Gross sales are the amount invoiced to customers, while net sales deduct from gross sales payment or discount terms, promotional allowances, slotting fees, warehouse damage and returned goods. Our net sales to date have been significantly less than gross sales largely as a result of startup costs with new accounts. As our accounts mature, we expect that the difference between gross sales and net sales will be reduced.
Cost of Sales. For the nine months ended September 30, 2004, cost of sales were $604,517, a decrease of $595,644 or 50% lower than cost of sales of $1,200,161 for the nine months ended September 30, 2003. This decrease is primarily attributable to the 44% decrease in volume of cases shipped, which, in turn, was a direct consequence of the discontinuation of advertising. Cost of sales as a percent of gross sales remained relatively constant was 56.6% for the nine months ended September 30, 2004, a decrease from 63.2% for the nine months ended September 30, 2003 due to the lower write offs of obsolete inventory. In 2003, we wrote off ingredients and packaging related to discontinued flavors.
Gross Profit. Gross profit was $219,915 for the nine months ended September 30, 2004, an increase of $9,441, or 4%, from a $210,474 gross profit for the nine months ended September 30, 2003. Gross profit as a percentage of net sales was 27% for the nine months ended September 30, 2004, an increase of 12% over the gross profit as a percentage of net sales for the nine months ended September 30, 2003, primarily due to a decrease in writeoffs discussed above.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,372,727 for the nine months ended September 30, 2004, a decrease of $65,704, or 5%, from selling, general and administrative expenses of $1,438,431 for the nine months ended September 30, 2003. Selling, general and administrative expenses exceeded net sales in each period, because we are in an early stage of development and have not achieved sales volumes sufficient to generate net sales in excess of our selling, general and administrative expenses. The decrease in selling, general and administrative expenses was primarily attributable to decreased salaries and advertising costs, partially offset by increased expenses resulting from the restart of television advertising in August and September 2004.
Loss from Operations. Loss from operations was $1,152,812 for the nine months ended September 30, 2004 compared to $1,227,957 for the nine months ended September 30, 2003. The $75,145, or 6%, decrease in the loss from operations was primarily attributable to lower selling, general and administrative expenses described above.
Interest Expense. Interest expense was $573,379 for the nine months ended September 30, 2004, an increase of $121,364, or 27%, from interest expense of $452,015 for the nine months ended September 30, 2003. The increase in interest expense was primarily attributable to increased borrowings from related parties and under our bridge financing during 2004.
Gain on Forgiveness of Accounts Payable. Gain on forgiveness of accounts payable represents the difference between the invoiced amount and the amount accepted as a cash settlement for certain advertising expenditures incurred and expensed in 2002.
Proceeds from Sale of State Tax Benefits. Proceeds from sale of state tax benefits was $0 for the nine months ended September 30, 2004 and September 30, 2003. This amount represents net proceeds realized from the transfer of State of New Jersey tax benefits resulting from the net operating losses. We do not recognize these benefits until received, typically in the fourth quarter, as their receipt is not assured until final approval is received from the state. If our application for the current year is approved, we expect to receive approximately $300,000 in proceeds in December 2004.
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Net Loss. Net loss was $1,665,933 for the nine months ended September 30, 2004 compared to $1,679,972 for the nine months ended September 30, 2003. The $14,039 decrease in net loss was primarily attributable to increased interest expense offset by lower selling, general and administrative expenses described above.
Results of operations for the year ended December 31, 2003 compared to the year ended December 31, 2002
Gross Sales. Gross sales for the year ended December 31, 2003 were $2,335,676, a decrease of $1,203,442 or 34% lower than gross sales of $3,539,118 for the year ended December 31, 2002. The decrease in gross sales is primarily attributable to a 34% decrease in case volume resulting from reduced promotional and discontinued advertising spending. We suspended substantially all advertising after the first half of 2002 due to a lack of funding. This has resulted in a steady decline in sales since these programs were reduced or terminated, due to a decrease in repeat purchases of our products and the loss of certain accounts due to the lower sales volume per store.
Promotional Allowances and Discounts. Promotional allowances and discounts consists of promotional allowances to retailers, credits for product that is not sold by its expiration date, discounts for early payment, slotting fees and coupon reimbursements. For the year ended December 31, 2003, promotional allowances and discounts were $581,394, a decrease of $276,965 or 32% lower than the promotional allowances and discounts of $858,359 for the year ended December 31, 2002. This decrease is primarily attributable to a 34% decrease in gross sales. Promotional allowances as a percentage of gross sales increased slightly from 24.3% for the year ended December 31, 2002 to 24.9% for the year ended December 31, 2003.
Net Sales. Net sales for the year ended December 31, 2003 were $1,754,282, a decrease of $926,477, or 34% lower than net sales of $2,680,759 for the year ended December 31, 2002. The decrease in net sales is primarily attributable to the decrease in cases sold discussed above.
Cost of Sales. For the year ended December 31, 2003, cost of sales was $1,527,416, a decrease of $978,585 or 39% lower than cost of sales of $2,506,001 for the year ended December 31, 2002. The decrease in cost of sales was primarily attributable to a 34% decrease in cases sold and lower ingredient costs resulting from a reformulation of the product.
Gross Profit. Gross profit was $226,866 for the year ended December 31, 2003, an increase of $52,108, or 30%, over the $174,758 gross profit for the year ended December 31, 2002. Gross profit as a percentage of net sales was 12.9% for the year ended December 31, 2003, compared to a gross profit as a percentage of net sales of 6.5% for the year ended December 31, 2002. The increase in gross profit was primarily attributable to reduced ingredient costs resulting from reformulation of the product.
