sponsored by W.F. Young, Inc.
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PRODUCT SUPPLY
NutraCea currently purchases all of its stabilized rice bran, rice bran
solubles, rice bran fiber concentrates, and other rice bran products from RiceX.
The Company believes RiceX has a proprietary manufacturing process for
stabilizing the rice bran it processes. This process results in an estimated
shelf life for the rice bran products of at least one year and up to three years
under proper storage conditions, compared to a typical shelf life of
approximately two months for rice bran products processed by other suppliers.
The extended shelf life is a critical factor in the use of rice bran products as
an ingredient since the availability of rice bran products would otherwise be
seasonal and inventories of products using rice bran products would spoil or
become unsaleable between seasons.
NutraCea does not currently have a supply contract with RiceX and purchases its
rice bran products at RiceX's standard prices. NutraCea currently purchases
approximately 8.2% of RiceX's output of stabilized rice bran products and
believes that it will be able to continue purchasing its requirements of
stabilized rice bran products from RiceX. There are few other sources of
stabilized rice bran of the quality comparable to that produced by RiceX. The
interruption of supply from RiceX, either because of other significant
purchasers or the damage or destruction of the RiceX processing facility, could
interrupt the production of the Company's products.
COMPETITION
NutraCea competes with other companies that offer products that incorporate
stabilized rice bran as well as companies that offer other food ingredients and
nutritional supplements. Suppliers of nutritional supplements and other
products that use stabilized rice bran provided by other suppliers are subject
to the higher costs of shorter shelf life and the seasonal availability of
stabilized rice bran ingredients. NutraCea also faces competition from
companies providing products that use oat bran and wheat bran in the nutritional
supplements and health and beauty aids. Many consumers may consider such
products to be a replacement for the products manufactured and distributed by
NutraCea even though they have a higher incidence of allergic reaction and
adverse health indications. Many of NutraCea's competitors have greater
marketing, research, and capital resources than NutraCea does, and may be able
to offer their products as lower costs because of their greater purchasing power
or the lower cost of oat and wheat bran ingredients. There are no assurances
that NutraCea's products will be able to compete successfully.
GOVERNMENT REGULATION
Any claim that a dietary supplement is useful in the diagnosis, prevention,
mitigation, treatment or cure of a specific disease is treated by the Food and
Drug Administration ("FDA") as a claim regarding a drug. The Food and Drug Act
requires that all drugs must be proven "safe and effective" prior to marketing.
In many cases, drugs may qualify as "safe and effective" if they can be shown to
be related to other drugs that have previously been qualified. In other cases,
extensive clinical trials must be conducted to show the safety and efficacy of a
new drug. NutraCea does not make claims that any of its products are useful in
the diagnosis, prevention, mitigation, treatment or cure of a disease.
The Dietary Supplement Health Education Act of 1994 (the "DSHEA") provides the
basic statutory framework governing the manufacturing, distribution, composition
and labeling of dietary supplements for human consumption. These requirements
apply to the Company's products distributed by the TheraFoods(R) and NutraCea(R)
divisions. The DSHEA requires that all dietary supplements be prepared,
packaged, and held under conditions that satisfy the good manufacturing practice
regulations. The FDA
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proposed regulations governing the manufacturing of nutritional supplements in
February 1997 but has not adopted final regulations. NutraCea complies with the
regulations proposed by FDA.
Manufacturers of dietary supplements are allowed to make three different types
of claims in labeling: nutrient content claims; nutritional support claims; and
health benefit claims.
- Nutrient content claims are those claims that state the nutritional content
of a dietary supplement and include claims such as "high in calcium" and "a
good source of vitamin C." The DSHEA prescribes the form and content of
nutritional labeling of dietary supplements and requires the manufacturer
to list all additional ingredients. A manufacturer is not required to file
any information with the FDA regarding nutrient content claims, but must
have adequate data to support any such claims.
- Nutritional support claims may be either statements about classical
nutritional deficiency diseases, such as "vitamin C prevents scurvy" or
statements regarding the effect of a nutrient on the structure or function
of the body, such as "calcium builds strong bones." The DSHEA requires that
any claim regarding the effect of a nutrient on a structure or function of
the body must be substantiated by the manufacturer as true and not
misleading. In addition, the label for such products must bear the
prescribed warning: "This statement has not been evaluated by the Food and
Drug Administration. This product is not intended to diagnose, treat, cure,
or prevent any disease." The DSHEA requires that any manufacturer making a
claim that its product has a claimed effect on a structure or function of
the body must notify the FDA within 30 days after the product is first
marketed.
- Health benefit claims state a relationship between a nutrient and a disease
or a health-related condition. Under the DSHEA, a manufacturer must notify
the FDA of the intent to use a health benefit claim at least 120 days prior
to first marketing a product bearing such a claim, and include current
authoritative statements published by a federal scientific body, such as
the National Institutes of Health, that are based on the scientific body's
deliberative view of the scientific evidence. To date, only 14 health
benefit claims requested by manufacturers of nutritional supplements have
been approved, none of which directly relate to rice bran ingredients.
The DSHEA also provides that third party literature, such as scientific
publications, may be used in connection with the sale of dietary supplements but
regulates both the content of such literature and the manner in which it is
used. Such a publications must not be false or misleading, may not mention a
particular manufacturer or brand of dietary supplement, must be presented so as
to offer a balanced view of available scientific information, and must be
physically separated from the products when used in a retail establishment.
The FDA has broad authority to enforce the provisions of federal law applicable
to dietary supplements, including the power to seize adulterated or misbranded
products or unapproved new drugs, to request product recall, to enjoin further
manufacture or sale of a product, to issue warning letters, and to institute
criminal proceedings. In the future, NutraCea may be subject to additional laws
or regulations administered by the FDA or other regulatory authorities, the
repeal of laws or regulations that the Company might consider favorable, or more
stringent interpretations of current laws or regulations. NutraCea is not able
to predict the nature of such future laws or regulations, nor can it predict the
effect of such laws or regulations on its operations. The Company may be
required to reformulate certain of its products, recall or withdraw those
products that cannot be reformulated, keep additional records, or
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undertake expanded scientific substantiation. Any or all of such requirements
could have a material adverse effect on NutraCea's business and financial
condition.
While the FDA regulates the manufacturing process and labeling of dietary
supplements, the Federal Trade Commission (the "FTC") regulates the advertising
of such products. The FTC's primary concern is that any advertising must be
truthful and not misleading, and that a company must have adequate
substantiation for all product claims. In general, the FTC gives deference to
an FDA determination of whether there is adequate support for health related
claims. However, the FTC has been very active in enforcing requirements that
companies possess adequate substantiation for product claims. FTC enforcement
actions may result in consent decrees, cease and desist orders, judicial
injunctions, and the payment of fines with respect to advertising claims that
are found to be unsubstantiated.
In addition to the foregoing, NutraCea's operations will be subject to federal,
state, and local government laws and regulations, including those relating to
zoning, workplace safety, and accommodations for the disabled, and its
relationship with its employees are subject to regulations, including minimum
wage requirements, anti-discrimination laws, overtime and working conditions,
and citizenship requirements. NutraCea believes that it is in substantial
compliance with all material governmental laws and regulations.
RESULTS OF TRIALS AND SCIENTIFIC RESEARCH
The nutritional value of NutraCea's RiSolubles(R) and RiceMucil(R) Nutritional
Supplements have been analyzed by four independent certified analytical
laboratories in the US. The beneficial attributes of stabilized rice bran,
including the RiSolubles(R) and RiceMucil(R) Nutritional Supplements, have been
studied and reported by several laboratories, including Medallion Laboratories,
Craft's Technologies, Inc., Southern Testing & Research Laboratories, and Ralson
Analytical Laboratories. NutraCea has no affiliation with nor did it pay for
these studies. This analysis has verified the presence of antioxidants,
polyphenols, and phytosterols, as well as beneficial macro and trace minerals,
in NutraCea's stabilized rice bran products. Antioxidants are compounds that
scavenge or neutralize damaging compounds called free radicals. Polyphenals are
organic compounds that act as direct antioxidants and help fight cancer.
Phytosterols are plant-derived sterol molecules that help improve immune
response to fight certain cancers. NutraCea relies on these studies to
establish the nutritional content of its products and the nutritional support
claims for its products.
A limited clinical trial conducted by Advanced Medical Research with funding by
RiceX suggests that consumption of the stabilized rice bran used in NutraCea's
RiSolubles(R) and RiceMucil(R) Nutritional Supplements may lower blood glucose
levels of diabetes mellitus patients and may be beneficial in reducing high
blood cholesterol and high blood lipid levels. Studies have also found that
soluble and insoluble fiber, such as is found in NutraCea's RiceMucil(R)
Nutritional Supplement, produces the same beneficial effect on the function of
the colon as other soluble fiber but does not produce the uncomfortable gas
buildup in the colon and intestines which is common with soluble fibers like
psyllium and guar gum. These studies form the basis of certain structure and
function claims that the Company may make with respect to its products. The
Company intends to conduct additional clinical trials to further investigate
such effect and, if warranted, to develop products to address the use of
stabilized rice bran products for and to make health benefit claims relating to
the effect of dietary rice bran on diabetes and cardiovascular disease.
Through several consulting physicians, NutraCea has support from medical
institutions and practices that will continue to conduct clinical trials and
beta work for its products. For example, a 50-subject, open
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label clinical trial for using the SynBiotics 2(TM) Medical Food for supporting
treatment of Inflammatory Bowel Disease is being conducted by physicians at
University of California Davis Medical Center and a private physicians group is
conducting a 50-subject, open label clinical trial using SynBiotics 1(TM)
Medical Food for supporting treatment of Irritable Bowel Syndrome. These
clinical trials, which NutraCea funded, are reviewed in an article published in
the March 2002 issue of the Journal of Nutritional Biochemistry.
The W. F. Young Company, distributors of Absorbine(R) Pain Relief Products,
sponsored a 50-horse equine study, which demonstrated the Company's Absorbine
Flex+(R) Equine Pain Relief Cream to be an effective product for treating joint
degeneration in horses.
INTELLECTUAL PROPERTY
NutraCea, through NTI, filed applications with the U.S. Patent and Trademark
Office and has successfully registered NutraCea's logo, StaBran(R),
RiSolubles(R), RiceMucil(R), and 21 other product names, as registered federal
trademarks and service marks. The Company has nine additional trademark and
service mark applications pending.
NutraCea owns the international rights and has a license from RiceX for the
domestic use of Patent Number 6,126,943 entitled "A Method for Treating
Hypercholesterolmia, Hyperlipidemia, and Atherosclerosis," which was published
October 3, 2000; Patent Number 6,303,586 entitled "A Method for Treating
Diabetes, Hyperglycemia and Hypoglycemia," which was published October 16, 2001;
Patent Number 6,303,586 B1 entitled "Supportive Therapy for Diabetes,
Hyperglycemia and Hypoglycemia" which was published October 16, 2001; and Patent
Number 6,350,473 entitled "A Method for Treating Diabetes, Hyperglycemia and
Hypoglycemia, and Atherosclerosis" which was published February 26, 2002. Each
of the foregoing patents relate to the use of rice bran in connection with
products and methods of treatment for chronic diseases.
NutraCea, through NTI, filed a non-provisional patent application with 47 claims
entitled "Methods of Treating Joint Inflammation, Pain and Loss of Mobility" on
November 6, 2001. In a December 3, 2002 office action, the U.S. Patent and
Trademark Office allowed 26 and disallowed 21 of the patent's 47 claims.
Subsequently, in February 2004, the 26 claims that were allowed in December of
2002 were disallowed. In March 2004 we appealed the disallowance of the 26
claims that were previously allowed. Additionally, in October 2003, we added 9
preventive claims to the patent for which we have not yet had a response from
the U.S. Patent and Trademark Office.
NutraCea believes that its trademarks and patent rights represent a significant
asset and the loss of any such rights could have a significant effect on the
financial condition of the Company.
RESEARCH AND DEVELOPMENT EXPENDITURES
During fiscal years 2003 and 2002, NTI spent $63,873 and $88,695, respectively,
on product research and development.
EMPLOYEES
The Company has 10 full time employees, consisting of 4 executive personnel, 3
professional and scientific personnel, and 3 clerical and administrative
personnel. None of NutraCea's employees are
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employed pursuant to a collective bargaining or union agreement, and it
considers that its relationship with its employees is good.
FACTORS AFFECTING NUTRACEA'S BUSINESS
The Company will need additional funds to finance additional products as well as
fund its current operations. It currently has limited cash reserves and limited
working capital to fund its operations, and its ability to meet its obligations
in the ordinary course of business is dependent upon its ability to raise
additional financing through public or private equity financings, establish
increasing cash flow from operations, enter into collaborative or other
arrangements with corporate sources, or secure other sources of financing to
fund operations.
NutraCea has developed and is marketing a number of products, both food
supplements and cosmetics, which are derived from stabilized rice bran and
specially formulated rice bran oil. These rice bran based products are
relatively new which will require NutraCea to successfully introduce products to
the marketplace and create a sustainable and expanding market for its products.
The failure of the Company to effectively create a market and demand for its
products would have a material adverse affect on its financial condition and
results of operation.
The dietary supplement and cosmetic industries are subject to considerable
government regulation both as to efficacy as well as labeling and advertising.
There is no assurance that all of NutraCea's products and marketing strategies
will satisfy all of the applicable regulations of the DSHEA, FDA and/or the FTC.
Failure to meet any applicable regulations would require NutraCea to limit the
production or marketing of any non-compliant products or advertising.
The Company's prospects for financial success are difficult to forecast because
the Company has a limited operating history. The Company's current business
commenced in February 2000, when its wholly owned subsidiary, NTI, first started
its operations. Consequently, both the Company and its operating subsidiary
have a limited operating history upon which an evaluation of their future
prospects can be based. Neither the Company nor its subsidiary, NTI, has ever
made a profit in any fiscal quarter. The Company's prospects for financial
success must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in new, unproven and rapidly evolving
markets. To address these risks, NutraCea must, among other things, expand its
customer base, increase its cash flow from operations, respond effectively to
competitive developments, and continue to attract, retain and motivate qualified
employees. The Company's inability to further develop and expand its operations
would materially adversely affect the Company's business, financial condition
and results of operations.
