UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
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NUTRACEA
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(Exact name of small business issuer as specified in its charter)
CALIFORNIA 87-0673375
---------------------------------------- --------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1261 Hawk's Flight Court 95762
El Dorado Hills, California
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(Address of Principal Executive Offices) (Zip Code)
Issuer's telephone number: (916) 933-7000
--------------
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes X No
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The number of shares of the issuer's common stock outstanding as of November 12,
2004 was 34,332,887.
Transitional Small Business Disclosure Format (Check One): Yes No X
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INDEX
Page
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PART I - FINANCIAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 3. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . . . 17
PART II - OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 19
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES. . . . . . . . . . . . . . . . . 19
ITEM 5. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . . . 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRACEA
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 2004 (Unaudited) . . . . . . . 3
Consolidated Statements of Operations for the nine and three months ended
September 30, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Comprehensive Loss for the nine and three months
ended September 30, 2004 and 2003 (unaudited) . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . . . . 6
Notes to Unaudited Consolidated Financial Statements . . . . . . . . . . . . 7
2
NUTRACEA
AND SUBSIDIARIES
Consolidated Balance Sheet
September 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 377,035
Accounts receivable-trade 113,808
Marketable Securities 356,167
Inventory, net 183,632
Prepaid expenses 37,991
-------------
Total current assets 1,068,633
RESTRICTED MARKETABLE SECURITIES 356,167
EQUIPMENT, net 44,526
PATENTS AND TRADEMARKS, net 331,905
GOODWILL 250,001
-------------
TOTAL ASSETS $ 2,051,232
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 224,699
Accrued expenses 47,390
Due to related parties 8,810
Customer deposits 106,486
Convertible, manditorily redeemable series A preferred stock,
no par value, $1 stated value, 20,000,000 shares authorized,
130,000 shares issued and outstanding 150,473
-------------
Total current liabilities 537,858
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value, 100,000,000 shares authorized,
34,332,887 shares issued and outstanding 45,851,881
Deferred compensation (19,943)
Accumulated deficit (42,650,898)
Accumulated other comprehensive income,
unrealized loss on marketable securities (1,667,666)
-------------
Total shareholders' equity 1,513,374
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,051,232
=============
3
NUTRACEA
AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------ ------------ -----------
(Restated) (Restated)
REVENUES
Net sales $ 662,910 $ 1,206,652 $ 249,840 $ 631,220
COST OF GOODS SOLD 396,494 634,973 165,069 311,853
------------- ------------ ------------ -----------
GROSS PROFIT 266,416 571,679 84,771 319,367
OPERATING EXPENSES 21,567,575 2,434,722 1,169,691 1,136,365
------------- ------------ ------------ -----------
LOSS FROM OPERATIONS (21,301,159) (1,863,043) (1,084,920) (816,998)
------------- ------------ ------------ -----------
OTHER INCOME (EXPENSE)
Interest income 4,084 - 1,027 -
Interest expense (495) (65,874) - (25,997)
------------- ------------ ------------ -----------
Total other income (expense) 3,589 (65,874) 1,027 (25,997)
------------- ------------ ------------ -----------
NET LOSS (21,297,570) (1,928,917) (1,083,893) (842,995)
CUMULATIVE PREFERRED
DIVIDEND (8,373) (108,489) - (33,425)
------------- ------------ ------------ -----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(21,305,943) $(2,037,406) $(1,083,893) $ (876,420)
============= ============ ============ ===========
BASIC AND DILUTED LOSS
AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ (1.12) $ (0.78) $ (0.04) $ (0.31)
============= ============ ============ ===========
BASIC AND DILUTED WEIGHTED-
AVERAGE SHARES
OUTSTANDING 18,946,026 2,621,932 26,537,529 2,820,568
============= ============ ============ ===========
4
NUTRACEA
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(unaudited)
Nine Months Ended Three Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------- ------------ ------------ -------------
(Restated) (Restated)
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (21,305,943) $(2,037,406) $(1,083,893) $ (876,420)
OTHER COMPREHENSIVE LOSS
Unrealized loss on marketable