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Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,967,795 for the year ended December 31, 2003, a decrease of $1,539,091, or 44%, from selling, general and administrative expenses of $3,506,886 for the year ended December 31, 2002. Selling, general and administrative expenses exceeded net sales in each period as we are in an early stage of our development and have not achieved sales volumes sufficient to generate net sales in excess of our selling, general and administrative expenses. The decrease in selling, general and administrative expenses was primarily attributable to decreased advertising and marketing expenses of approximately $862,000 and lower selling, general and administrative expenses of $619,000. We suspended substantially all advertising and reduced promotional activities in the second half of 2002 and reduced sales and marketing personnel due to a lack of funding.
Loss from Operations. Loss from operations was $1,740,929 for the year ended December 31, 2003 compared to $3,332,128 for the year ended December 31, 2002. The $1,591,199 decrease in loss from operations was primarily attributable to the reduced operating expenses discussed above.
Interest Expense. Interest expense was $709,210 for the year ended December 31, 2003, an increase of $288,300, or 69%, from interest expense of $420,910 for the year ended December 31, 2002. The increase in interest expense is primarily attributable to cash and non-cash interest expense related to increased borrowings from related parties during 2003 and an increase in interest rates due to our defaults on related party and shareholder notes.
Income Tax Benefit. Income tax benefit was $211,131 for the year ended December 31, 2003, and $216,470 for the year ended December 31, 2002. This amount represents net proceeds realized from the sale of State of New Jersey tax benefits resulting from net operating losses we incurred in 2002 and 2003.
Net Loss. Net Loss was $2,239,440 for the year ended December 31, 2003 compared to $3,559,102 net loss for the year ended December 31, 2002. The $1,319,662 decrease in net loss from operations was primarily attributable to the reduced operating expenses discussed above.
Liquidity and Capital Resources
Our operations to date have generated significant operating losses that have been funded through the issuance of common stock, preferred stock and external borrowings, including a line of credit with a bank and loans from our executive officers, directors and principal stockholders.
As of September 30, 2004, we had $31,250 of cash on hand and a working capital deficit of $10,064,974. We are in default on approximately $6,712,951 of debt and accrued interest thereon. Additionally, we have not paid salaries to three of our executive officers since August 2002. The officers have agreed to accept shares of common stock in payment of accrued and unpaid salaries that totaled $623,500 through December 31, 2003. Accrued and unpaid salaries for 2004 will be paid from the expected proceeds from the sale of New Jersey State tax benefits related to our net operating losses. In June 2004, we again applied to the State of New Jersey for a certificate enabling us to sell our additional tax losses under a program administered by the New Jersey Economic Development Authority. We expect to receive approximately $300,000 in
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net proceeds in December 2004 as a result of the transfer of our additional tax loss benefits. The remaining balance of the accrued officers’ salaries of approximately $210,000 will be paid off from the net proceeds of this offering.
In connection with this offering, we have undertaken a steps to restructure our outstanding indebtedness and ownership structure and have obtained bridge financing to provide working capital to fund operations in contemplation of this offering. A certain number of these events are contingent upon a successful completion of the offering.
In July 2004, we entered into a series of loan agreements with Dick Clark, a stockholder of our company and spokesman for our products, and Stanley H. Moger, one of our directors. Under the terms of the loan agreement, Messrs. Clark and Moger agreed to loan us up to $1,000,000 in four tranches, each of which is conditioned upon completion of specified actions or events. As of November 30, 2004, we have received the first three tranches, or $750,000. The loan accrues interest at 10% per annum, unless it is in default, in which case the interest increases to 15% per annum. The principal and accrued interest is due and payable on the earlier of the consummation of this offering or January 1, 2005. In the event this loan is outstanding after January 1, 2005, the interest rate is increased to 15% per annum. The loan is secured by all of the assets of NuVim, and certain company creditors were required to execute subordination agreements in favor of Messrs. Clark and Moger. The proceeds from this loan were used for partial payment of amounts owed to SMBI, which payment is required in order to obtain the assignment of the NuVim trademark and partial payments of legal fees and general working capital purposes. The loan will be repaid from the net proceeds of this offering.
Concurrent with the closing of the offering, a group of related investors have agreed to pay unpaid principal and interest of approximately $2,700,000 outstanding on our demand bank note on our line of credit with Wachovia Bank and to forgive $3,220,000 in senior convertible notes payable and accrued interest thereon, in exchange for 461,700 shares of common stock. In addition, three members of management agreed to extinguish $341,619 of outstanding loans and accrued interest through November 30, 2004, and $623,500 of outstanding loans and deferred salary accrued and unpaid through December 31, 2003, in exchange for 223,000 shares of common stock.
We had working capital deficits of $8,348,828 and $10,064,974 as of September 30, 2003 and 2004, and $7,256,963 and $8,484,824 at December 31, 2002 and 2003. The increase in the working capital deficit each period was primarily attributable to increased borrowings from related parties to fund operating losses and accrued interest thereon.
Net cash used in operating activities for the year ended December 31, 2003 was ($386,889) compared to cash used in operating activities of ($2,101,470) during 2002. The decrease in cash used by operating activities of $1,714,581 was primarily attributable to decreased operating losses of $1,319,662 and the deferral of payment of officers’ salaries after August 2002.
Net cash used in operating activities for the nine months ended September 30, 2004 was ($769,165) compared to cash used in operating activities of ($496,844) during 2003.
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The increase in cash used by operating activities of $272,321 was primarily attributable to a cash benefit in 2003 resulting from a related party vendor, SMBI, allowing us to reduce the prepaid royalty balance we had with them against the accrued payable due to SMBI.
Net cash provided by financing activities was $1,778,544 and $440,956 for the years ending December 31, 2002 and 2003 and $512,356 and $747,200 for the nine months ended September 30, 2003 and 2004, respectively. Net cash provided by financing activities primarily consisted of loans from stockholders and related parties in 2003 and proceeds from sales of Series C preferred stock and loans from stockholders and related parties in 2002.
Application of Recent and Critical Accounting Policies and Pronouncements
Recent Accounting Pronouncements
In January 2003, the FASB issued interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities (“SPEs”) created prior to February 1, 2003: We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ended after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003: We were required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether SPE, that were created subsequent to December 31, 2003: The interpretation applies immediately. We do not have any arrangements with variable interest entities that will require consolidation of their financial information in our financial statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure on contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.