The Company operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
potential new companies. The markets for food supplements and cosmetics are
extremely competitive both as to price and quality.
In summary, the Company's net sales and operating results in any particular
quarter may fluctuate as a result of a number of factors, including its current
dependence on one source for its stabilized rice bran, the need to validate the
benefits and applications for stabilized rice bran products, delays in
establishing markets for its products, the current depressed economic conditions
as well as the overall performance of
8
the food supplement and cosmetic industries as discussed above. The Company's
future operating results will depend, to a large extent, on its ability to
anticipate and successfully react to these and other factors and successfully
implement its growth strategy.
ITEM 2. DESCRIPTION OF PROPERTY
The Company subleases its executive offices, warehouse and laboratory, located
at 1261 Hawk's Flight Court, El Dorado Hills, California, from RiceX for a
monthly rental of $5,358. The monthly rental will increase by 2.5% on October
1, 2004. The Company subleases this 5,500 square foot facility through
September 30, 2006. The Company believes that this facility will be adequate
for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in various lawsuits that arise in the
course of its business.
A Complaint was filed against NTI by Millennium Integrated Services, Inc.
("MISI") in Superior Court, Sacramento County, on April 4, 2002 (Case No.
02A502006). MISI provided website development services to NTI, at a cost of
$204,405. MISI was seeking contract payment of $204,405 plus interest of
$32,031 as well as damages for alleged conversion and misappropriation of trade
secrets. Additionally, MISI has stated that it will move the court to amend its
Complaint to add a cause of action for negligent and intentional interference
with an employment agreement between MISI and one of its programmers. On April
9, 2002, MISI filed a Motion for a Writ of Attachment which would allow MISI to
seize and hold NTI assets worth $236,436 pending the resolution of the lawsuit.
On April 10, 2002, a Writ of Attachment was granted by the Court pursuant to
which MISI attached $29,666 of the Company's accounts receivable. A Settlement
Agreement and Mutual Release was executed on May 27, 2003. In consideration,
the NutraCea defendants agreed to pay MISI one hundred and forty-eight thousand
dollars ($148,000). The settlement was fully paid on July 1, 2003 and the
complaint was dismissed on August 28, 2003.
On July 16, 2002, the Company was summoned to answer a Complaint filed by
Faraday Financial, Inc. ("Faraday") in District Court, County of Salt Lake, Utah
(Case No. 020906477). The Complaint alleges that 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, which the Company failed to do, and demands the Company
immediately forfeit to Faraday 735,730 shares of common stock owned by the Chief
Executive Officer of the Company. 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. A Settlement
Agreement was executed on December 10, 2003. In consideration for the mutual
releases, Faraday converted 735,730 preferred into 735,730 common shares and
$90,127 of accrued preferred dividends into 1,201,692 common shares. Within the
next year, if Faraday cannot realize $551,797 and approximately $9,800 in legal
expenses from the sale of the common shares, NutraCea will make up any
deficiency. If stock sales exceed $561,597, Faraday is entitled to keep any
excess. Subsequent to December 31, 2003, the Company issued an additional
250,000 shares to Faraday. Concurrently, with the executed Settlement Agreement,
a joint stipulated motion to stay all proceedings was filed with the Court.
After all the above conditions are met, if Faraday has not lifted the stay
within 18 months of December 10, 2003, NutraCea shall deliver to Faraday an
executed stipulation for dismissal with prejudice of the Complaint and
Counterclaim.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 6, 2003, shareholders representing a majority of the outstanding
shares of common stock and a majority of the outstanding shares of Series A
Preferred Stock executed a written consent approving a Certificate of Amendment
to the Company's Restated Articles of Incorporation declaring a 1:10 reverse
split of the outstanding shares of common stock and authorizing the Company to
issue up to 100,000,000 million shares of post-split common stock and 20,000,000
shares of preferred stock. A total of 1,552,874 common shares and 300,000
preferred shares (representing 1,852,874 votes) voted in favor of the amendments
by written consent. No other votes were solicited or received by the Company.
10
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
On September 17, 1998, Alliance Consumer International, Inc. ("Alliance") was
approved for quotation on the National Association of Securities Dealers'
Over-the-Counter Bulletin Board ("OTCBB") where it was quoted under the symbol
"ACIL" until June 3, 1999. On June 3, 1999, Alliance moved to the "Pink Sheets"
published by the Pink Sheets LLC (previously National Quotation Bureau, LLC).
In May 2001, Alliance's common stock was once again approved for quotation on
the OTCBB and its symbol was changed to "ACIN." Effective December 17, 2001,
Alliance changed its name to NutraStar Incorporated and the Common Stock began
trading on the OTCBB under the symbol "NTRA." On October 1, 2003, NutraStar
changed its name to NutraCea and the Common Stock began trading on the OTCBB
under the symbol "NTRC." On November 12, 2003, NutraCea declared a 1:10 reverse
stock split. Post-split shares of NutraCea trade on the OTCBB under the Symbol
"NTRZ".
A public trading market having the characteristics of depth, liquidity and
orderliness depends upon the existence of market makers as well as the presence
of willing buyers and sellers, which are circumstances over which we do not have
control. The following table sets forth the high and low bid prices for our
Common Stock in the periods indicated. The quotations below reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.
-------------------------------------------------
YEAR ENDED DECEMBER 31, 2002 LOW HIGH
---------------------------- -------- ---------
First Quarter $.45 $2.25
---------------------------- -------- ---------
Second Quarter $.30 $ .75
---------------------------- -------- ---------
Third Quarter $.20 $ .40
---------------------------- -------- ---------
Fourth Quarter $.05 $ .42
---------------------------- -------- ---------
---------------------------- -------- ---------
YEAR ENDED DECEMBER 31, 2003 LOW HIGH
---------------------------- -------- ---------
First Quarter $.60 $1.10
---------------------------- -------- ---------
Second Quarter $.50 $1.10
---------------------------- -------- ---------
Third Quarter $.70 $2.70
---------------------------- -------- ---------
Fourth Quarter $.85 $1.85
-------------------------------------------------
____________________________
As of May 14, 2004, there were approximately 175 holders of record of the
Company's Common Stock. This amount does not include shares held in street
name.
DIVIDEND POLICY
The Company has never paid any cash dividends on its common stock. The Company
currently anticipates that it will retain all future earnings for use in its
business. Consequently, it does not anticipate paying any cash dividends in the
foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
11
-----------------------------------------------------------------------------------------------------------------
Plan Category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding options, remaining available for
outstanding options, warrants and rights future issuance under
warrants and rights equity compensation
plans (excluding
securities reflected in
column
(a))
(a) (b) (c)
------------------------- --------------------------- ------------------------------- ------------------------
Equity compensation plans
approved by security -0- N/A -0-
holders
------------------------- --------------------------- ------------------------------- ------------------------
Equity compensation plans
not approved by security 3,961,519 $ 0.90 -0-
holders
------------------------- --------------------------- ------------------------------- ------------------------
Total 3,961,519 $ 0.90 -0-
-----------------------------------------------------------------------------------------------------------------
STOCK COMPENSATION PLANS
On October 301, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of the Company to execute a
registration statement under the Securities Act of 1933 for 10,000,000 shares of
common stock. Under the plan, the Board of Directors or a committee thereof may
grant warrants, options, restricted common shares, unrestricted common shares
and other awards to directors, employees and consultants of the Company for
services rendered. As of December 31, 2003, 1,200,000 shares of common stock
have been issued under the Stock Compensation Plan.
Other equity compensation plans not approved by shareholders include options and
warrants issued in connection with employment agreements and options and
warrants issued to vendors in exchange for services rendered.
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 2003, the Company issued the
following equity securities 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 bear a
legend stating the restrictions on resale.
- Options and warrants representing 1,549,105 shares of common stock
were exercised for a total value of $219,541.
- The Company issued 70,640 shares of common stock to consultants for
services valued at $22,400.
- The Company issued 3,431,251 shares of common stock, valued at
$823,119, to various parties for conversion of convertible notes
payable and accrued interest.
- The Company issued 4,174 shares of common stock to vendors in
satisfaction of accounts payable totaling $2,087.
12
In addition, during the three months ended December 31, 2003, the Company issued
the following equity securities pursuant to Section 3(a)(9) of the Securities
Act of 1933 pertaining to securities issued for conversion or exchange of
preferred stock and dividends thereon.
- The Company issued 84,000 shares of common stock in payment of
preferred dividends in the amount of $42,000.
- The Company converted 431,477 shares of preferred stock to 130,000
shares of common stock valued at $408,630.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
For more detailed financial information, please refer to the audited December
31, 2003 Financial Statements included in this Form 10-KSB.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-KSB includes "forward-looking" statements about future financial
results, future business changes and other events that haven't yet occurred.
For example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We do not undertake to update the information
in this Form 10-KSB if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of the Company's
business are discussed throughout this Form 10-KSB and should be considered
carefully.
RESULTS OF OPERATIONS
Our revenues increased by $249,714, to $1,536,153 in 2003 from $1,286,439, 2002.
Most of the 19% increase results from an increase of approximately $730,500 in
sales by our equine division. During 2002, RiceX terminated our exclusive
distribution agreement resulting in a $466,000 reduction in industrial sales of
stabilized rice bran during 2003 compared to 2002.
Cost of goods sold increased by $45,413 to $845,668 in 2003 from $800,255 in
2002. This 6% increase results from high net sales offset by economies of scale
in purchasing inventory.
Gross profit increased by $204,301 to $690,485 in 2003, from $486,184 in 2002.
This 42% increase is due to lower inventory costs and the increase in equine
division sales, which have a higher average gross profit than industrial sales.
Operating expenses increased by $5,325,152 to $8,917,489 in 2003, from
$3,592,337 in 2002. This increase is primarily due to increased non-cash stock
and option awards and modifications of stock option and warrants awards as of
result of the 1 for 10 reverse split on November 12, 2003. These non-cash items
total $6,782,136. In addition, commission expense increased by $64,615. However,
as a result of various cost-cutting measures, we reduced operating expenses as
follows:
Employee wages and related expense $298,204
Professional fees and outside services 285,204
Advertising and promotion expense 51,881
Insurance expense 26,512
13
Research and development expense 25,545
Various other operating expenses 97,564
--------
$784,910
--------
Interest expense increased by $4,211,869 to $4,310,796 in 2003, from $98,927 in
2002 primarily due to the recording of $4,224,246 in interest expense relating
to modifications of stock option and warrant awards attached to debt as a result
of the 1 for 10 reverse split on November 12, 2003.
CAPITAL FINANCING
During 2003, we borrowed $320,422 from related parties and $544,000 from third
parties to finance operations. Of the total borrowings of $864,422, $776,887 was
converted to equity and $318,225 was retired by cash payments prior to year-end.
There is no outstanding debt at December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses for its last three fiscal years
and, as of December 31, 2003, NutraCea had an accumulated deficit of
$21,344,955. At December 31, 2003, the Company had cash and cash equivalents of
$100,023 and a net working capital deficit of $812,127.
To date, we have funded our operating deficits through a combination of
short-term debt and the issuance of common and preferred stock. During 2003, we
raised $320,422 from related party promissory notes and $544,000 from the
issuance of third-party 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 45,000 shares of our common stock. We also raised
$104,500 from the sale of 134,048 shares of our common stock during 2003. In
2004, through May 15, 2004, we raised $2,744,507 through the exercise of stock
options.
14
DEPENDENCE ON KEY SUPPLIER
RiceX Company is a publicly-owned company. The spouse of our majority holder
owns 10% of RiceX and is the CEO and a director of RiceX. RiceX is our sole
supplier for rice bran derivatives, which are integral to our sales strategy and
which account for about 20% of our total cost of sales.
The RiceX Company agreed to sell to us its rice bran derivatives at prices equal
to the lower of RiceX's standard price or the price negotiated by other
customers for like quantities and products. The agreement also provided that
RiceX would not sell any rice bran derivatives products in the United States
except to NutraCea. This latter part of the agreement was terminated on July 9,
2002. Pending a new credit approval from RiceX, NutraCea is required to prepay
for all inventory purchases from RiceX.
In addition to the risks associated with the potential termination of RiceX as
NutraCea's major supplier, the inability of RiceX to deliver the amount of
product that NutraCea requires, any interruption in product delivery for any
reason, or the inability of RiceX to fulfill its contractual obligations would
have a material adverse effect on NutraCea's business, results from opera-tions,
and financial condition, as NutraCea could not readily find and implement
alternative suppliers and likely not on advantageous terms. RiceX's ability to
manufacture certain of NutraCea's raw materials is currently limited to the
production capability of RiceX's Dillon, Montana plant (the "Dillon Plant").
Currently, the Dillon Plant is capable of producing all of NutraCea's rice bran
raw materials, but that capacity may not be sufficient to meet all of NutraCea's
long-term supply needs. The Company and/or RiceX plan to add production capacity
during the current year.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements require managers to make
estimates and disclosures on the date of the financial statements. On an
on-going basis, 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 the following critical
accounting policies affect our more significant judgments and estimates in the
preparation of our consolidated financial statements.
Revenue recognition
-------------------
We are required to make judgments based on historical experience and future
expectations, as to the realizability of shipments made to 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.
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
15
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.
Off Balance Sheet Arrangements
------------------------------
None
16
ITEM 7. FINANCIAL STATEMENTS
Page
INDEPENDENT AUDITORS' REPORTS . . . . . . . . . . . . . . . . . . . . . . . . 17
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . 20
Consolidated Statements of Shareholders' Deficit . . . . . . . . . . . . 21
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . 22
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . 24
17
INDEPENDENT AUDITORS' REPORT
Board of Directors
NutraCea and subsidiaries
El Dorado Hills, California
We have audited the accompanying consolidated balance sheet of NutraCea as of
December 31, 2003, and the related statements of operations, changes in
stockholders' deficit, and cash flow for the year then ended. These financial
statements are the responsibility of NutraCea's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NutraCea as of
December 31, 2003, and the results of its operations and its cash flows for the
year then ended, in conformity with accounting principles generally accepted in
the United States of America.