securities (1,667,666) - (1,667,666) -
---------------------------------------------------------
NET AND COMPREHENSIVE LOSS $ (22,973,609) $(2,037,406) $(2,751,559) $ (876,420)
=========================================================
5
NUTRACEA
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(unaudited)
Nine months ended
September 30,
2004 2003
------------- ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(21,297,570) $(1,928,917)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 24,167 94,085
Amortization of deferred compensation 53,659 104,437
Non-cash issuances of stock options and warrants 7,782,515 218,105
Non-cash issuances of stock as compensation 11,627,484 795,790
(Increase) decrease in
Accounts receivable (83,355) 2,861
Inventory (112,738) 747
Prepaid expenses (23,134) 23,121
Accounts payable (21,711) (28,781)
Accrued salaries and benefits (37,130) (14,493)
Deferred compensation (47,842) 63,870
Accrued expenses 10,025 243,153
Customer deposits 5,000 7,170
Due to related parties (9,578) (26,457)
------------- ------------
Net cash used in operating activities (2,130,208) (445,309)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (35,110) (13,580)
Purchase of patents and trademarks (51,534) (13,734)
------------- ------------
Net cash used in investing activities (86,644) (27,314)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on notes payable - (55,000)
Proceeds from notes payable - 414,000
Proceeds from notes payable - related parties - 320,422
Payments on notes payable - related parties - (210,000)
Proceeds from issuance of common stock - 104,500
Proceeds from exercise of stock options 2,771,868 3,034
Common stock repurchase (230,000) -
Payment of preferred dividends (48,004) -
------------- ------------
Net cash provided by financing activities 2,493,864 576,956
------------- ------------
Net increase in cash 277,012 104,333
CASH, BEGINNING OF PERIOD 100,023 34,718
------------- ------------
CASH, END OF PERIOD $ 377,035 $ 139,051
============= ============
SUPPLEMENTAL AND NON-CASH DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ - $ 4,378
6
NUTRACEA AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of NutraCea
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission ("SEC"), and should be read in conjunction with the audited financial
statements and notes thereto contained in NutraCea's Annual Report filed with
the SEC on Form 10-KSB. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the financial statements that would substantially duplicate
the disclosure contained in the audited financial statements for 2003 as
reported in the 10-KSB have been omitted.
NOTE 2-RESTATEMENT:
NutraCea has restated its Consolidated Financial Statements for the third
quarter of 2003 to correct an error in valuation of stock-based compensation.
This restatement increased operating expenses and the net loss attributable to
common shareholders by $853,395 and $479,495, respectively, for the nine months
and three months ended September 30, 2003.
The following table presents the effects of the correction and restatement on a
condensed basis.
Nine months ended Three months ended
September 30, 2003 September 30, 2003
------------------------------------------- ------------------------------------------
As previously Restatement As As previously Restatement As
reported adjustments restated reported adjustments restated
--------------- ------------ ------------ --------------- ------------ -----------
Operating expenses $ 1,581,327 853,395 $ 2,434,722 $ 656,870 479,495 $1,136,365
Net loss available to common
shareholders $ (1,184,011) (853,395) $(2,037,406) $ (396,925) (479,495) $ (876,420)
Basic and diluted loss available
to common shareholders per
share $ (0.45) (0.33) $ (0.78) $ (0.14) (0.17) $ (0.31)
NOTE 3-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.
7
For the nine months For the three months
ended September 30, ended September 30,
2004 2003 2004 2003
------------- ------------ ------------ ------------
(Restated) (Restated)
Net loss available
to common shareholders:
As reported: $(21,305,943) $(2,037,406) $(1,083,893) $ (876,420)
Add: compensation expense
charged to income: 7,782,515 1,133,109 21,000 722,350
Less: proforma compensation
expense: (7,784,542) (1,138,841) (23,027) (724,192)
------------- ------------ ------------ ------------
Proforma net loss available
to common shareholders: $(21,307,970) $(2,043,138) $(1,085,920) $ (878,262)
============= ============ ============ ============
Basic loss per common share:
As reported: $ (1.12) $ (0.78) $ (0.04) $ (0.31)
Proforma: $ (1.12) $ (0.78) $ (0.04) $ (0.31)
NOTE 4- MARKETABLE SECURITIES
On September 8, 2004, NutraCea purchased 1,272,026 shares of Langley Park
Investment Trust, PLC, a United Kingdom closed-end mutual fund that is actively
traded on a London exchange. Per the Stock Purchase Agreement, NutraCea paid
with 7,000,000 shares of its own common stock.