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Critical accounting policies are defined as those that are reflective of significant judgments, estimates and uncertainties and potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed discussion on the application of these and other accounting policies see Note 2 to our financial statements.
Equity Issuances for Services
We account for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, using an intrinsic value approach to measure compensation expense, if any. Under this method, compensation expense is recorded on the grant date only if the current market price of the underlying stock exceeds the exercise price. Options issued to non-employees are accounted for in accordance with SFAS 123, “Accounting for Stock-Based Compensation”, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services” using a fair value approach.
SFAS No. 123 established accounting and disclosure requirements using a fair value-basis method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, we have elected to continue to apply the intrinsic value-based method of accounting described above, and have adopted the disclosure requirements of SFAS No. 123. Had we elected to recognize compensation cost based on fair value of the stock options at the date of grant under SFAS 123, such costs would have been recognized ratably over the vesting period of the underlying instruments and our net loss and net loss per common share would have increased to the pro forma amounts indicated in our financial statements.
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax reporting bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Differences that give rise to significant portions of our deferred tax assets are net operating losses and deferred stock compensation. A valuation allowance is recorded against deferred tax assets in instances where the realization of the deferred tax asset is not considered to be “more likely than not.”
Placement and Promotional Allowances
As an inducement to our customers to promote and to display our products in preferred locations of their stores, we provide placement and promotional allowances to certain customers. We also provide credits for product which has not been sold by its expiration date. These allowances and credits are reflected as a reduction of revenue as they are determined.
During 2002, we adopted Emerging Issues Task Force (“EITF”) No. 01-9, which requires certain sales promotions and customer allowances previously classified as selling, general and
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administrative expenses to be classified as a reduction of sales or as cost of goods sold. We have conformed our presentation of advertising and promotional allowances to comply with the provisions of EITF No. 01-9.
Accounts Receivable
We evaluate the collectibility of our trade accounts receivable based on a number of factors. Accounts receivable are unsecured, non-interest bearing obligations that are typically due from customers within 30 days of the invoice date. We apply collections in accordance with customer remittance advices or to the oldest outstanding invoice if no remittance advice is presented with payment.
We estimate an allowance for doubtful accounts and revenue adjustments based on historical trends and other criteria. Further, as accounts receivable outstanding are deemed uncollectible or subject to adjustment, these allowances are adjusted accordingly. In circumstances where we become aware of a specific customer’s inability to meet its financial obligations to us, a specific reserve for bad debts is estimated and recorded which reduces the recognized receivable to the estimated amount we believe will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on our recent past history and an overall assessment of past due trade accounts receivable outstanding. We also estimate the amount of credits for product placement, promotion and expired product that are expected to be issued for product sold based on an evaluation of historical trends and record an allowance when the sale is recorded.
Inventories
Inventories are stated at the lower of cost to purchase and/or manufacture the inventory or the current estimated market value of the inventory. We regularly review our inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and/or our ability to sell the products concerned and production requirements. Demand for the our products can fluctuate significantly. Factors which could affect demand for the our products include unanticipated changes in consumer preferences, general market conditions or other factors, which may result in cancellations of advance orders or a reduction in the rate of reorders placed by customers and/or continued weakening of economic conditions. Additionally, our estimates of future product demand may be inaccurate, which could result in an understated or overstated provision required for excess and obsolete inventory.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented.
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BUSINESS
Introduction
We produce, market and distribute NuVim dietary supplements in beverage form, which contain two proprietary micronutrients derived from cow’s milk, known as LactoActin and LactoMune. These two micronutrients, in their patented formulation, have been shown in independent clinical studies to help strengthen the immune system, support muscle flexibility and promote sturdy joints when consumed over time in certain quantities. NuVim dietary supplement beverages are non-dairy, virtually lactose-free and fortified with vitamins and minerals. By incorporating these micronutrients into our nutritional beverages, we believe that we are able to provide consumers with a good-tasting beverage choice that provides benefits unlike any other on the market. Except for Asia, Australia and New Zealand, we have an exclusive worldwide license agreement with SMBI to use these proprietary micronutrients in carbonated and non-carbonated beverages (and powders based on such beverages designed for reconstitution), excluding certain milk, yogurt and nutritional meal replacement products.
Our first product line was introduced in May 2000. Our product line currently consists of three flavors of refrigerated dietary supplement beverages, including Orange Tangerine, Fruit Symphony and Strawberry Vanilla and are available in 64-ounce cartons. Orange Tangerine and Strawberry Vanilla are also available in 16-ounce bottles.
NuVim beverages are currently available in 13 states and the District of Columbia. Our 64-ounce cartons are currently sold in over 2,800 supermarkets, as of November 30, 2004, including, but not limited to ShopRite Supermarkets, Publix Super Markets, Pathmark Supermarkets, Giant Supermarkets, A&P Supermarkets, Stop & Shop, Food Emporium, Waldbaums, Mars Super Markets, Wegmans Food Markets, Giant Eagle and Acme Markets. Our relationship with Publix, which expanded our distribution by 830 supermarkets and four states, began in September 2004. Our 16-ounce bottles are sold in selected retail locations, including small grocery stores, delicatessens and a limited number of chain supermarkets in the New York metropolitan area, but accounted for less than 5% of our net revenues for the nine months ended September 30, 2004.
In the future we plan to introduce three new flavors of the 64-ounce size beverage – chocolate, vanilla and peach – at least one of which should be available in 2005. Also in 2005, we expect to introduce a line of shelf-stable (non-refrigerated) sports drinks and, through our majority-owned subsidiary, NuVim Powder LLC, chocolate, vanilla and strawberry flavors of a powder version of our nutritional beverage. Both the sports drink and the powder product will deliver the same health benefits as our existing refrigerated product.