MALONE & BAILEY, PLLC
www.malone-bailey.com
Houston, Texas
April 15, 2004
18
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
NutraCea and subsidiaries
We have audited the accompanying consolidated statements of operations,
shareholders' deficit, and cash flows of NutraCea and subsidiaries for the year
ended December 31, 2002, as restated. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations of NutraCea and
subsidiaries for the year ended December 31, 2002, as restated, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in note 15 to the consolidated financial statements, the December
31, 2002 consolidated financial statements have been restated due to a
correction of an error.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. During the year ended
December 31, 2002, as restated, the Company incurred a net loss of $3,204,443
and had negative cash flows from operations of $871,266. In addition, the
Company had an accumulated deficit of $8,682,746 at December 31, 2002, as
restated. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 29, 2003
19
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 100,023
Accounts receivable 30,453
Inventory 70,894
Prepaid expenses 14,857
-------------
Total current assets 216,227
PROPERTY AND EQUIPMENT, net 18,532
PATENTS AND TRADEMARKS, net 56,321
GOODWILL 250,001
-------------
TOTAL ASSETS $ 541,081
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 304,353
Accrued expenses 122,337
Customer deposits 101,486
Due to related parties 18,388
Convertible, mandatorily redeemable series A preferred stock,
no par value, $1 stated value
20,000,000 shares authorized
670,000 shares issued and outstanding 481,790
-------------
Total current liabilities 1,028,354
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Common stock, no par value
100,000,000 shares authorized
11,773,842 shares issued and outstanding 20,979,874
Deferred compensation (122,192)
Accumulated deficit (21,344,955)
-------------
Total shareholders' deficit (487,273)
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 541,081
=============
20
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
For the years ended
December 31,
2003 2002
------------- ------------
(restated)
REVENUES
Net sales $ 1,536,153 $ 1,286,439
COST OF GOODS SOLD 845,668 800,255
------------- ------------
GROSS PROFIT 690,485 486,184
OPERATING EXPENSES 8,917,489 3,592,337
------------- ------------
LOSS FROM OPERATIONS (8,227,004) (3,106,153)
------------- ------------
OTHER INCOME (EXPENSE)
Interest income 2 637
Interest expense (4,310,796) (98,927)
------------- ------------
Total other income (expense) (4,310,794) (98,290)
------------- ------------
NET LOSS (12,537,798) (3,204,443)
CUMULATIVE PREFERRED DIVIDENDS 124,411 150,129
------------- ------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(12,662,209) $(3,354,572)
============= ============
BASIC AND DILUTED LOSS AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ (2.07) $ (1.52)
============= ============
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING 6,106,548 2,207,088
============= ============
21
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
Convertible, Redeemable
Series A Preferred Stock Common Stock Committed Deferred
------------------------- ------------------------ Common Compen- Accumulated
Shares Amount Shares Amount Stock sation Deficit Total
----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2001 2,084,707 $ 1,850,802 2,164,952 $ 4,572,845 $ 399,174 $(925,875) $ (5,328,174) $ (1,282,030)
(RESTATED)
PREFERRED STOCK
ISSUED FOR
EXPENSE
REIMBURSEMENT 60,000 60,000
PREFERRED STOCK
DIVIDEND - 150,129 (150,129) (150,129)
COMMON STOCK ISSUED
for cash 190,855 395,000 395,000
for services
rendered 20,000 90,000 90,000
ISSUANCE COSTS - (39,499) (39,499)
COMMITTED STOCK
ISSUED FOR
SERVICES
RENDERED 172,500 172,500
STOCK OPTIONS
ISSUED
for compensation - 193,750 (145,312) 48,438
for services
rendered - 173,250 173,250
for interest
expense - 5,600 5,600
WARRANTS ISSUED FOR
SERVICES RENDERED - 850 850
BENEFICIAL
CONVERSION
FEATURE FOR THE
ISSUANCE OF
CONVERTIBLE DEBT - 66,000 66,000
COMMON STOCK
ISSUED FOR
CONSULTING FEES 403,906 403,906
AMORTIZATION OF
DEFERRED
COMPENSATION 197,914 197,914
NET LOSS (3,204,443) (3,204,443)
----------------------------------------------------------------------------------------------------------
Balance, December
31, 2002 2,144,707 2,060,931 2,375,807 5,861,702 571,674 (873,273) (8,682,746) (3,122,643)
(RESTATED)
PREFERRED STOCK
ISSUED FOR
ACCRUED INTEREST 200,000 8,351
PREFERRED STOCK
DIVIDEND 124,411 (124,411) (124,411)
PREFERRED STOCK
CONVERTED TO
COMMON STOCK (1,674,707) (1,633,453) 254,323 1,651,860 1,651,860
PREFERRED DIVIDENDS
CONVERTED TO
COMMON STOCK (208,450) 278,766 190,043 190,043
COMMON STOCK ISSUED
for committed
stock 145,917 571,674 (571,674)
for cash 134,048 111,500 111,500
for services
rendered 28,688 29,795 29,795
for deferred
salaries 475,555 416,899 416,899
for accounts
payable 80,114 62,724 62,724
for convertible
notes payable 3,431,251 823,119 823,119
for loan
collateral 50,000
ISSUANCE COSTS (7,000) (7,000)
AMORTIZATION OF
DEFERRED
COMPENSATION 140,114 140,114
REVERSAL OF
DEFERRED
COMPENSATION (243,605) 243,605
STOCK OPTIONS
EXERCISED
FOR CASH 4,519,373 427,575 427,575
STOCK OPTIONS
ISSUED
in lieu of
deferred
salaries 150,465 150,465
for services
rendered 1,274,584 (109,000) 1,165,584
for accounts
payable 40,527 40,527
for convertible
debt 183,855 183,855
BENEFICIAL
CONVERSION
FEATURE FOR
CONVERTIBLE DEBT 99,516 99,516
STOCK OPTIONS
CANCELLED (476,362) 476,362
MODIFICATION OF
OPTIONS AND
WARRANTS
non-employees 9,507,253 9,507,253
employees 303,750 303,750
NET LOSS (12,537,798) (12,537,798)
----------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER
31, 2003 670,000 $ 351,790 11,773,842 $20,979,874 $ - $(122,192) $(21,344,955) $ (487,273)
==========================================================================================================
22
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Year Ended
December 31,
2003 2002
------------- ------------
(restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(12,537,798) $(3,204,443)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 238,900 126,460
Loss reserve for patents and trademarks - 75,359
Non-cash issuances of preferred stock - 60,000
Non-cash issuances of common stock 29,795 262,500
Non-cash issuances of stock options & warrants 1,349,439 426,052
Non-cash payment of consulting fees - 403,906
Beneficial conversion feature 99,516 66,000
Modifications of options and warrants, non-employees 9,507,253 -
Modifications of options and warrants, employees 303,750 -
(Increase) decrease in
Accounts receivable (23,180) (5,680)
Inventory (28,199) 51,191
Prepaid expenses 12,323 (18,392)
Advances to related parties (8,206) (5,435)
Deposits - 181,071
Accounts payable (231,061) 325,214
Accrued salaries and benefits 19,149 (9,822)
Deferred compensation 289,244 325,962
Accrued expenses (53,107) 24,475
Customer deposits 57,170 44,316
------------- ------------
Net cash used in operating activities (975,012) (871,266)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (20,075) (61,150)
Purchase of patents and trademarks (17,770) (24,669)
------------- ------------
Net cash used in investing activities (37,845) (85,819)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 544,000 159,000
Proceeds from notes payable-related parties 320,422 175,800
Principal payments on notes payable (60,000) (104,000)
Principal payments on notes payable-related parties (258,335) -
Proceeds from the issuance of common stock, net 104,500 355,501
Proceeds from exercise of stock options 427,575 -
------------- ------------
Net cash provided by financing activities 1,078,162 586,301
------------- ------------
Net increase (decrease) in cash 65,305 (370,784)
CASH, BEGINNING OF YEAR 34,718 405,502
------------- ------------
CASH, END OF YEAR $ 100,023 $ 34,718
============= ============
CASH, PAID FOR INTEREST $ 21,631 $ -
CASH, PAID FOR INCOME TAXES $ - $ -
23
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
During 2003, Nutracea:
- Issued 20,000 shares of preferred stock for accrued interest totaling
$8,351
- Issued 80,114 shares of common stock in satisfaction of accounts
payable totaling $62,724
- Issued 44,210 options in satisfaction of accounts payable totaling
$40,527
- Issued 3,212,848 warrants in lieu of deferred salaries in the amount
of $150,465
- Issued 475,555 shares of common stock in lieu of deferred salaries in
the amount of $416,899
- Issued 3,431,251 shares of common stock for conversion of $776,887 in
notes payable and $46,232 in accrued interest to equity
During the 2002, NutraCea:
- issued 200,000 shares of common stock for services rendered totaling
$90,000.
- issued options to purchase 155,000 shares of common stock to an
employee of the Company. In relation to these issuances, the Company
recorded compensation expense totaling $193,750 and deferred
compensation expense totaling $145,312.
- issued options to purchase 425,000 shares of common stock for services
rendered. In relation to these issuances, the Company recorded
consulting expense totaling $173,250.
- issued options to purchase 28,000 shares of common stock for debt
issued. In relation to these issuances, the Company recorded interest
expense totaling $5,600.
- issued warrants to purchase 2,500 shares of common stock for services
rendered. In relation to these issuances, the Company recorded
consulting expense totaling $850.
- committed to issue 1,060,000 shares of common stock for services
rendered. In relation to these commitments, the Company recorded
consulting expense totaling $172,500.
- recorded interest expense totaling $66,000 related to the beneficial
conversion feature for the issuance of convertible debt.
- issued 60,000 shares of preferred stock as payment for an expense
reimbursement totaling $60,000.
- recorded 7% cumulative preferred stock dividends totaling $150,129
24
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
NutraCea was originally incorporated on February 4, 2000 in California as
NutraStar Technologies Incorporated. On December 14, 2001, NutraStar
Technologies Incorporated effected a reorganization with the inactive
publicly-held company, Alliance Consumer International, Inc., and the name was
changed to NutraStar Incorporated. The name was changed again to NutraCea on
October 1, 2003. NutraCea is a relatively new health science company focused on
the development and distribution of products based upon the use of stabilized
rice bran and proprietary rice bran formulations. Rice bran is the outer layer
of brown rice that, until recently, was a waste by-product of the commercial
rice industry. These products include food supplements that provide health
benefits for humans and animals (known as "nutraceuticals") as well as cosmetics
and beauty aids based on the rice bran oils. NutraCea believes that stabilized
rice bran products can deliver beneficial biological effects with fewer of the
adverse side effects commonly associated with many prescription drugs. As a
result, NutraCea believes that certain of its products may be used in place of,
or as a supplement to, some of the most commonly used pharmaceuticals. NutraCea
has conducted and is currently involved in ongoing clinical trials and third
party analysis in order to support the uses for and effectiveness of its
products.
On April 27, 2000, Nutracea formed NutraGlo Incorporated ("NutraGlo"), a Nevada
corporation, which was owned 80% by NutraCea and 20% by NutraGlo Investors L.P.
During 2001, NutraGlo started marketing, manufacturing and distributing one of
Nutracea's products to the equine market. In 2002, NutraCea issued 250,001
shares of its common stock to the limited partnership in exchange for the
remaining 20% of the common stock of NutraGlo. The value of the shares was
$250,001. As a result, NutraGlo is now a wholly owned subsidiary of NTI.
25
Lines of Business
-----------------
Nutracea 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 animals.
For internal reporting purposes, management segregates Nutracea into two
segments: (1) NutraStar, including the transactions of TheraFoods(R),
NutraCea(R), and NutraBeauticals(R), and (2) NutraGlo.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
26
Principles of Consolidation-The consolidated financial statements include the
----------------------------
accounts of NutraCea and its wholly owned subsidiaries, NutraCea Technologies
Incorporated and NutraGlo(R) (collectively, the "Company"). All significant
inter-company accounts and transactions are eliminated in consolidation.
Revenue Recognition-Revenue is generally recognized upon shipment of product
--------------------
with a provision for estimated returns and allowances recorded at that time, if
applicable. Commissions revenue is generally recognized when earned and
collection is reasonably assured.
Accounts Receivable-The Company provides for the possible inability to collect
--------------------
accounts receivable by recording an allowance for doubtful accounts. As of
December 31, 2003, there were no uncollectible accounts.
Inventory-Inventory is stated at the lower of cost (first-in, first-out) or
----------
market and consists of nutraceutical products manufactured by an affiliated
company, RiceX, which the Company enhances for final distribution to its
customers. While the Company has an inventory of these products, which contain
ingredients supplied by RiceX, any significant prolonged shortage of these
ingredients or of the supplies used to enhance these ingredients could
materially adversely affect the Company's results of operations.
Property and Equipment-Property and equipment are stated at cost. The Company
-------------------------
provides for depreciation using the straight-line method over the estimated
useful lives as follows:
Furniture and equipment 7 years
Software 3 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
Patents and Trademarks-The Company has exclusive licenses for several patents,
-----------------------
which were acquired from independent third parties and a related party. All
costs associated with the patents are capitalized. Patents acquired from
related parties are recorded at the carryover basis of the transferor. The
Company paid cash as consideration for all patents and trademarks acquired,
except the Via-Bran registered trademark, which was acquired for 21,409 shares
of common stock valued at $21,409.
Amortization is computed on the straight-line method based on estimated useful
lives of 17 to 20 years. The Company also has registered trademarks, which are
amortized over estimated useful lives of 10 years.