Per the Agreement, NutraCea may sell 636,013 shares of Langley at any time, and
the remaining 636,013 shares of Langley and the 7,000,000 shares of NutraCea are
escrowed together for a 2-year period. At the end of the period, Langley's
NutraCea shares are measured for any loss in market value and if so, NutraCea
must give up that pro-rata portion of its Langley shares up to the escrowed
636,013 shares.
As of September 30, 2004, the NutraCea shares have not lost any value. However,
the Langley shares are marked down to their fair market value of $712,334, with
one-half or $356,167 shown as a current asset because they may be sold at any
time, and the other one-half shown as long-term because they are held in escrow
pending the 2-year review of NutraCea's stock valuation.
Any unrealized holding gains and losses on the marketable securities are
excluded from operating results and are recognized as other comprehensive
income. The fair value of the securities is determined based on prevailing
market prices.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Agreements
----------
For all agreements where stock is awarded as partial or full consideration, the
expense is valued at the fair value of the stock. Expense for stock options and
warrants issued to consultants is calculated at fair value using the
Black-Scholes valuation method.
Effective January 1, 2004, NutraCea 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 NutraCea 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.
NutraCea 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, NutraCea 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".
On January 12, 2004, NutraCea 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
$3,911,886 was recorded relating to this agreement. All of the warrants had been
exercised at March 31, 2004.
On January 28, 2004, NutraCea entered into a one-year consulting agreement with
a sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to
8
purchase 90,000 shares of common stock at an exercise price of $.01 per share.
Non-cash compensation expense of $137,158 was recorded relating to this
agreement. As of March 31, 2004, these warrants had been exercised.
On February 2, 2004, NutraCea 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, NutraCea 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 NutraCea.
On March 1, 2004, NutraCea entered into a 90-day consulting agreement with a
financial relations company. Compensation shall be the issuance of 100,000
shares of common stock per month. As of March 31, 2004, 100,000 shares valued
at $142,000 had been issued to the consultant.
On March 1, 2004, NutraCea 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, NutraCea entered into a one-year consulting agreement with a
communications company. Under the terms of the agreement, compensation shall be
issuance of shares of common stock valued at $36,000. At March 31, 2004, these
shares have been issued in full.
On March 15, 2004, NutraCea 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. Non-cash
compensation expense of $2,149,598 was recorded relating to this agreement.
On March 19, 2004, NutraCea 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, NutraCea 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
$286,000, and the options are valued at $107,684. Expense for these amounts was
recorded in April 2004 when the shares and options were issued.
On March 25, 2004, NutraCea 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,
NutraCea will issue 100,000 shares of common stock for each probiotic
formulation NutraCea markets, and options to purchase 300,000 shares of common
stock at an
9
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 $102,782.
On April 2, 2004, NutraCea 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 NutraCea, 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, NutraCea entered into a one-year consulting agreement (with
options to extend for four successive terms of one year each) with two retired
employees of NutraCea. Under the terms of the agreements, annual compensation of
$70,000 and $80,000 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.
On April 15, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing consultant. Under the terms of the agreement, compensation
shall be warrants to purchase 50,000 shares of common stock at $.80 per share
upon the completion of certain benchmarks. The warrants are valued at $46,758
and expire in 3 years.
On June 2, 2004, NutraCea entered into two consulting agreements with sales and
marketing consultants. Under the terms of the agreements, each consultant shall
be issued 150,000 restricted shares of common stock, valued at $161,500. The
agreement calls for these shares to be included in the next registration
statement filed.
On July 14, 2004, NutraCea entered into a six-month consulting agreement with a
business consultant to provide NutraCea with consulting services and advice
pertaining to NutraCea's business affairs. Compensation shall be $12,000 payable
in cash monthly. In addition, should the consultant provide assistance to
NutraCea in the raising of capital either in the form of equity or debt,
NutraCea agrees to pay an additional future bonus or fee, which the consultant
will receive based on the efforts expended and results obtained.