Industry Background
Beverages account for the third highest spending category in the grocery store, behind only produce and meat/seafood. NuVim, as a dietary supplement in beverage form, is considered part of the “functional foods” category of the nutrition industry. Functional foods are defined as foods and beverages that promise health benefits beyond their inherent nutritional value. The largest segment of the functional foods category is beverages. Functional beverages include a
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variety of drinks, such as sports drinks, energy drinks, enhanced fruit drinks, soy beverages, ready-to-drink tea and bottled water.
The functional beverage market in the United States has developed beyond being a niche category of drinks meant for better health and well-being. The wide variety of functional beverages makes available options that can appeal to many types of consumers who have become taste- and ingredient-conscious as well as more sophisticated about their overall food consumption. In its 2004 report on the United States functional beverages market, Frost & Sullivan cites the following trends in the functional beverages market:
• | physical fitness and mental well-being are the core needs driving the functional beverage industry; |
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• | the variety of functional beverages has grown to appeal to almost all demographics of consumers; |
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• | the growing ethnic population in the United States influences beverage consumption patterns with their use of novel ingredients; and |
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• | while still a small segment of the competitive and already crowded beverage industry, functional beverages have splintered into many subcategories with their own consumer target markets. |
Business Communications Company, Inc. (“BCC”) estimates that the functional beverage segment of the industry will grow from approximately $8.7 billion in 2002 to approximately $11.5 billion in 2007, despite a decline in overall beverage industry growth rate. BCC estimates that the chilled juice market will increase from approximately $3.0 billion to approximately $4.2 billion from 2002 to 2007 and that sports drinks will increase from approximately $2.0 billion in 2002 to approximately $2.6 billion in 2007.
In recent years, there has been a trend toward increased consumption of dietary supplements, as well as foods and beverages that assist the human body in preventing and controlling certain diseases. We believe that the growing demand and awareness for functional beverages will increase consumer acceptance of dietary supplements and enlarge this category’s share of the total beverage market.
We believe growth in the functional foods market is driven by the following trends:
• | increasing medical acceptance and recommendation of supplements, vitamins and health foods; |
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• | increasing consumer desire to avoid prescription drugs and seek non-medical treatment options; |
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• | growing number of consumers seeking health benefits in food and beverages; |
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• | growing number of consumers seeking to avoid certain unhealthy attributes in foods and beverages; and |
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• | growing scientific interest in the problems of inflammation and a compromised immune system. |
Many of these trends are a result of the fact that the U.S. population over 35 years of age is growing 20% faster than the overall population. Therefore, these issues are of concern to an increasing proportion of the population.
Micronutrients: History and Development of LactoActin and LactoMune
Micronutrients, which include vitamins, minerals and certain other chemical agents, are nutrients that play important roles in the production of enzymes, hormones and other substances that help to regulate growth, activity, development and functioning of the immune and other body systems. The body requires these nutrients only in minute quantities, which is why they are referred to as “micronutrients.” Cow’s milk naturally contains many vital micronutrients, but generally in such minute quantities that they are unable to provide noticeable benefits to a person’s feeling of well-being.
The health benefits of our beverages are based on more than 35 years of clinical research conducted by Stolle Milk Biologics, Inc. (“SMBI”). SMBI’s work was based on earlier research that demonstrated that a cow’s natural process of creating antibodies to the antigens present in an immune stimulant injected into the cow was passed to the milk and could benefit humans who consumed the milk. Dairy cows are routinely immunized, but the immunizations generally target bacterial antigens specific to cows, some of which may also affect humans. SMBI developed a proprietary and patented cow immune stimulant that targets a broad spectrum of bacterial antigens that are specific to humans. The immunization induces the treated cows to produce antibodies and other biologic factors against these bacteria that are not found in regular milk. SMBI trademarked this micronutrient under the name LactoMune. The immune stimulant also increases the level of activity of a natural anti-inflammatory factor in the milk. SMBI trademarked this micronutrient under the name LactoActin.
SMBI’s unique immune stimulant, as well as the SMBI micronutrients resulting from the immunizations, are the subject of patent protection. LactoMune and LactoActin are secreted into the milk of the treated cows, which is then processed into nonfat skim milk powder, milk protein concentrate and whey protein concentrate under strictly controlled conditions to minimize inactivation and prevent destruction of the micronutrients. This gentle, low heat process reduces the lactose and salts in the milk. The resulting products also are free of hormones, antibiotics and genetic alteration.
The milk and whey micronutrient concentrates produced from the cows injected with SMBI’s proprietary immunizations have been used in more than 20 independent but small-scale human and animal clinical studies, which generally conclude that milk and whey protein concentrates from these cows are effective in promoting the health benefits of LactoMune and LactoActin. Our NuVim beverage has also been used in one clinical study involving 31 human
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subjects with similar results, when subjects consumed 12 ounces of NuVim daily for six weeks. We do not have clinical evidence that a shorter period of daily consumption might provide similar beneficial results, but we do have anecdotal evidence supporting that conclusion.
Our Strategy
Our objective is to become a leading provider of good-tasting, nutritional beverages and beverage products based on the technology we license from SMBI. The elements of our business strategy include:
• | increasing brand awareness of the NuVim brand through increased television advertising, sampling and other marketing activities; |
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• | expanding sales for our existing product line into additional geographic markets and increasing sales in our current markets; |
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• | introducing new products that we have developed, including the NuVim powder mix and the shelf-stable sports drink; and |
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• | expanding our distribution channels beyond the current concentration in supermarkets, to club warehouses, convenience stores, schools, business cafeterias, the military, drug stores, fast food outlets and other locations using the 16-ounce plastic bottle single-serving size; and using e-commerce for distribution of our powder mix product. |
Our Products
We have developed the NuVim beverage line of products to provide consumers with good-tasting beverages that also help strengthen the immune system, support muscle flexibility and promote sturdier joints. All of our products contain the proprietary micronutrients, LactoActin and LactoMune.