The Company recorded a loss reserve totaling $75,359 as of December 31, 2002
related to the
27
impairment of certain patents.
Deferred Compensation-Deferred compensation at December 31, 2003 consists of
----------------------
salaries payable to employees of the Company that have been earned, but not
paid.
Fair Value of Financial Instruments-For certain of the Company's financial
------------------------------------
instruments, including cash, accounts receivable, inventory, prepaid expenses,
accounts payable, accrued salaries and benefits, deferred compensation, accrued
expenses, customer deposits, due to related party, notes payable - related
party, and note payable the carrying amounts approximate fair value due to their
short maturities.
Stock-Based Compensation-Compensation is recorded for stock-based compensation
-------------------------
grants based on the excess of the estimated fair value of the common stock on
the measurement date over the exercise price. Additionally, for stock-based
compensation grants to consultants, NutraCea recognizes as compensation expense
the fair value of such grants as calculated pursuant to SFAS No. 123, recognized
over the related service period. SFAS No. 148 requires companies to disclose
proforma results of the estimated effect on net income and earnings per share to
reflect application of the fair value recognition provision of SFAS No. 123.
For the years
ended December 31,
2003 2002
------------- ------------
Net loss available
to common shareholders:
As reported: $(12,662,209) $(3,354,572)
Pro forma: $(12,754,495) $(3,486,838)
Basic loss per common share:
As reported: $ (2.07) $ (1.52)
Proforma: (2.09) $ (1.58)
Advertising Expense-The Company expenses all advertising costs, including direct
--------------------
response advertising, as they are incurred. Advertising expense for 2003 and
2002 was $21,959 and $57,264, respectively.
Income Taxes-The Company accounts for income taxes under the liability method,
-------------
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Loss Per Share Basic loss per share is
---------------
28
computed by dividing loss available to common shareholders by the
weighted-average number of common shares outstanding. Diluted loss per share is
computed similar to basic loss per share except that the denominator is
increased to include the number of additional common shares that would have been
outstanding if the potential common shares had been issued and if the additional
common shares were dilutive. Common equivalent shares are excluded from the
computation if their effect is anti-dilutive. As such, basic and diluted loss
per share are the same.
Estimates-The preparation of financial statements requires management to make
----------
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk-
------------------------------
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 2003, sales to this customer totaled $1,247,086 (81% of
total sales). During 2002, sales to this customer totaled $516,596 (40% of total
sales).
Recently Issued Accounting Pronouncements-
------------------------------------------
29
SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity" 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 is 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. Having adopted of SFAS No. 150 in 2003, the Company has
reclassified its redeemable preferred stock as a current liability.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2003 consisted of the following:
Furniture and equipment $ 31,552
Software 286,047
--------
317,599
Less accumulated depreciation 299,067
--------
TOTAL $ 18,532
========
Depreciation expense was $88,589 and $116,393 for 2003 and 2002, respectively.
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks at December 31, 2003 consisted of the following:
Patents, net of impairment expense from 2002 $ 28,125
Trademarks 55,944
--------
84,069
Less accumulated amortization 27,748
--------
TOTAL $ 56,321
========
At December 31, 2003, $83,447 of NutraCea's patents and trademarks had been
purchased from a RiceX.
30
Amortization expense was $10,198 and $10,067 for 2003 and 2002, respectively.
NOTE 5 - NOTES PAYABLE - RELATED PARTIES
At December 31, 2002, NutraCea owed Ms. Patricia McPeak, Chief Executive Officer
of NutraCea, $175,800 on a demand note payable bearing interest at 10%. NutraCea
borrowed an additional $20,422, bearing interest at 10%, from her during 2003.
All of this debt was repaid prior to December 31, 2003. NutraCea also borrowed
$50,000 and $40,000 in June and September, 2003, respectively, from a then
greater than 5% shareholder. The notes were convertible at the option of the
holder into shares of the Company's common stock at a conversion price of $.20
per share, bearing interest at 10% per annum and due in June and September 2004,
respectively. Upon conversion of the notes payable, the holder will be entitled
to receive one warrant to purchase common stock for each common share issued.
The warrant will have an exercise price of $.20 per share and will expire one
year from the date of issuance. In November 2003 the holder exercised the
conversion option and 451,517 shares of common stock were issued in full
satisfaction of the debt.
The relative fair value of the warrants was $30,939. The discount for the
warrants created a beneficial conversion feature of $16,128, which was amortized
until conversion and fully expensed upon conversion.
There was no outstanding debt due to related parties at December 31, 2003.
NOTE 6 - NOTES PAYABLE
At December 31, 2002, NutraCea owed $50,000 to a third party, bearing interest
at 2% per month, secured by 243,036 shares of common stock, and due on December
20, 2002. As of December 31, 2002, NutraCea was in default on the note.
Subsequent to December 31, 2002, NutraCea agreed to modify the collateral to
634,121 shares of preferred stock and extended the due date of the note to
September 20, 2003. In addition, at December 31, 2002 NutraCea owed $5,000 to a
third party, bearing interest at 10% per annum, and due on December 20, 2002.
Both of these notes were retired in full by cash payments during 2003.
31
In March 2003, NutraCea executed two promissory notes totaling $45,000 to a
third party investor. The $40,000 note was convertible at the option of the
holder into shares of NutraCea's common stock at a conversion price of $.20 per
share. The notes bear interest at 2% per month, are due on demand, and are
collateralized by shares of NutraCea's common stock. NutraCea retired $5,000 of
this debt in September, 2003. The balance of the note, $40,000, was converted
into 203,320 shares of common stock of NutraCea prior to December 31, 2003.
There was no beneficial conversion feature associated with this note payable.
During 2003, NutraCea borrowed $339,000 from various third party investors. The
notes bear interest at 10% per annum, mature twelve months from the date of
issue, and are convertible at the option of the holder into shares of NutraCea's
common stock at a conversion price of $0.20 cents per share. Upon conversion of
the notes payable, the holders will be entitled to receive one warrant to
purchase common stock for each common share issued. The warrant will have an
exercise price of $.20 per share and will expire one year from the date of
issuance. Prior to December 31, 2003, at the option of the holders, all of the
notes were converted into 1,625,911 shares of common stock in full satisfaction
of the debts. The relative fair value of the warrants was $111,225. The
discount for the warrants created a beneficial conversion feature of $83,388,
which was amortized until conversion and fully expensed upon conversion.
In June and July, 2003, NutraCea borrowed $160,000 from a third party investor.
The notes were convertible at the option of the holder into shares of NutraCea's
common stock at a conversion price of $0.20 per share. Upon conversion of the
notes, the holder is entitled to receive one warrant to purchase one share of
common stock for each share of common stock issued. The warrants will have an
exercise price of $0.20 per share and will expire five years from the date of
the issuance. Prior to December 31, 2003, at the option of the holder, these
notes were converted into 805,547 shares of common stock in full satisfaction of
the debt. The relative fair value of the warrants was $41,691. The discount for
the warrants was amortized until conversion and fully expensed upon conversion.
There was no beneficial conversion feature associated with this note payable.
NOTE 7 - PUT OPTION
During the year ended December 31, 2001, NutraCea 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
NutraCea all, but not less than all, of the 130,000 shares of NutraCea'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, NutraCea has recorded a liability of $130,000. In
addition, NutraCea 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.
32
NOTE 8 - INCOME TAXES
NutraCea has had losses since inception and, therefore, has not been subject to
federal or state income taxes. As of December 31, 2003, NutraCea had
accumulated net operating loss ("NOL") carryforwards for income tax purposes of
approximately $7.6 million, resulting in a deferred tax asset amount of $3
million. All deferred tax asset amounts are fully reserved. These
carryforwards expire in 2020 through 2023.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease
-----
NutraCea leases its office space under a non-cancelable operating lease with
RiceX that expires in September 2006 and requires monthly payments of $5,358.
Future minimum payments under this lease agreement at December 31, 2003 were as
follows:
Year Ending
December 31,
------------
2004 $ 64,700
2005 65,906
2006 49,429
----------
TOTAL $ 180,035
==========
Rent expense was $63,899 and $63,899 for the years ended December 31, 2003 and
2002, respectively.
Agreements
----------
On March 5, 2003, the Company hired a consultant to assist with fundraising. As
compensation for any funding, the consultant is to be paid 7.5% of any cash
received, 2.5% in value of such funding in warrants to purchase common stock of
the Company, based on the closing price on the day any agreement is signed, and
a warrant to purchase one share of the Company's common stock for every dollar
funded. The warrants are exercisable at $5.00 per share on or before three years
from the anniversary of any funding. Pursuant to this agreement, during the
twelve months ended December 31, 2003, the Company issued warrants to purchase
8,955 shares of common stock at an exercise price of $0.01 per share and
warrants to purchase 6,021 shares of common stock at an exercise price of $5.00
per share. Non-cash compensation expense of $20,662 was recorded as a result of
these awards. As of December 31, 2003, all of the warrants had been exercised.
In April 2003, the Company entered into a three-year employment agreement with
its Chief Operating Officer, whereby the Company is to pay the officer a base
salary of $10,000 per month. The agreement states that the first four months
salary will be deferred, except for a 10% bonus to be paid to the officer
dependent upon certain reductions in monthly operation costs or conversion of
debt into equity. The agreement also provides that the officer is entitled to an
annual bonus based upon performance and a monthly car allowance of $500,
beginning on the seventh month of employment. In addition, the officer was
issued warrants to purchase 1,000,000 shares of the Company's common stock
33
During July 2003, the Company entered into a settlement agreement with a
consultant for $60,000 as payment on accounts payable. The Company executed a
convertible promissory note for $60,000, bearing interest of 10%, due on July
21, 2004, and committed to execute an agreement for future consulting services
for a total obligation of $25,000. The note is convertible at the option of the
holder into shares of the Company's common stock at a conversion price of $0.20
per share. Upon conversion of the note, the holder is entitled to receive one
warrant to purchase one share of common stock for each share of common stock
issued. The warrant will have an exercise price of $0.20 per share and will
expire five years from the date of issuance. As part of this transaction, the
Company also issued warrants to purchase 15,000 shares of common stock at an
exercise price of $0.01 per share. The warrants expire on the earlier date of
July 12, 2008 or upon the Company's change of control through acquisition or
sale of substantially all of its assets. Non-cash compensation expense of
$12,000 was recorded related to issue of these warrants. As of August 6, 2003,
all of the warrants had been exercised.
During July 2003, the Company entered into a compensation agreement with a
consultant, whereby the Company will pay a total of $17,000 of earned and unpaid
compensation due to the consultant in monthly payments of $3,000, payable on the
first of the month beginning September 1, 2003. Per the compensation agreement,
the Company also issued warrants to purchase 32,900 shares of common stock at an
exercise price of $0.01 per share, thereby retiring an additional $23,000 in
earned and unpaid compensation. In addition, in September 2003, the Company
issued warrants to purchase 50,000 shares of common stock at an exercise price
of $0.01 per share to the consultant in exchange for a technology agreement
relating to NutraCea/NutraStar product formulas. Non-cash compensation of
$40,000 was recorded as a result of this award. As of December 31, 2003, all of
the warrants had been exercised.
In July 2003, the Company hired a consultant to provide investor relations
services. The consultant will be compensated by the issuance of 250,000 shares
of restricted common stock, with the expectation that those shares will be
registered or released from restriction within one year of issue. These shares
were not issued to the consultant until the first quarter of 2004.
On July 30, 2003, the Company issued 100,000 shares of common stock previously
recorded in committed stock, and entered into an additional agreement with a
consultant as payment on accounts payable totaling $24,000. The consultant
accepted a cash payment of $2,500 and a commitment to provide product valued at
$2,500; a promissory note payable at $2,000 a month beginning November 1, 2003
was executed for the balance of $19,000.
During 2003 the Company issued 8,231 shares of common stock to a consultant for
services valued at $9,795. In addition, under an agreement dated August 6, 2003,
the Company was committed to issue 1,000 shares of common stock per month up to
a value of $2,000, plus an additional $2,000 per month in cash, for future
services.
On September 18, 2003, the Company entered into a Technology Agreement with a
third party, whereby the initial term of a distribution agreement dated May 1,
2001 granting the exclusive worldwide distributorship of a food supplement
formulation based on NutraCea's proprietary technology rights was extended to
September 17, 2006. In addition, the Technology Agreement restates certain
minimum purchase requirements under the distribution agreement and transfers all
rights to the production and distribution of certain nutraceutical products
created using NutraCea's technology. Under the terms of the agreement, NutraCea
will receive the sum of $100,000, to initially be recorded as a deposit towards
the minimum purchase requirement. Should the payor at a later date desire to
obtain certain additional
34
rights to the NutraCea technology, the payor will pay to NutraCea a lump sum
option fee of $300,000. The aforementioned payment of $100,000 towards the
minimum purchase requirement shall be deemed a deposit against the option fee to
the degree it has not been used for product purchases.
In December 2003 the Company hired a consultant to provide marketing services.
Under the terms of the agreement, the Company will issue 400,000 warrants to
purchase shares of common stock at $0.50 per share. As of December 31, 2003,
120,000 of the warrants had been exercised. The Company has entered into several
employment agreements with key employees with terms ranging from three to ten
years. Minimum future payments under these agreements at December 31, 2003 were
as follows:
Year Ending
December 31,
------------
2004 $ 263,000
2005 263,000
2006 144,250
2007 137,000
Thereafter 251,167
----------
TOTAL $1,058,417
==========
Generally, if the Company terminates these agreements without cause or the
employee resigns with good reason, as defined, the Company will pay the
employees' salaries, bonuses, and benefits payable for the remainder of the term
of the agreements.
Litigation
----------
A Complaint was filed against NTI by Millennium Integrated Services, Inc.
("MISI") in Superior Court, Sacramento County, on April 4, 2002 (Case No.