On August 1, 2004, NutraCea entered in a 90-day Independent Contractor Agreement
with a contractor to prepare reports regarding investor relations, prepare
advertising and marketing materials, and prepare press releases. Compensation
shall be $12,000 payable in cash monthly.
On September 2, 2004, NutraCea entered into a 90-day consulting agreement with a
securities firm to serve as NutraCea's investment advisor regarding acquisitions
or similar corporate transactions and to provide assistance and advice with
respect to raising capital required to consummate an acquisition or similar
corporate transaction. A non-reimbursable initial fee of $50,000, to be credited
again Phase I fees, was paid at execution of the agreement. Services shall be
rendered as Phase I and Phase II services and shall be compensated as follows.
Phase I services: A fee of two percent of the total value of a target
acquisition to be paid simultaneously with the closing of the acquisition
or similar corporate transaction, to be paid 50% in cash and 50% in newly
issued stock by NutraCea based on the closing values of the transaction on
that day.
10
Phase II services: A cash fee of ten percent of the total amount of capital
raised pursuant to sources introduced to NutraCea by the consultant. In the
event NutraCea shall issue any equity or convertible securities to raise
capital in connection with an acquisition or similar corporate transaction,
NutraCea shall issue warrants for ten percent of the total amount of
securities issued. The warrants shall have an exercise price equal to one
hundred and twenty percent (120%) of the per share equity valuation
established in the capital raising transaction, but in no case less than
100% of the market value of the shares on the date of the transaction, and
shall be exercisable for a term of five years. A cash fee of six percent
will be paid in any capital raising transaction involving unsecured debt
securities.
NOTE 6 - COMMON STOCK
Common and Preferred Stock
-----------------------------
All stock issued is valued at the fair value of the stock.
On March 25, 2004, NutraCea established the NutraCea Patent Incentive Plan,
which grants 15,000 shares of common stock to each named inventor on each
granted patent, which is assigned to NutraCea.
During the quarter ended March 31, 2004, NutraCea issued 544,965 shares of
common stock to consultants for services rendered valued at $723,381.
During the quarter ended March 31, 2004, NutraCea issued 168,095 shares of
common stock to vendors in payment of accounts payable totaling $57,111.
During the quarter ended March 31, 2004, NutraCea issued 6,490,711 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $2,744,507.
During the quarter ended March 31, 2004, NutraCea 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, NutraCea issued 5,500,000 shares of
common stock, valued at $8,360,000, to NutraCea's Chief Executive Officer for
current services rendered. 175,000 of these shares replace shares owned by
NutraCea's CEO and used to satisfy NutraCea obligations and the balance of the
shares will be held in escrow to satisfy a deferred compensation arrangement
between NutraCea and the CEO.
On April 1, 2004, NutraCea repurchased 344,956 shares of common stock valued at
$230,000 from the Chief Executive Officer of NutraCea pursuant to a repurchase
agreement of that date.
During the quarter ended June 30, 2004, NutraCea issued 1,083,489 shares of
common stock to consultants for services rendered valued at $1,380,287.
During the quarter ended June 30, 2004, NutraCea issued 531 shares of common
stock to a vendor in payment of accounts payable in the amount of $833.
During the quarter ended June 30, 2004, NutraCea issued 438,612 shares of common
stock pursuant to the exercise of stock options and warrants for cash totaling
$22,861.
During the quarter ended June 30, 2004, NutraCea converted 510,000 shares of
preferred stock to 510,000 shares of common stock pursuant to the Mandatory
Conversion paragraph of the Private Placement Memorandum dated November 9, 2001.
During the quarter ended June 30, 2004, NutraCea converted preferred dividends
in the amount of $5,986 into 5,759 shares of common stock.
11
During the quarter ended September 30, 2004, NutraCea issued 486,839 shares of
common stock to consultants for services rendered valued at $496,100.
During the quarter ended September 30, 2004, NutraCea issued 300,000 shares of
restricted common stock valued at $429,000 to officers and directors for
services rendered.
During the quarter ended September 30, 2004, NutraCea issued 25,000 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $4,500.
During the quarter ended September 30, 2004, NutraCea converted 300,000 shares
of preferred stock to 120,000 shares of common stock pursuant to the Mandatory
Conversion paragraph of the Private Placement Memorandum dated November 9, 2001.