Current Products
Our initial product line consists of natural, fruit-flavored, refrigerated dietary supplement beverages. It is available in three flavors: Strawberry Vanilla, Orange Tangerine and Fruit Symphony. The product is available in 64-ounce cartons and currently is sold primarily in supermarkets. We also sell single-serving, 16-ounce bottles, which are available in Strawberry Vanilla and Orange Tangerine flavors. The smaller containers are currently marketed primarily to small grocery stores and delicatessens, plus a limited number of chain supermarkets in the New York metropolitan area.
In addition to containing LactoActin and LactoMune, NuVim refrigerated beverages are also fortified with vitamins and minerals including in an eight-ounce serving 100% of the minimum daily requirement of Vitamins E, C, B-12 and zinc, smaller quantities of Vitamin A and calcium and complete protein with all nine essential amino acids. The beverage is readily
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digestible, is virtually lactose-free and contains no fat, cholesterol or caffeine. An eight-ounce serving contains 70 calories, 10 grams of sugar and 12 grams of carbohydrates.
The 64-ounce size of NuVim is typically priced from $2.78 to over $4.00, depending on the supermarket, which is approximately a $0.10 to $0.20 premium over the everyday price of a 64-ounce carton of a nationally branded orange juice. The 16-ounce bottle is typically priced at approximately $1.29 to $1.59.
New Product Development
We intend to develop the following additional products that deliver the same clinically-demonstrated health benefits as our current products:
• | Powdered Drink Mix. Through our subsidiary, NuVim Powder LLC, during the first quarter of 2005 or as soon thereafter as possible, we plan to introduce a powdered drink mix that may be added to almost any milk, juice or other beverage. We initially expect to have three flavors – chocolate, vanilla and strawberry – which will be sold in boxes of 30-packets of individual servings. |
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• | New Flavors. We plan to introduce three new flavors of our 64-ounce size beverage – chocolate, vanilla and peach – at least one of which should be available in 2005. |
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• | Shelf-Stable Sports Drinks. We plan to test market shelf-stable NuVim sports drinks early in the second quarter of 2005 or as soon thereafter as possible. We will market this product in 20-ounce bottles, initially in three flavors – lemon lime, tangerine and fruit punch. |
Sales and Marketing
We target consumers seeking specific health benefits in foods or beverages, people taking vitamins or other supplements, healthy, active people and weight conscious consumers. The health profile of our consumers includes people with health concerns, people trying to boost their immunity and people with restrictive diets, such as diabetics or lactose-intolerant consumers.
Approximately 80% of our current sales are to refrigerated food warehouses that deliver our product and other brands of refrigerated products to individual supermarkets. Some of these warehouses are owned by the supermarket chains that stock our product, while others have contracts with a supermarket chain to warehouse and then deliver refrigerated products to their stores. For the year ended December 31, 2003, White Rose, a wholesaler that sells to a number of supermarket chains in New York such as Foodtown, Gristedes and Key Food, and C & S New Jersey, a wholesaler that sells to chains in New Jersey such as A & P, Food Emporium and Walbaums, accounted for 15.0% and 11.4% of our total net sales, respectively. For the nine months ended September 30, 2004, White Rose and C &S New Jersey accounted for 15.0% and 11.4% of our net net sales, respectively.
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Our 64-ounce refrigerated beverage product is primarily sold to consumers through supermarkets. We also sell the 16-ounce refrigerated beverage product to refrigerated food warehouses. Some of these warehouses sell their refrigerated products to independent smaller grocery stores or to large supermarkets that have only one or two stores. In addition, our 16-ounce beverage product is sold to distributors who only sell to foodservice outlets, such as cafeterias, schools, hospitals and convenience stores. Once adequate funding is available, we plan to expand the categories of customers to include club stores, nutrition centers and health food outlets.
Our advertising activities include national television advertisements on CNN, TNT and TBS. We employ supermarket advertising and consumer promotions, Internet advertising in conjunction with Dialog Group’s network of health-related consumer sites, product sampling and, when appropriate opportunities arise, sponsorship of sporting, health and wellness events and joint promotional opportunities with third parties. We attend and present at health and nutraceutical trade shows and conferences. We also reach our customers and consumers through direct delivery of coupons and promotional materials, our website at www.nuvim.com and our toll-free number for consumer inquiries.
Dick Clark is our public spokesperson and appears in our television advertisements, point of sale materials and on our website. He also will appear in the infomercials we are creating for broadcast on cable television beginning in 2005 to market our powder drink mix product.
Our public relations campaign helps to build awareness and credibility, as well as communicate the benefits of our products in a grass roots format to stimulate trial and repeat purchases. To accomplish this awareness, we have used user testimonials, press releases, regional publications and channel trade magazines, health, sports and lifestyle publications and third-party outreach to medical associations and foundations such as the American Cancer Society and American Diabetes Association, dieticians, health and wellness organizations. When the opportunity arises, we also participate in local television and radio appearances with our spokesperson, Dick Clark.
Distribution
We first introduced NuVim refrigerated beverages in the New York, New Jersey and Connecticut metropolitan area during the second quarter of 2000. We then expanded the distribution of our products into the Philadelphia, Baltimore, Washington, D.C., Harrisburg, Scranton, Wilkes-Barre and the State of Delaware marketing areas during the first quarter of 2001. In 2002 we further expanded into Virginia, Pittsburgh, Cleveland and upstate New York. In September 2004, began selling to Publix Super Markets, a chain of approximately 830 grocery stores located in Florida, Alabama, Georgia, Tennessee and South Carolina. As of November 30, 2004, our refrigerated beverages are available in approximately 2,800 supermarkets in all or part of 13 states (New York, New Jersey, Connecticut, Maryland, Pennsylvania, Delaware, Virginia, Ohio, Florida, Alabama, Georgia, Tennessee and South Carolina) and the District of Columbia. These accounts are serviced by a network of eight food brokers.