02A502006). MISI provided website development services to NTI, at a cost of
$204,405. MISI was seeking contract payment of $204,405 plus interest of
$32,031 as well as damages for alleged conversion and misappropriation of trade
secrets. Additionally, MISI has stated that it will move the court to amend its
Complaint to add a cause of action for negligent and intentional interference
with an employment agreement between MISI and one of its programmers. On April
9, 2002, MISI filed a Motion for a Writ of Attachment which would allow MISI to
seize and hold NTI assets worth $236,436 pending the resolution of the lawsuit.
On April 10, 2002, a Writ of Attachment was granted by the Court pursuant to
which MISI attached $29,666 of the Company's accounts receivable. A Settlement
Agreement and Mutual Release was executed on May 27, 2003. In consideration,
the NutraCea defendants agreed to pay MISI one hundred and forty-eight thousand
dollars ($148,000). The settlement was fully paid on July 1, 2003 and the
complaint was dismissed on August 28, 2003.
35
On July 16, 2002, the Company was summoned to answer a Complaint filed by
Faraday Financial, Inc. ("Faraday") in District Court, County of Salt Lake, Utah
(Case No. 020906477). The Complaint alleges that 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, which the Company failed to do, and demands the Company
immediately forfeit to Faraday 735,730 shares of common stock owned by the Chief
Executive Officer of the Company. 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. A Settlement
Agreement was executed on December 10, 2003. In consideration for the mutual
releases, Faraday converted 735,730 preferred into 735,730 common shares and
$90,127 of accrued preferred dividends into 1,201,692 common shares. Within the
next year, if Faraday cannot realize $551,797 and approximately $9800 in legal
expenses from the sale of the common shares, NutraCea will make up any
deficiency. If stock sale exceeds $561,597, Faraday is entitled to keep any
excess. Subsequent to December 31, 2003, the Company issued an additional
250,000 shares to Faraday. Concurrently, with the executed Settlement Agreement,
a joint stipulated motion to stay all proceedings was filed with the Court.
After all the above conditions are met, if Faraday has not lifted the stay
within 18 months of December 10,2003, NutraCea shall deliver to Faraday an
executed stipulation for dismissal with prejudice of the Complaint and
Counterclaim.
NOTE 10 - PREFERRED AND COMMON STOCK
Effective November 12, 2003 and pursuant to adoption of the Company's
"Certificate of Amendment of Restated Articles of Incorporation" dated October
27, 2003, the Company effected a reverse split of all previously issued common
stock on the basis of one-for-ten shares. Additionally, per the "Certificate of
Amendment of Restated Articles of Incorporation", the number of authorized
shares of common stock was increased from 50,000,000 to 100,000,000, and the
number of authorized shares of preferred stock was increased from 10,000,000 to
20,000,000. All share amounts reflected in the following discussion of common
stock and elsewhere in this Form 10-KSB have been adjusted to account for the
one-for-ten reverse split.
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. On
November 12, 2003, the number of authorized shares of preferred stock was
increased from 10,000,000 shares to 20,000,000 shares.
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
36
bid price of at least $1.25 per share over any 30-day trading period.
On July 7, 2003, the Company cancelled 634,121 shares of preferred stock
previously issued to a shareholder as collateral and issued 20,000 shares of
preferred stock for accrued interest totaling $8,351 on a promissory note dated
September 23, 2002.
During the year ended December 31, 2003, the Company converted 1,674,707 shares
of preferred stock to 254,323 shares of common stock valued at $1,651,860.
During the year ended December 31, 2003, the Company issued 278,766 shares of
common stock in payment of preferred stock dividends due in the amount of
$190,043.
The Company may redeem any and all outstanding shares of Series A preferred
stock. Upon the five-year anniversary of the date of issuance, the Company is
required to redeem all of its outstanding shares of Series A preferred stock at
$1 per share, plus all accrued and unpaid dividends declared. As of December
31, 2003, cumulative dividends totaled $274,540.
Common Stock
-------------
On March 4, 2002, NutraCea commenced a private placement of up to 6,666,667
units. Each unit consisted of one share of common stock and one warrant to
purchase an additional share of common stock. The units were offered at $0.65
per unit. The warrants have an exercise price of 120% of the current market
value of the Company's common stock at the time of exercise.
In connection with this offering, on March 15, 2002 NutraCea issued 153,333
shares of common stock with a detachable purchase warrant to purchase 153,333
shares of common stock at an exercise price of $1.20 per for $100,000.
During 2002, NutraCea issued 180,000 shares of common stock to consultants for
$36,000 or $.20 per share for services received.
During 2003, NutraCea issued 134,048 shares of common stock for $104,500, net of
$7,000 in related commissions.
During 2003, NutraCea issued 4,519,373 shares of common stock pursuant to the
exercise of stock options and warrants for $427,575.
During 2003, NutraCea issued 28,688 shares of common stock to various
consultants for services rendered with a fair value of $29,795.
37
On August 18, 2003, NutraCea agreed to pay a consultant for unpaid fees in the
amount of $9,236. NutraCea will pay $4,636 in monthly installments of $1,159,
payable on the first of the month beginning October 1, 2003. NutraCea also
agreed to issue 2,421 shares of common stock, valued at $4,600, to the
consultant as payment in full.
In September, 2003 NutraCea agreed to pay $38,771 of unpaid fees to a
Consultant, of which $8,771 is payable upon execution of the agreement and the
balance, $30,000, is payable in monthly installments of $2000, payable on the
first of the month beginning October 1, 2003. NutraCea also agreed to issue
73,519 shares of common stock, valued at $56,037, to the consultant as payment
in full.
On October 31, 2003, the Board of Directors approved the issuance of common
stock in lieu of compensation to the Company's Chief Operating Officer and Chief
Executive Officer. Chief Operating Officer John Howell received 72,911 shares of
common stock in lieu of $94,784 in salary and other compensation accrued for
past services; Chief Executive Officer Patricia McPeak received 402,644 shares
of common stock in lieu of $322,115 in salary and other accrued compensation for
past services. These shares of common stock were issued under the 2003 Stock
Compensation Plan.
Due to the termination of certain employees during 2003, the Company recorded a
reversal of deferred compensation totaling $243,605.
During 2003, the Company issued 3,431,251 shares of common stock, valued at
$823,119, to various parties for conversion of convertible notes payable and
accrued interest in the amount of $776,887 and $46,232, respectively.
Committed Common Stock
----------------------
At December 31, 2002, the Company was committed to issue 145,917 shares of
common stock representing $399,174 for conversion of debt and accrued interest
and $172,500 for consulting services. These shares were issued during 2003, and
no committed stock remains at year-end.
38
NOTE 11 - STOCK OPTIONS AND WARRANTS
------------------------------------
On October 31, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of the Company to execute a
registration statement under the Securities Act of 1933 for 10,000,000 shares of
common stock.
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.
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 15,500 shares of common stock. The options vest over four years in
increments of 8,000, 2,500, 2,500, and 2,500, have an exercise price of $10 per
share, and expire on January 7, 2012. The options are amortized over the vesting
periods. As of December 31, 2002, the Company recorded compensation expense and
deferred compensation totaling $48,438 and $145,312, respectively, in relation
to this transaction.
On January 10, 2002, the Company entered into a six-month consulting services
agreement for marketing services. In relation to this agreement, the Company
issued options to purchase 2,500 shares of common stock valued at $47,250 at an
exercise price of $10 per share. The options vest immediately and expire in 10
years. The Company recorded consulting expense of $47,250 in relation to this
transaction.
On February 4, 2002, the Company entered into a three-month marketing services
agreement for public relations and advertising services. In relation to this
agreement, the Company paid a retainer of $35,000 upon execution of the
agreement, issued 35,000 shares of restricted common stock valued at $47,250,
and issued options to purchase 5,000 shares of the Company's common stock valued
at $43,000 at an exercise price of $30 per share. The options vest immediately
and 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 20,000 restricted shares of common
stock valued at $90,000, and issued options to purchase 10,000 restricted shares
of common stock at $10 per share valued at $29,000, 10,000 restricted shares at
$25 per share valued at $22,000, and 10,000 restricted shares at $40 per share
valued at $18,000. The options vest immediately and expire in two years. The
Company recorded consulting expense totaling $159,000 in relation to this
transaction.
On June 10, 2002, the Company issued warrants to purchase 2,500 shares of common
stock at $0.50 per share to a consultant for consulting expenses valued at $850.
On June 19, 2002, the Company issued options to purchase 5,000 shares of common
stock at an exercise price of $10 per share to a consultant for consulting
expenses valued at $14,000. The options vest over two years and expire in 10
years.
On August 13, 2002, the Company issued options to purchase 2,800 shares of
common stock at an exercise price of $2.50 per share to a debtor. The options
vest immediately and expire in 10 years. In relation to this transaction, the
Company recorded interest expense of $5,600.
In April 2003, the Company issued warrants to purchase 1,000,000 shares of
common stock to its Chief Operating Officer in accordance with an employment
agreement dated April 15, 2003. The warrants have an exercise price of $0.001
per share and vest as follows:
39
- 250,000 on April 15, 2003
- 250,000 upon the fourth month of employment
- 250,000 upon the eighth month of employment
- 250,000 upon the twelfth month of employment
In relation to this transaction, the Company recorded deferred compensation
expense totaling $109,000. As of December 31, 2003, $34,750 of the deferred
compensation remains unamortized. In addition, because this grant as modified
due to the reverse split of November 21, 2003 must be accounted for as a
variable award, an additional $303,750 was recorded relating to this award as of
December 31, 2003.
On June 20, 2003, the Company issued warrants to purchase 32,900 shares of
common stock to a vendor as payment on accounts payable totaling $27,786. The
warrants have an exercise price of $.01 per share and expire June 18, 2008. In
addition, the Company entered into a note payable agreement with the consultant
totaling $17,000, payable at $3,000 per month beginning September 2003.
On July 31, 2003, the Company issued warrants to purchase 7,143 shares of common
stock to a vendor as payment on accounts payable totaling $5,676. The warrants
have an exercise price of $0.01 per share and expire June 12, 2008. In addition,
the Company entered into a note payable agreement with the consultant totaling
$4,000, payable at $1,000 a month beginning October 1, 2003.
During September 2003, the Company entered into a compensation agreement with a
consultant, whereby the Company will pay a total of $5,356 of unpaid fees due to
the consultant in monthly payments of $670, payable on the first of the month
beginning October 1, 2003. Per the agreement, the Company also issued warrants
valued at $7,065 to purchase 4,167 shares of common stock at an exercise price
of $.01 per share. The warrants expire on August 5, 2008.
During the six months ended June 30, 2003, the Company issued warrants to
purchase 321,285 shares of common stock at exercise prices ranging from $.01 to
$.70 per share to employees in lieu of deferred salaries totaling $150,465. The
warrants expire five years from date of issue.
During the year ended December 31, 2003, options and warrants representing
4,519,373 shares of common stock were exercised for a total value of $427,575.
During the year ended December 31, 2003 the Company issued 3,796,563 options to
various consultants for services rendered. The options have exercise prices
between $.001 and $5.00 and expire at varying times between six months and five
years. Non-cash consulting expense of $1,165,584 was recorded relating to these
agreements.
During the year ended December 31, 2003, the Company issued warrants to purchase
2,545,000 shares of common stock exercisable at $.20 per share and expiring five
years from date of issue. The warrants were issued in connection with the
conversion of $823,119 of convertible notes payable and accrued interest to
common shares of the Company, and non-cash expense of $183,855 was recorded
relating to these warrants.
Modification of Employee Awards Accounted for Under APB 25
----------------------------------------------------------
NutraCea granted 1,000,000 options in 2003 to an employee where the option
agreement contained a provision whereby the number of options nor the exercise
price would be adjusted by reverse splits. Effective November 12, 2003,
NutraCea authorized a 1 for 10 reverse split. This triggered variable
accounting for this award. As of November 12, 2003, 500,000 options had been
exercised and only 500,000 remained. Variable accounting requires any intrinsic
value at the modification date in excess of the amount measured at the original
measurement date shall be recognized as compensation cost over the remaining
future service period if the award is unvested, or immediately if the award is
vested, for any employee who could benefit from the modification. The award
vests 75% in 2003 and 25% in 2004. The award will be marked to market each
balance sheet date with the changes charged to compensation expense and
additional paid in capital. As of December 31, 2003, the additional intrinsic
value on the vested portion totaled $303,750.
Modification of Non-Employee Awards Accounted for Under FAS 123
---------------------------------------------------------------
NutraCea granted 5,725,000 warrants to outsiders in 2003 where the warrant
agreements contained a provision whereby the number of warrants nor the exercise
price would be adjusted by reverse splits. Effective November 12, 2003,
NutraCea authorized a 1 for 10 reverse split. This triggered a modification for
this award. A modification of the terms of an award that makes it more valuable
shall be treated as an exchange of the original award for a new award. In
substance, the entity repurchases the original instrument by issuing a new
instrument of greater value, incurring additional compensation cost for that
incremental value. The incremental value shall be measured by the difference
between (a) the fair value of the modified option determined in accordance with
the provisions of this section and (b) the value of the old option immediately
before its terms are modified, determined based on the shorter of (1) its
remaining expected life or (2) the expected life of the modified option. As of
December 31, 2003, the additional value totaled $9,811,002 which was recorded as
non-cash compensation expense.