On September 8, 2004, NutraCea and Langley Park Invesments PLC ("Langley")
signed a Stock Purchase Agreement under which NutraCea agreed to sell 7,000,000
shares of its common stock to Langley. The transaction will close at the time
that Langley's shares are trading on the London Stock Exchange for anticipated
consideration to the Company (i) immediately following the closing of
approximately $1,190,000 U.S.D., and (ii) additional consideration of that
number of Langley shares which, as of the closing, will have a value of
approximately $1,190,000 (the "Langley Shares"). NutraCea has agreed to hold the
Langley Shares in escrow for two years from the date of closing. After the
two-year holding period, the Langley Shares will be subject to possible
reduction in number if NutraCea's common shares are trading at a value of less
than $0.34 U.S.D. After such reduction, if any, the remaining Langley Shares
may be sold by NutraCea at their then current value.
Pursuant to the Purchase Agreement, Langley has agreed that it will not sell,
transfer or assign any or all of the NutraCea shares for a period of two years
following the closing without the prior written consent of NutraCea, which
consent may be withheld by NutraCea in its sole discretion.
Stock Options & Warrants
------------------------
Expense for stock options and warrants issued to consultants is calculated at
fair value using the Black-Scholes valuation method.
During the quarter ended March 31, 2004, NutraCea 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 expense was recorded relating to the issue of these
warrants.
During the quarter ended June 30, 2004 NutraCea issued 451,230 warrants with
exercise prices between $.001 and $5.00 to consultants. The warrants expire at
varying times between three and five years. A total of $490,455 in non-cash
compensation expense was recorded relating to the issue of these warrants.
On July 9, 2004, NutraCea issued 25,000 stock options with an exercise price of
$.20, expiring in five years, to an employee of the Company. Non-cash
compensation expense of $21,000 was recorded relating to the issue of these
options.
12
NOTE 7 - BUSINESS SEGMENTS
For internal reporting purposes, management segregates NutraCea into operating
segments as follows for the nine and three months ended September 30, 2004 and
2003:
NINE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
SEPTEMBER 30, 2004 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ---------- ------------- --------- ---------- --------------
NutraStar Technologies Incorporated $ 306,113 $ (9,505,506) $ 495 $1,914,563 $ 24,167
NutraGlo Incorporated 356,797 109,200 - 136,669 -
Unallocated corporate overhead - (11,904,853) - - -
---------- ------------- --------- ---------- --------------
Total, NutraCea $ 662,910 $(21,301,159) $ 495 $2,051,232 $ 24,167
========== ============= ========= ========== ==============
NINE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
SEPTEMBER 30, 2003 (RESTATED) NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ---------- ------------- --------- ---------- --------------
NutraStar Technologies Incorporated $ 98,619 $ (1,265,163) $ 49,358 $ 492,208 $ 94,085
NutraGlo Incorporated 1,108,033 462,178 16,516 26,286 -
Unallocated corporate overhead - (1,060,058) - - -
---------- ------------- --------- ---------- --------------
Total, NutraCea $1,206,652 $ (1,863,043) $ 65,874 $ 518,494 $ 94,085
========== ============= ========= ========== ==============
THREE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
SEPTEMBER 30, 2004 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ---------- ------------- --------- ---------- --------------
NutraStar Technologies Incorporated $ 88,916 $ 304,277 $ - $1,914,563 $ 10,225
NutraGlo Incorporated 160,924 49,091 - 136,669 -
Unallocated corporate overhead - (1,438,288) - - -
---------- ------------- --------- ---------- --------------
Total, NutraCea $ 249,840 $ (1,084,920) $ - $2,051,232 $ 10,225
========== ============= ========= ========== ==============
THREE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
SEPTEMBER 30, 2003 (RESTATED) NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ---------- ------------- --------- ---------- --------------
NutraStar Technologies Incorporated $ 37,403 $ (595,027) $ 17,076 $ 492,208 $ 29,987
NutraGlo Incorporated 593,817 278,450 8,921 26,286 -
Unallocated corporate overhead - (500,421) - - -
---------- ------------- --------- ---------- --------------
Total, NutraCea $ 631,220 $ (816,998) $ 25,997 $ 518,494 $ 29,987
========== ============= ========= ========== ==============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking" statements about future financial
results, future business changes and other events that have not yet occurred.