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In August 2004, we established NuVim Powder LLC, of which we own 51%. The remaining 49% is owned 24% by the owner of our advertising production company, and 12.5% each by Dick Clark, our spokesperson, and Stanley H. Moger, one of our directors. The business plan for NuVim Powder contemplates that NuVim, Inc. will provide the powder mix product pursuant to our SMBI license and supply agreements to NuVim Powder for distribution. NuVim Powder will market the powder drink mix product through infomercials created for cable television by the advertising production company, featuring Dick Clark as NuVim’s spokesperson. Orders for our powder drink mix will be taken by telephone and mail-in response to our infomercials and on our website. We anticipate that NuVim Powder will begin distributing NuVim powder products in the first half of 2005.
Supply, Manufacturing and Order Processing
SMBI whey protein concentrate (“WPC”) containing LactoActin and LactoMune, which is the unique ingredient in our products, is extracted from the milk of approximately 30,000 pasture-fed cows in New Zealand, which is well known for maintaining high standards for dairy production and quality. We obtain our requirements of WPC under a supply agreement with SMBI (the “Supply Agreement”). See “Related Party Transactions” for information concerning our license agreement with SMBI (the “License Agreement”), which gives us the exclusive right to incorporate SMBI’s WPC into our dietary supplement beverages and the Supply Agreement under which we obtain our requirements of WPC from SMBI.
Our products are currently manufactured solely at Clover Farms Dairy in Reading, Pennsylvania, using WPC supplied by SMBI, plus milk protein concentrate and a blend of customized flavors, as well as other ingredients purchased from major domestic and international companies. Clover Farms purchases and maintains inventories of select ingredients, which allows for purchasing leverage that results in more favorable prices and service. We purchase all the other ingredients. Our refrigerated nutritional beverage is then packaged in 64-ounce juice cartons and 16-ounce plastic single-serving bottles. NuVim beverages are produced under a strict quality assurance program and have an 83-day shelf-life from the date of production. This compares favorably with fresh juice not made from concentrate and pasteurized milk.
We expect to contract with other co-packer dairies in addition to Clover Farms in the future as the geographic scope of our distribution expands. We believe there are numerous qualified dairies throughout the United States that have sufficient capacity to meet our needs.
Our beverages are currently warehoused exclusively at Orefield Cold Storage in Orefield, Pennsylvania and distributed by Sommer Maid Creamery, a warehousing and transportation company in Doylestown, Pennsylvania. We use eight food broker organizations to obtain product orders from our major supermarket accounts which they send to us for fulfillment. These broker organizations also provide retail coverage in the supermarkets to insure that our products are stocked properly, priced correctly and rotated as needed.
Upon receiving an order, our products are shipped directly from the Orfield warehouse to customer warehouses, enabling “just in time” inventory levels for our finished products. Customers typically receive the product with a minimum of 50 days of shelf life. We control inventory management, production and invoicing.
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Patents and Trademarks
SMBI has over 100 U.S. and foreign patents and patent applications that apply directly to NuVim products, which expire at various times between February 2005 and April 2017. In addition, in November 2003, NuVim was awarded a manufacturing process patent for milk protein concentrate beverages, which expires in March 2021.
SMBI granted to us for the term of the License Agreement the exclusive irrevocable license to use the NuVim trademark (the “NuVim Trademark”) (i) in North America for all purposes; and (ii) for certain prescribed uses outside North America. Upon the written consent of SMBI, which consent may not be unreasonably withheld, we also have a non-exclusive right to use and/or sublicense the NuVim Trademark outside of North America for uses not contemplated in, or subject to the License Agreement. Upon an agreed upon payment by us to SMBI on amounts owed to SMBI under the Supply Agreement, SMBI will assign the NuVim Trademark to us upon our written consent, provided that we are adequately funded to enable us to use the rights and fulfill the obligations under the License Agreement and the Supply Agreement. We anticipate that the assignment of this trademark will have been consummated prior to or concurrently with the consummation of this offering.
LactoActin and LactoMune are trademarks of SMBI. Fruit Symphony is a trademark of NuVim.
SMBI retains responsibility for patent maintenance and filing applications for new technology and for infringement actions for the intellectual property licensed from SMBI. We are responsible for maintenance of our trademarks and for protecting those trademarks against infringement.
Competition
In a broad sense, all beverages are competitive with our dietary supplement beverages. When consumers buy NuVim, they most likely are not purchasing some alternative beverage choice, which could be any beverage, from bottled water to carbonated soda to milk or juice. Competition in the nutritional beverages market, in particular, which includes all of our existing and currently planned products, is intense, growing and evolving. The industry trend has moved from small start-up companies to industry participants that are large beverage companies or food conglomerates. These companies often have better cost control, product promotion and distribution networks than we are able to generate.
Competition is based primarily on product benefits, price, quality, customer service and marketing support. Our competition includes national, regional and local producers and distributors. Most of our competitors have significantly greater financial, managerial and technical resources than we do, which may put us at a competitive disadvantage. For instance, channels of distribution for our products often require the expenditure of significant and ongoing capital, which may put us at a disadvantage to better capitalized competition.
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We believe that our current products are best positioned as a nutritional beverage and placed in supermarkets or other retail outlets in the refrigerated juice section. Competition is particularly intense among products in these nutritional beverage market segments. We believe our direct beverage competition in this market segment includes national, regional and local beverage manufacturers. We compete within the refrigerated fruit drink category, which includes national and regional brands such as Tropicana (owned by PepsiCo, Inc.) Minute Maid (owned by The Coca-Cola Company) and Florida’s Natural (a division of Citrus World, Inc.). In addition, a number of major supermarkets and other retail outlets market their own brand of fresh juices that compete with our products. Significant competitive pressure from these or other companies could negatively impact our sales and results of operations.