40
The following table summarizes all of the Company's stock option transactions:
Employee
---------------------------------------------
Year Ended Year Ended
----------------------- --------------------
December 31, 2003 December 31, 2002
----------------------- --------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares Price Shares
---------- ---------- --------- ---------
Options Outstanding,
Beginning of Period $ 0.41 1,090,564 $ 0.31 935,564
Options Granted $ 0.11 1,371,285 $ 1.00 155,000
Options Cancelled $ (6.60) (24,361) -
Reverse Split $ (4.17) (981,503) -
Options Exercised $ (0.02) (691,285) -
---------- ---------
Options Outstanding,
End of Period $ 0.56 764,700 $ 0.41 1,090,564
========== =========
Options Exercisable,
End of Period $ 0.56 764,700 $ 0.41 1,090,564
========== =========
Consultant
---------------------------------------------
Year Ended Year Ended
----------------------- --------------------
December 31, 2003 December 31, 2002
----------------------- --------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares Price Shares
---------- ----------- --------- ---------
Options Outstanding,
Beginning of Period $ 0.90 2,096,890 $ 0.51 1,641,390
Options Granted $ 0.29 6,989,105 $ 2.16 455,500
Options Cancelled $ (5.31) (76,182) -
Reverse Split $ (8.42) (1,884,951) -
Options Exercised $ (0.12) (3,928,043) -
----------- ---------
Options Outstanding,
End of Period $ 0.98 3,196,819 $ 0.87 2,096,890
=========== =========
Options Exercisable,
End of Period $ 0.98 3,196,819 $ 0.87 2,096,890
=========== =========
41
Other information regarding stock options outstanding at December 31, 2003 is as
follows:
Options Outstanding Options Exercisable
-------------------- --------------------
Weighted Weighted
Remaining Average Average
Range of Exercise Life Number of Exercise Number of Exercise
Price (Years) Shares Price Shares Price
------------------ ---------- --------- --------- --------- ---------
$.001-1.20 .5-10 3,667,146 $ 0.40 3,367,146 $ 0.42
$2.50-10.00 1-10 269,373 $ 1.00 249,726 $ 4.66
$25.00-45.00 2 25,000 $ 32.00 25,000 $ 32.00
NOTE 12 - RELATED PARTY TRANSACTIONS
RiceX Company is a publicly owned company. The spouse of our majority
stockholder owns 10% of RiceX and is the CEO and a director of Ricex. RiceX is
our sole supplier for rice bran derivatives, which are integral to our sales
strategy and which account for about 20% of our total cost of sales.
On December 12, 2001, NutraCea agreed with RiceX to be their exclusive
distributor of rice solubles and rice bran fiber concentrate in the United
States of America and to have the exclusive rights to various patents and
trademarks owned by RiceX under a 15-year agreement. Under the terms of this
agreement, RiceX has agreed to cancel certain indebtedness by NutraCea in
exchange for 130,000 shares of Series A preferred stock and payment of $41,335
in interest, has agreed to new minimum purchase requirements, and has agreed to
extend the term of the agreement for five years, with two additional renewal
periods of five years each. The sales price to NutraCea will be the lower of
RiceX's published standard price or the price negotiated by other customers for
like quantities and products. In January 2002, NutraCea revised the 15-year
agreement with RiceX.
To maintain rights under this revised agreement, NutraCea must purchase $250,000
of product from RiceX by April 2002, $500,000 by July 2002, $750,000 by October
2002, $1,250,000 by January 2003, $1,500,000 by July 2003, $2,250,000 by January
2004, $6,000,000 by January 2005, and increasing thereafter by 10% per annum
through the remaining term of the agreement. During 2002, the Company received
notice from RiceX, stating that NutraCea was in default under the terms of this
distribution agreement with RiceX. On July 9, 2002, RiceX exercised its right to
terminate the exclusive distribution agreement and the related license
agreements with NutraCea due to NutraCea default. However, RiceX has agreed that
NutraCea has license to use the patents in its business pursuits.
42
In connection with this agreement, NutraCea must pay RiceX a royalty equal to 2%
of gross receipts received by NutraCea from the sale of any products that
incorporate any of RiceX's products, less certain selling expenses. In 2003,
NutraCea capitalized patent and license costs in the amount of $8,088 related to
these exclusive rights.
NOTE 13 - 401(K) PROFIT SHARING PLAN
Effective April 2000, NutraCea adopted a 401(k) profit sharing plan (the "Plan")
for the exclusive benefit of eligible employees and their beneficiaries.
Substantially all employees are eligible to participate in the Plan. Matching
contributions to the Plan are 3% of the employees' gross salary, not to exceed a
certain percentage. For the 2003 and 2002, the Company made matching
contributions of $12,616 and $14,696, respectively.
NOTE 14 - BUSINESS SEGMENTS
For internal reporting purposes, management segregates the Company into two
segments as follows for 2003 and 2002:
SEGMENT INFORMATION
-------------------
TWELVE MONTHS ENDED INCOME (LOSS) INTEREST TOTAL DEPRECIATION/
DECEMBER 31, 2003 NET SALES FROM OPERATIONS EXPENSE ASSETS AMORTIZATION
----------------------------------- ---------- ----------------- ---------- -------- --------------
NutraStar Technologies Incorporated $ 251,157 $ (1,946,352) $4,292,109 $482,089 $ 98,787
NutraGlo Incorporated 1,284,996 541,091 18,687 58,992 -
Unallocated corporate overhead - (6,821,743) - - -
---------- ----------------- ---------- -------- --------------
Total, NutraCea $1,536,153 $ (8,227,004) $4,310,796 $541,081 $ 98,787
========== ================= ========== ======== ==============
TWELVE MONTHS ENDED LOSS FROM INTEREST TOTAL DEPRECIATION/
DECEMBER 31, 2002 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
----------------------------------- ---------- ----------------- ---------- -------- --------------
NutraStar Technologies Incorporated $ 683,097 $ (323,082) $ 98,927 $512,307 $ 126,460
NutraGlo Incorporated 603,342 (202,459) - 54,020 -
Unallocated corporate overhead - (2.985,530) - - -
---------- ----------------- ---------- -------- --------------
Total, NutraCea $1,286,439 $ (3,106,153) $ 98,927 $566,327 $ 126,460
========== ================= ========== ======== ==============
NOTE 15 - RESTATEMENT
NutraCea has restated its Consolidated Financial Statements for 2002 to correct
a reporting error that was discovered in the fourth quarter of 2003. During
2002, NutraCea's CEO transferred personal shares of common stock to third-party
consultants as compensation for services rendered to NutraCea and to settle
certain contingencies related to the failure to file an effective registration
statement by June 30, 2002.
43
These transactions were omitted in error from the financial statements as
originally reported. This restatement increases the net loss attributable to
common shareholders and common stock by $403,906. The following table presents
the effects of the correction and restatement on a condensed basis.
FOR THE YEAR ENDED DECEMBER 31, 2002
-------------------------------------------
As previously Restatement As
reported adjustments restated
--------------- ------------ ------------
Shareholder's deficit:
Common stock $ 5,457,796 403,906 $ 5,861,702
Accumulated deficit $ (8,278,840) (403,906) $(8,682,746)
Operating expenses $ 3,188,431 403,906 $ 3,592,337
Net loss attributable to common
shareholders $ (2,950,666) (403,906) $(3,354,572)
Basic and diluted loss attributable
to common shareholders per
common share $ (1.34) (0.18) $ (1.52)
NOTE 16-SUBSEQUENT EVENTS (UNAUDITED)
On February 23 and March 19, 2004, respectively, Eliot Drell, MD and Ernie
Bodai, MD were appointed to serve on the Board of Directors until the next
annual meeting and election.
On March 25, 2004, the Company established the NutraCea Patent Incentive Plan,
which grants 15,000 shares of common stock to each named inventor on each
granted patent.
Agreements
----------
Effective January 1, 2004, the Company amended two executive employment
contracts to reflect quarterly bonuses. Under the contract, compensation shall
be $45,000 per calendar quarter, with 250,000 shares of common stock to be
granted in the event the Company achieves gross revenues of $1 million or more
for the quarter. In addition, a one-time stock grant of 550,000 shares of common
stock will be awarded for the first quarter gross revenues equal or exceed $5
million. This bonus agreement is effective until April 15, 2006, unless extended
by the board. The Company also agreed to maintain an annual bonus program for
members of the senior management group, including the Chief Executive Officer.
The Chief Executive Officer shall be eligible to receive an annual bonus under
terms otherwise governing the annual bonus program.
Effective January 1, 2004, the Company amended the stock options section of an
executive employment contract dated April 15, 2003. The amendment changed the
vesting conditions on 250,000 shares of common stock to "upon the completion of
the twelfth month of employment " instead of "upon the Company achieving two
successful calendar quarters of net profits from operations of the business of
the Company before interest, taxes, depreciation and amortization as
conclusively determined by the independent certified public accountant for the
Company".
44
On January 12, 2004, the Company entered into a one-year consulting agreement
with a sales and marketing company. Under the terms of the agreement,
compensation shall be warrants to purchase 4,000,000 shares of common stock as
follows: 300,000 shares at $.50 per share on or before January 12, 2004;
400,000 shares at $.50 per share on or before February 17, 2004; and 3,300,000
shares at $.50 per share on or before April 19, 2004. Non-cash compensation
expense of $3,200,000 was recorded relating to this agreement. All of the
warrants had been exercised at March 31, 2004.
On January 28, the Company entered into a one-year consulting agreement with a
sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 90,000 shares of common stock at an exercise price
of $.01 per share. Non-cash compensation expense of $136,800 was recorded
relating to this agreement. As of March 31, 2004, these warrants had been
exercised.
On February 2, 2004, the Company entered into a six -month consulting agreement
with a communications company. Under the terms of the agreement, compensation
shall be $2,500 per month, plus shares of common stock valued at $6,000 issued
at signing of contract. Either party may terminate the agreement with sixty
days written notice. At March 31, 2004, the shares had been issued in full.
On February 23, 2004, the Company entered into a one-year consulting agreement
with a marketing company. Under the terms of the agreement, compensation shall
be monthly issuance of shares of common stock valued at $7,500 per month. In
addition, the consultant is entitled to a 3% commission on equity or debt
financing introduced to the Company.
On March 1, 2004, the Company entered into a 90-day consulting agreement with an
advertising and promotional services company. Compensation shall be the
issuance of 100,000 shares of common stock per month.
On March 1, 2004, the Company entered into a one-year consulting agreement with
a sales and marketing company. Compensation shall be the issuance of 25,000
shares of common stock. At March 31, 2004, these shares had been issued.
Non-cash compensation expense of $35,500 was recorded relating to this
agreement.
On March 9, 2004, the Company entered into a one-year consulting agreement with
a communications company. Under the terms of the agreement, compensation shall
be issuance shares of common stock valued at $36,000. At March 31, 2004, these
shares have been issued in full.
On March 15, 2004, the Company entered into a six-month consulting agreement
with a sales and marketing company. Under the terms of the agreement,
compensation shall be warrants to purchase 400,000 shares of common stock, at an
exercise price of $.001 and warrants to purchase up to 1,000,000 shares of
common stock at an exercise price of $1.20, to be exercised within three years.
At March 31, 2004, the 400,000 warrants exercisable at $.001 had been exercised.
On March 19, 2004, the Company approved granting a one-time cash bonus of 2/3 of
normal salary to the CEO and President. The bonus amount for both executives is
$180,000, payable April 1, 2004.
On March 25, 2004, the Company entered into two, two-year consulting agreements
with two medical advisors. Under the terms of the agreement, compensation shall
be 100,000 shares of common stock each, payable in advance, and options to
purchase 100,000 shares of common stock at a price of $.50 per share for the
second year of service. The 200,000 shares of common stock are valued at
$78,920.
45
On March 25, 2004, the Company entered into a three-year consulting agreement
with a development and marketing company. Under the terms of the agreement,
compensation shall be $1 per unit (a minimum 30-day supply of NutraCea product)
for up to a total accumulated payment of $750,000, and $.50 per unit thereafter,
payable quarterly within 45 days after the end of the quarter. In addition, the
Company will issue 100,000 shares of common stock for each formulation the
company markets, and options to purchase 300,000 shares of common stock at an
exercise price of $1 per share with 100,000 options to be vested immediately and
50,000 shares per year thereafter. The vested options are valued at $39,840.
On April 2, 2004, the Company entered into a 180-day consulting agreement with a
marketing and investor relations company. The term can be extended another 180
days by mutual agreement. Under the terms of the agreement, compensation shall
be 400,000 shares of common stock, and $4,000 cash per month. Compensation
shall also include an 8% cash commission on equity or debt financing introduced
to the Company, as well as a warrant, exercisable within 3 years, for common
shares to equal 10% of the gross financing proceeds. The warrant is to be priced
at 110% of the closing bid price for the preceding 30 business days of the day
of closing, such warrant or shares to be issued at closing.
On April 29, 2004, the Company entered into a one-year consulting agreement
(with options to extend for four successive terms of one year each) with two
retired employees of the Company. Under the terms of the agreements, annual
compensation of $75,000 each is payable on a monthly basis. In addition, each
of the consultants received warrants to purchase 50,000 shares of common stock
at $.20 a share. The 100,000 warrants are valued at $91,370 and expire in 5
years. Either party can cancel this agreement with 30-day written notice.
Shareholders' Deficit
---------------------
Common Stock
During the quarter ended March 31, 2004, the Company issued 544,965 shares of
common stock to consultants for services rendered valued at $723,381. Subsequent
to March 31, 2004, the Company issued an additional 660,797 shares of common
stock to consultants for services rendered valued at $905,650.
During the quarter ended March 31, 2004, the Company issued 168,095 shares of
common stock to vendors in payment of accounts payable totaling $57,111.
Subsequent to March 31, 2004, the Company issued an additional 531 shares of
common stock to a vendor in payment of accounts payable in the amount of $833.
During the quarter ended March 31, 2004, the Company issued 6,490,711 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $2,744,507. Subsequent to March 31, 2004, the Company issued an
additional 309,445 shares of common stock pursuant to the exercise of stock
options and warrants for cash totaling $10,344.
During the quarter ended March 31, 2004, the Company issued 280,000 shares of
common stock to two consultants in settlement of contractual agreements valued
at $477,816.
During the quarter ended March 31, 2004, the Company issued 5,500,000 shares of
common stock, valued at $8,360,000, to the Company's Chief Executive Officer in
exchange for execution of a non-compete agreement and transfer to the Company of
all intellectual property owned by the Chief Executive Officer.
46
On April 1, 2004, the Company repurchased 344,956 shares of common stock valued
at $230,000 from the Chief Executive Officer of the Company pursuant to a
repurchase agreement of that date.