For example, statements like NutraCea "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from NutraCea's expressed expectations because of risks and
uncertainties about the future. NutraCea does not undertake to update the
information in this Form 10-QSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of NutraCea's
business are discussed throughout this Form 10-QSB and should be considered
carefully.
RESULTS OF OPERATIONS
Operating Results for the Quarters Ended September 30, 2004 and 2003
--------------------------------------------------------------------
The Company had revenues of $249,840 for the quarter ended September 30, 2004
compared to revenues of $631,220 for the quarter ended September 30, 2003. The
decrease in the third quarter was due primarily to a continued decrease in
purchases by a major customer of the Company's subsidiary, NutraGlo
Incorporated.
Cost of goods sold for the third quarter of 2004 was $165,069 compared to
$311,853 for the same period of 2003. The decrease in cost of goods sold
relates directly to the decrease in sales during the third quarter.
Operating expenses were $1,169,691 for the quarter ended September 30, 2004
compared to $1,136,365 for the quarter ended September 30, 2003. During the
quarter ended September 30, 2004, non-cash stock and option awards decreased by
$185,745 to $489,500 from $675,245 for the quarter ended September 30, 2003.
Other significant variances in operating expenses incurred during the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003 are as follows:
Three months ended
9/30/2004 9/30/2003
---------- ----------
Commissions and finders fees $ - $ 38,115
Depreciation 10,225 29,987
Insurance 26,561 3,994
Professional fees 411,860 110,797
Promotional and marketing 19,450 350
Salaries and wages 91,286 185,362
Travel 9,721 7,366
Other 33,326 7,387
---------- ----------
$ 602,429 $ 383,358
---------- ----------
14
The Company posted an operating loss of $1,084,920 for the quarter ended
September 30, 2004 compared to an operating loss of $816,998 for the same
quarter in 2003. The operating losses are due to the significant operating
expenses consisting primarily of non-cash stock option and warrant awards made
to certain officers and consultants of NutraCea.
Interest expense decreased to zero for the quarter ended September 30, 2004
compared to interest expense of $25,997 for the same period in 2003. This
decrease is due primarily to the elimination of interest expense on notes that
were paid off or converted in 2003.
The net loss for the quarter ended September 30, 2004 was $1,083,893 compared to
a net loss of $876,420 recorded for the quarter ended September 30, 2003. This
24% increase in net loss was due primarily to the increase in operating losses
for the third quarter of 2004 offset somewhat by interest income of $1,027.
During the quarter ended September 30, 2004 the Company entered into the
following consulting agreements:
On July 14, 2004, NutraCea entered into a six-month consulting agreement
with 21st Century Diversified Holdings Inc., a business consulting firm, to
provide NutraCea with consulting services and advice pertaining to
NutraCea's business affairs and assistance in the raising of capital either
in the form of equity or debt.
On August 1, 2004, NutraCea entered in a 90-day Independent Contractor
Agreement with Margie Adelman to prepare reports regarding investor
relations, prepare advertising and marketing materials, and prepare press
releases.
On September 2, 2004, NutraCea entered into a 90-day consulting agreement
with Sandgrain Securities Inc. to serve as NutraCea's investment advisor
regarding acquisitions or similar corporate transactions and to provide
assistance and advice with respect to raising capital required to
consummate an acquisition or similar corporate transaction.
Operating Results for the Nine Months Ended September 30, 2004 and 2003
-----------------------------------------------------------------------
Revenues of NutraCea decreased by $543,742 to $662,910 for the nine months ended
September 30, 2004 as compared to revenues of $1,206,652 for the nine months
ended September 30, 2003. The decrease in revenues is primarily attributable to
decreased purchases by the major customer of the Company's subsidiary NutraGlo
Incorporated.
Costs of goods sold decreased by $238,479 to $396,494 for the nine months ended
September 30, 2004 from $634,973 for the nine months ended September 30, 2003.
The decrease in costs of goods sold generally reflects the decrease in revenues
during the first nine months of 2004.