We have not yet begun producing, marketing and distributing our shelf-stable sports drink. When we enter that market, we will be principally competing with two widely known brands, Gatorade (owned by PepsiCo, Inc.) and Powerade (owned by The Coca-Cola Company). We believe we will be able to compete effectively through independent distributions with these products on the basis of the price, taste, quality, plus the added health benefits our products will provide. However, our competition has significantly greater name recognition, financial, managerial and technical resources than we do, which may put us at a competitive disadvantage.
We also have not yet introduced our powder mix product. There are products on the market in tablet form, such as glucosamine and chondroitin, which claim to provide anti-inflammatory benefits, and powder whey and other products, of which there are many carried in health food stores, that claim to enhance the immune system. The competitors marketing these products include both small and large multi-national companies. We do not believe there is a competitive powder product currently available that offers the specific health benefits that our powder mix product will provide.
NuVim dietary supplement beverages are the only beverages sold in the United States containing the proprietary micronutrients, LactoActin and LactoMune. Other companies sell antibodies made from regular milk, but the antibodies in the NuVim products, which are secreted into SMBI milk from the specially immunized cows, react with bacteria that infect humans, and therefore, we believe, provide health benefits to consumers that are not available in other products that contain milk-derived antibodies. We believe NuVim is the only beverage product on the market derived from milk that has the anti-inflammatory effect that we claim.
Although we have an exclusive licensing agreement with SMBI and are aware of no other beverage brands that are positioned as dietary supplements with claims promoting healthy joints and immune enhancement, it is possible that another larger, established company might enter the dietary supplement market and offer a product similar to ours with comparable benefits. Such a potential competitor may have a longer operating history and substantially greater financial, technical support and other assets and resources and may be able to respond more quickly to new or changing business situations. If such a company were to enter the segment of the beverage market we currently occupy, this could have a material adverse effect on our business and prospects.
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Government Regulation
The FDA has primary regulatory authority over dietary supplements. In 1976, the FDA’s ability to regulate the composition of dietary supplements was restricted in several material respects by the Proxmire Amendment to the Federal Food, Drug and Cosmetic Act. Under this Amendment, the FDA is precluded from establishing maximum limits on the potency of vitamins, minerals and other dietary supplements, from limiting the combination or number of any vitamins, minerals or other food ingredients in dietary supplements and from classifying a vitamin, mineral or combination of vitamins and minerals, or dietary supplements as drugs solely because of their potency. However, the Proxmire Amendment did not affect the FDA’s authority to determine that a vitamin, mineral or other dietary supplement is a new drug on the basis of disease claims made in the product’s labeling. Such a determination would require deletion of the disease claims, or submission and FDA approval of a new drug application, which entails costly and time-consuming clinical studies over successive phases.
In October 1994, the DSHEA was enacted, which introduced a new statutory framework governing the composition and labeling of dietary supplements. Under this law, dietary supplements are permitted to make “statements of nutritional support” without FDA pre-approval. Such statements may describe how particular dietary ingredients affect the structure, function or general well-being of the body, or the mechanism of action by which a dietary ingredient may affect body structure, function or well-being, but may not state that a dietary supplement will diagnose, mitigate, treat, cure or prevent a disease. Nor can a claim be made that would be interpreted as a health claim. A company making a statement of nutritional support must possess adequate substantiating scientific evidence for the statement, disclose on the label that the FDA has not reviewed the statement and that the product is not intended to mitigate, treat, cure or prevent disease, and notify the FDA of the statement within 30 days after its initial use. Although the FDA has been notified of the statements of nutritional support made for our products, there can be no assurance that, at some time in the future, the FDA will not determine that a given statement of nutritional support which we make is a disease claim rather than an acceptable nutritional support statement relating to body function or structure. Such a determination would require deletion of the disease claim or, if it is to be used at all, our submission and the approval by the FDA of a new drug application (which would entail costly and time-consuming clinical studies) or revision to a health claim, which would, as noted above, require demonstration of significant scientific agreement and prior FDA approval.
We believe that we currently meet the requirements of DSHEA. Our structure/function claims are that the product helps build a strong total immune system, supports muscle flexibility and promotes sturdy joints. We believe that we are currently compliant with all material laws and that we maintain all material permits and licenses relating to our operation based on the current food labeling requirements under DSHEA.
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Property
We currently lease approximately 2,200 square feet of office space in Paramus, New Jersey under a two-year lease that expires on December 31, 2006. The lease space is used as our executive offices, which we use for marketing and administrative needs. Since we use off-site co-packing and warehousing arrangements for the manufacture and distribution of our products, we do not require extensive facilities. We believe that our current leased property is adequate for our needs, but that additional or alternative space will be available at commercially reasonable rates if our requirements change.
Employees
As of November 30, 2004, we have four full-time employees, who are our executive officers, and six part-time employees, two of whom are in sales, one of whom is in credit collection and management, one of whom is in consumer affairs and two of whom are in administration. Our corporate secretary also is a part-time consultant who, among other responsibilities, provides advice on Federal Trade Communication law.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
Our executive officers and directors as of November 30, 2004 are as follows:
Name | | Age | | Position | |
| | |
| | |
| |
Richard P. Kundrat | | | 61 | | | Chairman of the Board and Chief Executive Officer | |
Paul J. Young | | | 66 | | | Vice President of Operations | |
John L. Sullivan | | | 60 | | | Vice President of Sales | |
Michael Vesey | | | 42 | | | Chief Financial Officer | |
Donald F. Farley | | | 62 | | | Director | |
William Franke, Ph.D. | | | 59 | | | Director | |
Stanley H. Moger | | | 68 | | | Director | |
Frederick S. Pierce | | | 71 | | | Director | |
Marc Goldman | | | 61 | | | Director | |
Background and Business Experience of Directors and Executive Officers
The following is a brief description of the principal occupation and recent business experience of each of our executive officers and directors:
Richard P. Kundrat has served since our inception as a director and our Chief Executive Officer. He was elected as our Chairman of the Board in March 2000. He has more than 30 years experience in the beverage industry, including a total of 27 years in various positions at Thomas J. Lipton, Inc., the Lipton subsidiary of Unilever NV, Englewood Cliffs, New Jersey (“Unilever/Lipton”). From November 1991 to June 1996, Mr. Kundrat was the General Manager of the Unilever/Lipton and Pepsi-Cola partnership. From June 1987 to November 1991, he was the Vice President/General Manager of the Foodservice, Bottler, Dairy Division at Unilever/Lipton. Mr. Kundrat received his B.A. degree from the University of Scranton. He currently is a director of Dialog Group, Inc.