Stock Options and Warrants
During the quarter ended March 31, 2004, the Company issued 6,547,263 warrants
with exercise prices between $.001 and $5.00 per share to consultants. The
warrants expire at varying times between six months and five years. A total of
$7,271,060 in non-cash compensation expenses was recorded relating to the issue
of these warrants. Subsequent to March 31, 2004 the Company issued an additional
401,230 warrants with exercise prices between $.001 and $5.00 to consultants.
The warrants expire at varying times between four and five years. A total of
$443,698 in non-cash compensation expense was recorded relating to the issue of
these warrants.
47
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective October 23, 2003, Singer Lewak Greenbaum & Goldstein, LLP (the
"Predecessor Accountant") was dismissed as the independent auditors for the
Company, and Malone & Bailey, PLLC (the "Successor Accountant") was appointed as
the Company's new independent accountants. For the years ended December 31, 2001
and 2002, the Predecessor Accountant's report contained a qualification that the
financial statements were prepared on a "going concern" basis and uncertainty of
the Company to continue as a going concern but did not otherwise contain any
adverse opinion or disclaimer of opinion and was not qualified or modified as to
uncertainty, audit scope, or accounting principles. The Company's Board of
Directors approved this action on October 23, 2003.
During the years ended December 31, 2001 and 2002, and the subsequent interim
period January 1, 2003 through October 22, 2003, there were no disagreements
with the Predecessor Accountant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreement, if not resolved to the satisfaction of the Predecessor Accountant,
would have caused it to make reference to the subject matter of the disagreement
in connection with its report on the financial statements of the Company for
such period. The Predecessor Accountant has not advised the Company of any
deficiencies in the internal controls necessary to develop reliable financial
statements, that information has come to their attention which made such
Predecessor Accountants unwilling to rely on management's representations or to
be associated with the financial statements prepared by management, or that the
scope of the audit should be expanded significantly; or that information has
come to the attention of the Predecessor Accountant that materially impacts the
fairness or reliability of a previously issued audit report or the underlying
financial statements or the financial statements issued or to be issued covering
the fiscal period(s) subsequent to the date of the most recent audited financial
statements, other than what has been disclosed in note 16 to the consolidated
financial statements, other than the restatement of the 2002 audited financial
statements as disclosed in Note 15 to the consolidated financial statements for
the year ended 2003.
The Company has not previously consulted with the Successor Accountant regarding
the application of accounting principles to a specific completed or contemplated
transaction or the type of audit opinion that might be rendered on the Company's
financial statements.
ITEM 8A. CONTROLS AND PROCEDURES
The Company has adopted and implemented internal disclosure controls and
procedures designed to provide reasonable assurance that all reportable
information will be recorded, processed, summarized and reported within the time
period specified in the SEC's rules and forms. Under the supervision and with
the participation of the Company's management, including the Company's President
and Chief Executive Officer and the Company's Controller and Principal Financial
Officer, the Company has evaluated the effectiveness of the design and operation
of its disclosure controls and procedures pursuant to Exchange Act Rule
13a-15(e) as of the end of the year covered by this report. Based on that
evaluation, the President and Chief Executive Officer and the Controller and
Principal Financial Officer have concluded that these disclosure controls and
procedures are effective. There were no changes in the Company's internal
controls or in other factors during or since the end of the fiscal year covered
by this report that have had a material affect or are reasonably likely to have
a material affect on internal controls subsequent to the end of the year covered
by this report.
48
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
PATRICIA MCPEAK Ms. McPeak, 62, has been our Chairman of the Board and Chief Executive Officer since the
Chairman of the Board and Exchange Transaction with NutraStar Technologies Incorporated on December 14, 2001.
Chief Executive Officer She was the founder of NutraStar Technologies Incorporated and was the Chief Executive
Director since 2001 Officer, President and a director of NutraStar Technologies Incorporated since its formation
in February 2000. From May 1989 until February 2000 she was the President and a
director of The RiceX Company, which she co-founded. From 1981 to 1989, Ms. McPeak
was an executive officer of Brady International, Inc. a company engaged in providing
stabilized rice bran, which she also co-founded. Ms. McPeak has extensive experience in
the field of protein and ingredient production, having served as an executive in the industry
for 25 years.
JOHN HOWELL Mr. Howell, 58 was named President and a member of the Board of Directors of NutraCea
President on April 15, 2003. Prior to joining NutraCea, he served as the Executive Vice President
Director since 2003 and a member of the Board of Directors of Kingdom Ventures (OTCBB; KDMV), a
marketing company for the Christian community. From 2000 until October of 2002 he
served as Executive Vice President and remains a member of the Board of Directors of New
Visual Corporation (OTCBB:NVEI), a late development stage fabless communications
semiconductor company. From January 1998 until October 1998 Mr. Howell was Vice
President of TeraGLOBAL Communications Corp., a manufacturer of telecommunication
hardware. From 1997 to 1998 he was Chief Executive Officer of EVERSYS Corporation, a
manufacturer of computer equipment. Mr. Howell received his Bachelor's Degree from
Oregon State University in Aerospace Engineering.
49
ELIOT DRELL Dr. Drell, 51, has been Chief of Gastroenterology at Mercy Hospital, Folsom, California
Director since February 2004 since 1984. Dr. Drell's past medical appointments including acting as a Director of the
Endoscopic unit at Mercy Hospital of Folsom, California and Marshall Hospital; Chief of
Medicine at Mercy Hospital; Member of the Medical Executive Committee at both Mercy
Hospital and Marshall Hospital; and Assistant Professor at U.C. Davis Medical Center. Dr.
Drell is an active speaker and lecturer for major pharmaceutical companies.
ERNIE BODAI, M.D. Dr. Bodai, 53, is Director of Breast Surgical Services at Kaiser Permanente in Sacramento,
Director since March 2004 California. He is also Clinical Professor at the University of California at Davis, and has
authored over 250 medical articles, clinical guidelines for practitioners and a surgical
textbook. He holds a number of medical device patents, is a member of numerous
prestigious surgical societies and is the recipient of many prominent national awards.
EDWARD G. NEWTON Mr. Newton, 67, has been NutraCea's Secretary and Vice President-Sales since the
Vice President and Exchange Transaction with NutraStar Technologies Incorporated on December 14, 2001.
Secretary He has been the Vice President-Sales and a director of NutraStar Technologies
Incorporated since its formation in February 2000 and the Secretary of NutraStar
Technologies Incorporated since October 2000. Mr. Newton resigned as a Director of
NutraCea in 2003. From 1996 to February 2000, Mr. Newton served as Director of Sales
for RiceX. Prior to February 2000, Mr. Newton worked in various sales and management
capacities for General Mills, an international consumer foods company. His positions at
General Mills included Purchasing Director of Ingredients from 1974 to 1977, Director of
Personnel and Sales Training from 1977 to 1986, and Manager of Military Sales from 1986
to 1993.
JOANNA HOOVER Ms. Hoover, 54, joined NutraCea as acting Chief Financial Officer in October 2003. From
Chief Financial 2000 until the present Ms. Hoover has also served as the Chief Financial Officers of ITIS
Officer Holdings, Inc., a public company engaged in providing database management services to
attorneys for research and litigation support. Ms. Hoover is a certified public accountant
and from 1973 to 2000 was engaged in public accounting. From 1985 until 2000 she was a
partner in the accounting firm of Nommensen, Hoover & Williams.
DR. RUKMINI CHERUVANKY Dr. Cheruvanky, 68, became NutraCea's Chief Science Officer on February 1, 2002 and
Chief Science Officer was the Chief Science Officer of NutraStar Technologies Incorporated from March 2000.
Prior to joining NutraStar Technologies Incorporated, she served as the Director of
Research and Development for The RiceX Company from April 1996 until March 2000.
From January 1996 to April 1996, Dr. Cheruvanky served as the Laboratory Supervisor for
Certified Analytical Laboratories, a company specializing in food analysis. From
November 1994 until December 1995, she was a Research Chemist in the Research and
Development Department of DuPont Merck Pharmaceutical Company. From May 1967
until she retired in February 1994, Dr. Cheruvanky was the Deputy Director of the National
Institute of Nutrition located in Hyderabad, India, heading the Food Toxicology and
Environmental Carcinogenic Division of the Institute. Dr. Cheruvanky is a Fellow of the
American College of Nutrition and has more than 80 peer-reviewed scientific publications
to her credit.
50
DR. REDDY SASTRY V. Dr. Cherukuri, 67, has been the Director of Science and Technology for NutraStar
CHERUKURI Technologies Incorporated, a subsidiary of NutraCea, since March 2000. Prior to joining
Director of Science and NutraStar Technologies Incorporated, he served as the Director of Science and Technology
Technology of The RiceX Company from April 1996 to March 2000. From May 1995 to April 1996,
Dr. Cherukuri served as a Laboratory Supervisor at Customs Coatings, Inc., a
pharmaceutical company. From December 1994 to January 1995, he was a chemist at
DuPont Merck Pharmaceutical Company. From May 1992 to November 1994, Dr.
Cherukuri was a consultant to several pharmaceutical companies in India. From 1967 to
1992 he held several positions with the Indian Drugs and Pharmaceutical, Ltd., a premier
drugs and pharmaceuticals manufacturing company under the federal government of India,
retiring as the Senior Research Manager, Chief of Medicinal Chemistry and Group Leader
of New Drug Development division of the company. Dr. Cherukuri has served as a member
of several scientific boards and as a reviewer for several scientific journals and has more
than 75 peer-reviewed scientific publications and 12 patents to his credit.
The current Directors will serve and hold office until the next annual
shareholders' meeting or until their respective successors have been duly
elected and qualified. Our executive officers are appointed by the Board of
Directors and serve at the discretion of the Board.
FAMILY RELATIONSHIPS
There are no family relationships between any director or executive officer.
AUDIT COMMITTEE FINANCIAL EXPERT
NutraCea does not currently have an audit committee, nor an audit committee
financial expert. The Board of Directors during the year ended December 31, 2003
consisted entirely of members of the management of the company. Because of the
size of the Company's Board of Directors, and lack of director and officer
liability insurance, the Company was not able to attract qualified individuals
to serve on its Board of Directors. All of the functions of the Audit
Committee, Compensation Committee and Nominating Committee are performed by the
Board of Directors as a whole. Management intends to form an audit committee in
2004 if sufficient directors agree to serve on the Board of Directors, and will
attempt to attract a qualified financial expert to serve on the committee.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the
Company's executive officers and directors, and persons who own more than 10% of
the Company's common stock to file reports of ownership on Form 3 and changes in
ownership on Form 4 with the Securities and Exchange Commission (the "SEC").
Such executive officers, directors and 10% stockholders are also required by SEC
rules to furnish the Company with copies of all Section 16(a) forms they file.
The following table contains information relating to the number of reports that
were not timely filed during the year ended December 31, 2003 by the officers
and directors of the Company.
51
-----------------------------------------------------------------------------
OFFICER OR DIRECTOR REPORTS TRANSACTIONS NOT REPORTED TIMELY
NOT FILED
TIMELY
--------------------------- --------- -------------------------------------
--------------------------- --------- -------------------------------------
Patricia McPeak Form 3 Initial Ownership
Form 4 Grant of Employment Options
Form 4 Issuance of Shares in Lieu of Salary
Form 5 Annual Reconciliation of Transactions
--------------------------- --------- -------------------------------------
John Howell Form 3 Initial Ownership
Form 4 Grant of Employment Options
Form 4 Exercise of Employment Options
Form 4 Issuance of Shares in Lieu of Salary
Form 4 Issuance of Shares in Lieu of Bonus
Form 5 Annual Reconciliation of Transactions
--------------------------- --------- -------------------------------------
Edward Newton Form 3 Initial Ownership
Form 4 Grant of Employment Options
Form 4 Exercise of Employment Options
Form 4 Issuance of Shares in Lieu of Salary
Form 5 Annual Reconciliation of Transactions
-----------------------------------------------------------------------------
CODE OF ETHICS
NutraCea is currently developing an Executive Code of Ethics to be applied to
our Chief Executive Officer, Chief Financial Officer, Controller and other
members of our management team. The Board of Directors has not completed a
review of the best practices relating to the adoption of Codes of Ethics or
acted to adopt the Code of Ethics proposed by members of management. When
adopted, the code will be available for viewing on our Website,
www.nutracea.com. Upon request, a copy of the code of ethics will be provided
without charge upon written request to NutraCea, 1261 Hawk's Flight Court, El
Dorado Hills, CA 95762.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the aggregate compensation paid
or accrued by the Company during each of the last three fiscal years to or for
(i) any individual that held the office of Chief Executive Officer during the
year ended December 31, 2003 and (ii) each of the other four highest compensated
executive officers, each of whom received compensation in excess of $100,000
during the year ended December 31, 2003 (the "Named Executive Officers").
52
SUMMARY COMPENSATION TABLE
FOR YEARS ENDED DECEMBER 31, 2003 AND 2002
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------- ----------------------------
AWARDS PAYOUTS
------------------ --------
OTHER RESTRICTED SECURITIES ALL
NAME AND PRINCIPAL ANNUAL STOCK UNDERLYING LTIP OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
------------------------- ------ ----------- ----------- ------------- ------- --------- -------- -------------
Patricia McPeak 2003 $ 150,000 $ 100,000 $ 12,000 $ - - $ - $ -
Chief Executive Officer 2002 $ 150,000 $ 100,000 $ 12,000 $ - - $ - $ -
2001 $ 241,667 $ 8,333 $ 12,000 $ - 28,820 $ - $ -
John Howell 2003 $ 120,000 $ 101,284 $ 6,000 $ - 1,000,000 $ - $ -
President 2002 $ - $ - $ - $ - - $ - $ -
2001 $ - $ - $ - $ - - $ - $ -
Edward G. Newton 2003 $ 100,000 $ - $ - $ - 50,000 $ - $ -
Vice President and 2002 $ 100,000 $ - $ - $ - - $ - $ -
Secretary 2001 $ 100,000 $ - $ - $ - 304,124 $ - $ -
Stock Options and Stock Appreciation Rights
NutraCea adopted the 2003 Stock Compensation Plan (the "Plan") on October 31,
2003. Under the terms of the Plan, NutraCea may grant up to 10,000,000
warrants, options, restricted common or preferred stock, or unrestricted common
or preferred stock to officers, directors, employees or consultants providing
services to the Company on such terms as are determined by the Board of
Directors. The Plan provides that the Board of Directors may also permit
officers, directors, employees or consultants to have their bonuses and/or
consulting fees payable in warrants, restricted common, unrestricted common and
other awards, or any combination thereof. In addition, NutraCea has granted
options to certain officers, directors and employees outside of the Plan.