Operating expenses have increased to $21,567,575 for the nine months ended
September 30, 2004 compared to $2,434,722 for the similar period of 2003. The
substantial increase in 2004 was attributable primarily to non-cash stock and
option awards which increased by $18,396,104 to $19,409,999 for the nine months
ended September 30, 2004 compared to $1,013,895 for the first nine months of
2003. During the first half of 2004, the Company has attempted to conserve its
cash flow position by issuing options and stock for services whenever possible.
Other variances in operating expense line items are as follows:
15
Nine months ended
9/30/2004 9/30/2003
----------- -----------
Commissions and finders fees $ 209,438 $ 38,115
Depreciation 24,167 94,085
Insurance 54,675 15,306
Professional fees 745,121 281,496
Promotional and marketing 95,479 750
Salaries and wages 539,694 513,623
Travel 74,975 9,593
Other 19,132,853 19,186,685
----------- -----------
$20,876,402 $20,139,653
----------- -----------
The Company reported an operating loss of $21,301,159 for the nine-month period
ending September 30, 2004 compared to an operating loss of $1,863,043 reported
for the same period of 2003. The increase in operating loss for the first nine
months of 2004 is due primarily to the substantial increase in non-cash stock
and option related expenses.
Interest expense decreased by $65,379 to $495 for the nine months ended
September 30, 2004 from $65,874 for the nine months ended September 30, 2003.
This decrease is due to the substantial reduction in the number of promissory
notes outstanding.
The Company posted a net loss of $21,297,570 for the nine-month period ended
September 30, 2004 compared to $1,928,917 for the first nine months of 2003.
The substantially larger nine-month operating loss in 2004 was due primarily to
the significant operating expenses incurred in the first half of 2004 relating
to the issuance of the Company's common stock as compensation.
Off-Balance Sheet Arrangements
------------------------------
During the quarter ended September 30, 2004, the Company did not engage in any
off-balance sheet arrangements as defined in Item 303 (c) of the SEC's
Regulation S-B
LIQUIDITY AND SOURCES OF CAPITAL
NutraCea has incurred significant operating losses since its inception, and, as
of September 30, 2004 NutraCea had an accumulated deficit of $42,650,898.
However, at September 30, 2004, NutraCea had cash and cash equivalents of
$377,035 and working capital of $530,775.
To date, NutraCea has funded its operations, in addition to sales revenues,
through a combination of short-term debt and the issuance of common and
preferred stock. During the nine months ended September 30, 2004, NutraCea has
issued a total of 22,559,405 shares of common stock of which approximately 8.4
million shares were issued as compensation to officers and consultants of the
Company. During the nine months ended September 30, 2004, NutraCea raised a
total of $2,771,868 from the exercise of options and warrants to purchase
6,954,323 shares of common stock. NutraCea continues to
16
pursue cost cutting or expense deferral strategies in order to conserve working
capital.
Based on management's financial projections, NutraCea has enough cash reserves
to finance its business plan through fiscal year 2004.
Due to the Company's limited cash flow and operating losses, it is unlikely that
the Company could obtain financing through commercial or banking sources.
Consequently, the Company is dependent on continuous cash infusions from major
investors and the exercise of outstanding warrants and options in order to fund
its current operations. If these sources of capital were unwilling or unable to
provide additional working capital to the Company, the Company would probably
not be able to sustain its full range of operations. There is no written
agreement or contractual obligation which would require the Company's past
funding sources to fund the Company's future operations up to certain amounts or
indeed continue to finance the Company's operations at all.
As of September 30, 2004, NutraCea's principal commitments include a lease
commitment that expires in 2006 of $ 5,358 per month for the Company's corporate
offices.
Management of NutraCea believes that it will need to raise additional capital to
continue to develop, promote and conduct its operations. Such additional
capital may be raised through public or private financing as well as borrowing
from other sources. Although the Company believes that current and/or future
investors will continue to fund the Company's expenses, there is no assurance
that such investors will continue to fund the Company's ongoing operations or
the terms upon which such investments will be made.
CRITICAL ACCOUNTING POLICIES
NutraCea's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements require
managers to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and disclosures on the date of the
financial statements. On an on-going basis, the Company's accountants' evaluate
the estimates, including, but not limited to, those related to revenue
recognition. The Company uses authoritative pronouncements, historical
experience and other assumptions as the basis for making judgments. Actual
results could differ from those estimates.