The following table summarizes the options granted by the Company to its Named
Executive Officers during the year ended December 31, 2003. None of the options
granted to the Named Executive Officers during the year ended December 31, 2003
were granted pursuant to the Plan.
POTENTIAL REALIZABLE VALUE
AT
ASSUMED ANNUAL RATES OF
STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
--------------------------------------------- ----------------------
% OF TOTAL EXERCISE
OPTIONS PRICE
OPTIONS GRANTED TO PER EXPIRATION
NAME GRANTED EMPLOYEES SHARE DATE 5% 10%
---------------- --------- ----------- --------- ---------- --------- -----------
Patricia McPeak -0- - - - - -
John Howell 1,000,000 76% $ .001 4/15/13 $740,333 $1,178,856
Edward G. Newton 50,000 4% $ .01 6/16/08 $ 57,433 $ 72,473
The following table sets forth information regarding the stock options held by
the Named Executive Officers as of December 31, 2003.
53
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2003
AND FY-END OPTION VALUES
SHARES VALUE OF UNEXERCISED IN-
ACQUIRED VALUE NUMBER OF UNEXERCISED THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED OPTIONS AT 12/31/03 12/31/03
---------------- ----------- --------- ------------------------- -------------------------
exercisable/unexercisable exercisable/unexercisable
Patricia McPeak -0- - 1,729/1,253 0/0
John Howell 500,000 $ 454,500 0/500,000 0/$454,500
Edward G. Newton 50,000 $ 45,000 0/0 0/0
COMPENSATION OF DIRECTORS
NutraCea does not presently provide compensation to its directors in such
capacity.
EMPLOYMENT AGREEMENTS
Patricia McPeak has an employment contract with NutraStar Technologies
Incorporated that was assigned to and assumed by NutraCea (the "McPeak
Employment Agreement"). The McPeak Employment Agreement provides for the
payment of an annual base salary of $150,000, which will increase to $500,000
when NutraCea achieves $25 million in annual gross sales or its Common Stock is
publicly traded and has a sales price of at least $25 per share for 90
consecutive days, and to $1 million when NutraCea achieves $50 million in annual
gross sales. Ms. McPeak also will be entitled to quarterly bonuses of $25,000
upon achievement of certain benchmarks that will be set and determined by
NutraCea's Board of Directors. The agreement provides that Ms. McPeak will be
allowed to participate in NutraCea's stock bonus plans, and that NutraCea will
provide Ms. McPeak with medical benefits, additional executive level benefits,
and an annual automobile allowance of $12,000. NutraCea may terminate the
agreement on 30 days' prior notice, but will remain liable for all base salary,
bonus, and benefits obligations throughout the remaining term of the agreement.
The McPeak Employment Agreement expires on October 31, 2009.
In April 2003, the Company entered into a three-year employment agreement with
John Howell, whereby the Company is to pay the Mr. Howell 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 dependent upon
certain reductions in monthly operation costs or conversion of debt into equity.
The agreement also provides that Mr. Howell 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, Mr. Howell was issued warrants to purchase
1,000,000 shares of the Company's common stock.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of the Company's Common
Stock beneficially owned as of December 31, 2003 by, (i) each executive officer
and director of the Company; (ii) all executive officers and directors of the
Company as a group; and (iii) owners of more than 5% of the Company's Common
Stock.
54
-----------------------------------------------------------------------------
NAME AND ADDRESS OF POSITION NUMBER OF SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY
------------------------------ ---------------- ----------------- --------
Patricia McPeak Chairman and CEO 4,262,777(1) 36.2%
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
------------------------------ ---------------- ----------------- --------
John Howell President 1,077,911(2) 9.2%
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
------------------------------ ---------------- ----------------- --------
Edward Newton Vice President, 50,000 *
1261 Hawk's Flight Court Secretary
El Dorado Hills, CA 95762
------------------------------ ---------------- ----------------- --------
Joanna Hoover Chief -0- *
10750 Hammerly Financial
Houston, Texas 77043 Officer
------------------------------ ---------------- ----------------- --------
All officers and directors as 5,390,688(3) 46.0%
a group (6 individuals)
-----------------------------------------------------------------------------
*Less than 1%
________________________
(1) Dorothy Hanks, Ms. McPeak's mother, owns 215,600 shares of NutraCea's
common stock, of which Ms. McPeak disclaims any beneficial ownership.
(2) Includes 250,000 shares issuable under options or warrants exercisable
within 60 days of December 31, 2003.
(3) Includes 250,000 shares issuable under options or warrants exercisable
within 60 days of December 31, 2003
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DISTRIBUTION AGREEMENT WITH THE RICEX COMPANY
The RiceX Company ("RiceX") is our principal supplier of stabilized rice bran
products. Patricia McPeak, Chief Executive Officer, Chairman of the Board of
Directors and our principal shareholder, is a co-founder, a principal
shareholder, and the former President and a former director of RiceX. Daniel L.
McPeak, her husband, is a co-founder, the current Chairman of the Board and
Chief Executive Officer, a director, and a principal shareholder of RiceX.
During the year ended December 31, 2002, NutraCea purchased $441,739 in products
from RiceX, which represented 8% of all sales of rice bran and rice bran
products by RiceX. Purchases during the year ended December 31, 2003 totaled
$173,647 and represented 5% of total sales by RiceX. All such purchases were
either pursuant to the terms of the contract described below or were at standard
prices established by RiceX.
55
On December 12, 2001, NutraStar Technologies Incorporated entered 15-year
agreement with RiceX to be the exclusive distributor of rice solubles and rice
bran fiber concentrate in the United States and to have the exclusive rights to
various patents and trademarks owned by RiceX. The exclusive distribution of
rice bran and rice bran products was terminated during fiscal 2003 as a result
of the failure of NutraCea to meet certain minimum purchase requirements.
However, the provisions relating to the patents and trademarks continue to be in
force. Under the terms of this agreement, NutraCea will pay RiceX a royalty
equal to 2% of gross receipts received by NutraCea from the sale of products
that incorporate any RiceX products, less selling expenses. NutraCea paid RiceX
no royalties during the year ended December 31, 2003 and 2002.
LOANS FROM OFFICER AND RELATED PARTIES
At December 31, 2002, the Company owed Ms. Patricia McPeak, Chief Executive
Officer of NutraCea, $175,800 on a demand note payable bearing interest at 10%.
The Company executed an additional demand note payable in the amount of $20,422,
bearing interest at 10%, to the Chief Executive Officer during 2003.
Additionally the Chief Executive Office and a related party made short-term
advances to the Company amounting to $210,000 during the year. All of this debt
was repaid prior to December 31, 2003. Cash payments retired $258,335 of the
debt, while $147,887 was retired by conversion to 344,956 shares of common
stock.
The Company also executed notes payable in June and September 2003 in the amount
of $50,000 and $40,000, respectively, to a greater than 5% shareholder. The
notes were convertible at the option of the holder into shares of the Company's
common stock at a conversion price of $.20 per share, bearing interest at 10%
per annum and due in June and September 2004, respectively. Upon conversion of
the notes payable, the holder will be entitled to receive one warrant to
purchase common stock for each common share issued. The warrant will have an
exercise price of $.20 per share and will expire one year from the date of
issuance. In November 2003 the holder exercised the conversion option and
451,517 shares of common stock were issued in full satisfaction of the debt.
There was no outstanding debt due to related parties at December 31, 2003.
LEASE WITH RICEX
NutraCea leases its principal office space from RiceX pursuant to a five-year
sublease agreement that expires September 30, 2006. Current monthly lease
payments are $5,358. Management believes the terms of this sublease are at
least as favorable as terms that could have been obtained from an unaffiliated
third party.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2(1) Plan and Agreement of Exchange.
Exhibit 3.1(2) Restated Articles of Incorporation filed March 28, 2001.
Exhibit 3.2(2) Bylaws
Exhibit 3.3(5) Restated and Amended Articles of Incorporation dated
December 11, 2001.
Exhibit 3.4(6) Certificate of Amendment of Restated Articles of
Amendment
56
Exhibit 10.1(5) Executive Employment Agreement between NutraCea and
Patricia McPeak.
Exhibit 10.2(5) Executive Employment Agreement for Edward Newton.
Exhibit 10.3(7) 2003 Stock Compensation Plan
Exhibit 16.1(3) Letter on change in certifying accountant dated March
13, 2002.
Exhibit 16.2(4) Updated letter on change in certifying accountant dated
March 25, 2002.
Exhibit 16.3(4) Letter on change in certifying accountant dated March
21, 2002.
Exhibit 16.4(8) Letter on change in certifying accountant dated October
28, 2003.
Exhibit 31.1 Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act
of 2002.
Exhibit 31.2 Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification by CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
_______________________________
(1) Incorporated by reference to exhibits previously filed on Form 8-K filed on
November 19, 2001.
(2) Incorporated by reference to exhibits previously filed on Form 10-SB filed
on April 19, 2001.
(3) Incorporated by reference to exhibits previously filed on Form 8-K filed on
March 14, 2002.
(4) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on March 25, 2001.
(5) Incorporated by reference to exhibits previously filed on Form 10-KSB filed
on April 16, 2002.
(6) Incorporated by reference to exhibits previously filed on Form 10-QSB filed
on November 18, 2003
(7) Incorporated by reference to exhibits previously filed on Form S-8 filed
November 19, 2003.
(8) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on November 7, 2003.
(b) Reports on Form 8-K filed during the quarter ended December 31, 2003:
Form 8-K filed on October 24, 2003 and Form 8-K/A filed on November 7,
2003, reporting under Item 4, the change in our certifying accountant
from Singer Lewak Greenbaum & Goldstein LLP to Malone & Bailey, PLLC.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by the Company's
independent public accountants for the audit of the Company's financial
statements for the fiscal year ended December 31, 2003 and 2002 and for the
review of the financial statements included in the Company's Quarterly Reports
on Form 10-Q for those fiscal years were $31,554 and $59,077, respectively.
Audit-Related Fees
There were no fees billed for other audit-related services rendered by the
Company's independent public accountants for the fiscal years ended December 31,
2003 and 2002.
Tax Fees
The aggregate fees billed for tax services rendered by the Company's independent
public accountants for the fiscal years ended December 31, 2003 and 2002 were
$5,901 and $5,041, respectively.
57
All Other Fees
The aggregate of all other fees billed for services rendered by the Company's
independent public accounts for the fiscal years ended December 31, 2003 and
2002 amounted to $9,159 and $3,202, respectively. These fees related to the
preparation and review of a registration statement and general accounting
assistance.
As stated elsewhere in this report, the Company does not have a separate Audit
Committee. All of the functions of the Audit Committee are performed by the
Board of Directors as a whole, including the review and authorization of all
non-audit fees incurred by the Company. All of the non-audit fees incurred by
the Company were authorized by the Board of Directors.
58
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NUTRACEA
Date: May 19, 2004 By /s/ Patricia McPeak
----------------------
Patricia McPeak
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Patricia McPeak
-------------------------
Patricia McPeak Director, Chairman of the
Board and Chief Executive
Officer May 19, 2004
/s/John Howell
-------------------------
John Howell Director and President May 19, 2004
/s/Eliot Drell Director May 19, 2004
-------------------------
Eliot Drell
/s/Ernie Bodai Director May 19, 2004
-------------------------
Ernie Bodai
/s/ Edward G. Newton
-------------------------
Edward G. Newton Secretary May 19, 2004
/s/ Joanna Hoover
-------------------------
Joanna Hoover Chief Financial Officer May 19, 2004
(Principal Financial and Accounting Officer)
59
Exhibit Index
Exhibit 2(1) Plan and Agreement of Exchange.
Exhibit 3.1(2) Restated Articles of Incorporation filed March 28, 2001.
Exhibit 3.2(2) Bylaws
Exhibit 3.3(5) Restated and Amended Articles of Incorporation dated
December 11, 2001.
Exhibit 3.4(6) Certificate of Amendment of Restated Articles of
Amendment
Exhibit 10.1(5) Executive Employment Agreement between NutraCea and
Patricia McPeak.
Exhibit 10.2(5) Executive Employment Agreement for Edward Newton.
Exhibit 10.3(7) 2003 Stock Compensation Plan
Exhibit 16.1(3) Letter on change in certifying accountant dated March
13, 2002.
Exhibit 16.2(4) Updated letter on change in certifying accountant dated
March 25, 2002.
Exhibit 16.3(4) Letter on change in certifying accountant dated March
21, 2002.
Exhibit 16.4(8) Letter on change in certifying accountant dated October
28, 2003.
Exhibit 31.1 Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification by CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
_______________________________
(1) Incorporated by reference to exhibits previously filed on Form 8-K filed on
November 19, 2001.
(2) Incorporated by reference to exhibits previously filed on Form 10-SB filed
on April 19, 2001.
(3) Incorporated by reference to exhibits previously filed on Form 8-K filed on
March 14, 2002.
(4) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on March 25, 2001.
(5) Incorporated by reference to exhibits previously filed on Form 10-KSB filed
on April 16, 2002.
(6) Incorporated by reference to exhibits previously filed on Form 10-QSB filed
on November 18, 2003
(7) Incorporated by reference to exhibits previously filed on Form S-8 filed
November 19, 2003.
(8) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on November 7, 2003.