The Company has adopted the fair value based method of accounting prescribed in
Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation," for its employee stock option plans.
The Company has adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" which
requires gains and losses from extinguishment of debt to be reported as part of
recurring operations.
ITEM 3. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Chief Executive
17
Officer along with the Company's Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14 as of the end of the period covered by this
report. Based upon that evaluation, the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective to ensure the
information required to be disclosed by the Company in reports filed or
submitted under the Exchange Act were timely recorded, processed and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms.
There have been no significant changes in the Company's internal controls over
financing reporting or in other factors which occurred during the quarter
covered by this report, which could materially affect or are unreasonably likely
to materially affect the Company's internal controls over financing reporting.
18
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
SALES OF UNREGISTERED SECURITIES DURING THE QUARTER
During the quarter ended September 30, 2004, NutraCea issued 451,770 shares of
restricted common stock to consultants for services rendered valued at $473,600.
During the quarter ended September 30, 2004, NutraCea issued 300,000 shares of
restricted common stock to officers and directors for services rendered valued
at $429,000.
During the third quarter, the Company issued options to an employee to purchase
25,000 shares of the Company's common stock. The options were valued at
$21,000.
During the quarter-ended September30, 2004, NutraCea issued 25,000 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $4,500.
All of the above issuances were made without any public solicitation, to a
limited number of investors or related individuals or entities and were acquired
for investment purposes only. Each of the individuals or entities had access to
information about NutraCea and was deemed capable of protecting their own
interests. The securities were issued pursuant to the private placement
exemption provided by Section 4(2) of the Securities Act of 1933 ("1933 Act").
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.
On September 8, 2004, NutraCea and Langley Park Invesments PLC ("Langley")
signed a Stock Purchase Agreement under which NutraCea agreed to sell 7,000,000
shares of its common stock to Langley. The transaction will close at the time
that Langley's shares are trading on the London Stock Exchange for anticipated
consideration to the Company (i) immediately following the closing of
approximately $1,190,000 U.S.D., and (ii) additional consideration of that
number of Langley shares which, as of the closing, will have a value of
approximately $1,190,000 (the "Langley Shares"). NutraCea has agreed to hold
the Langley Shares in escrow for two years from the date of closing. After the
two-year holding period, the Langley Shares will be subject to possible
reduction in number if NutraCea's common shares are trading at a value of less
than $0.34 U.S.D. After such reduction, if any, the remaining Langley Shares
may be sold by NutraCea at their then current value.
Langley is a corporation formed outside the United States and is not deemed to
be "U.S. persons" as that term is defined under Regulation S. The investor
represented that it is purchasing such shares for its own account. Both the
offer and the sale of the NutraCea shares were made outside the United States
and are deemed to be "offshore transactions" as that term is defined under
Regulation S. The share certificate contains a legend indicating that such
shares can only be transferred in compliance with the provisions of Regulation
S. In light of the foregoing, such sales were deemed exempt from registration
pursuant to Regulation S of the Securities Act of 1933 (the "1933 Act"). The
shares are deemed to be "restricted securities" as defined in Rule 144 under the
1933 Act and the certificate(s) evidencing the shares bear a legend stating the
restrictions on resale.
ITEM 5. OTHER INFORMATION
On July 26, 2004, John Howell resigned as President and as a director of
NutraCea. His duties as President were assumed by Patricia McPeak, NutraCea's
CEO.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report:
31.1 Certification by CEO pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002
19
31.2 Certification by CFO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(i) Form 8-K filed on July 27, 2004 reporting under Item 9 the
resignation of John Howell as President and as a director of
NutraCea.
(ii) Form 8-K filed on September 14, 2004 reporting under Item 3.02
the sale of unregistered equity securities to Langley Park
Investments PLC.
20
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRACEA
Dated: November 15, 2004 /s/ Patricia McPeak
-------------------
Patricia McPeak
Chief Executive Officer
Dated: November 15, 2004 /s/ Joanna Hoover
-----------------
Joanna Hoover,
Chief Financial Officer
(Principal Accounting Officer)
21