Paul J. Young has been our Vice President of Operations since March 2000 . He has more than 30 years of manufacturing and processing experience as a senior executive in the food and beverage industry, holding various operating positions with Unilever/Lipton. From January 1997 to January 1998, he served as the Vice President of Safety Health and Environment for Unilever North American Foods, and from August 1990 to January 1997, he was Vice President of Manufacturing & Engineering at Unilever/Lipton. Mr. Young received his B.S. degree from the University of Nebraska.
John L. Sullivan has served as our Vice President of Sales since March 2000. He has more than 35 years of sales management experience directing sales efforts in supermarkets, convenience stores, drug stores and mass merchandisers. For 32 years, he held various sales and marketing positions with Unilever/Lipton, including from September 1996 to September 1998, as Vice President of Sales – Food Service Division at Unilever/Lipton. He received his B.S. degree in Marketing from Fairleigh Dickenson University.
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Michael Vesey has served as our Chief Financial Officer since November 2004. Prior to joining NuVim, from May 2003 to October 2004, Mr. Vesey served as an independent consultant advising companies on financial management issues. From September 2000 to May 2003, Mr. Vesey was the Chief Financial Officer of Dynamic Mobile Data Systems, Inc., an early stage company developing wireless communications software solutions for the transportation and field service industries. From September 1999 to September 2000, he served as the Director of Financial Management for Cingular Interactive, a national provider of wireless data and Internet-based communications systems. Mr. Vesey is a Certified Public Accountant, and he earned his B.B.A. degree from Pace University.
Donald F. Farley has been a director of NuVim since November 1999. Since June 1998, he has served as Chief Executive Officer of Spencer Trask Specialty Group, LLC and as Chairman of the Board of Directors of Stolle Milk Biologics, Inc., which is wholly-owned by Spencer Trask. Since November 2000, he also has served as Chairman of the Board of Vyteris, Inc., a private drug delivery technology company. He has more than 30 years of experience with Pfizer, Inc., where he was a senior executive in various technical and business assignments. He received his B.S. degree from The University of Rhode Island and his MBA from the University of Hartford.
William Franke, Ph.D. was elected to our Board of Directors in September 2003. Since May 2001, he has been the Associate Director of the Center for Advanced Food Technology at Rutgers University. Before he assumed that position, he was Vice President Scientific and Regulator Affairs at Unilever North America, a position he held from March 1999 to April 2001. He received his B.S, M.S. and Ph.D. degrees in Food Science from Rutgers University.
Stanley H. Moger was elected to our Board of Directors in March 2004. Since January 1998, he has served as President of SFM Entertainment, LLC, a provider of media services to major corporations. He received his B.A. degree from Colby College.
Frederick S. Pierce was elected to our Board of Directors in September 2004. Since its founding in 1989, he has served as President of The Frederick Pierce Company, Inc., which produces programming for television, cable and motion picture theaters. Mr. Pierce served as President of the American Broadcasting Companies, Inc. (ABC) from January 1983 until January 1986, during which time he had overall responsibility for all operating divisions plus the financial, legal and corporate staff of ABC, while also serving on the Executive Committee of the Board of Directors. He received his B.A. degree from City College of New York. Mr. Pierce is a member of the Board of Trustees of The American Film Institute (AFI) and previously served as AFI’s Chairman of the Board for four years.
Marc Goldman was elected to our Board of Directors in November 2004. In 1972, he joined Farmland Dairies, his family’s business, where he served as Vice President in 1980 to 1986 and as President from 1986 to 1999. In September 1999, he founded Hot Spring Ventures, Inc., where he holds the position of President.
Directors hold office until the next annual meeting of stockholders, and until their successors are duly elected and qualified. Board vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority vote of the directors then in office, even if less than a quorum, or by a sole remaining director. The executive
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officers are appointed by the Board and serve at their discretion. There are no family relationships among the directors or executive officers of NuVim.
Board Committees
The Board of Directors currently has three standing committees: an Audit Committee, a Compensation Committee and a Corporate Governance and Nominating Committee.
Audit Committee. Our Audit Committee oversees our accounting and financial reporting processes, internal systems of accounting and financial controls, relationships with independent auditors, and audits of financial statements. Specific responsibilities include the following:
• | selecting, hiring and terminating our independent auditors; |
| |
• | evaluating the qualifications, independence and performance of our independent auditors; |
| |
• | approving the audit and non-audit services to be performed by the independent auditors; |
| |
• | reviewing the design, implementation, adequacy and effectiveness of our internal controls and critical accounting policies; |
| |
• | overseeing and monitoring the integrity of our financial statements and our compliance with legal and regulatory requirements as they relate to financial statements or accounting matters; |
| |
• | with management and our independent auditors, reviewing any earnings announcements and other public announcements regarding our results of operations; and |
| |
• | preparing the report that the Securities and Exchange Commission requires in our annual proxy statement. |
Our Audit Committee is comprised Messrs. Pierce, Franke and Goldman. Mr. Pierce serves as Chairman. The Board has determined all members of the Audit Committee are independent under the rules of the Securities and Exchange Commission and the Nasdaq Stock Market. The Board has determined that Mr. Pierce qualifies as an “audit committee financial expert,” as defined by the rules of the Securities and Exchange Commission.
Compensation Committee. Our Compensation Committee assists our Board of Directors in determining the development plans and compensation of our officers, directors and employees. Specific responsibilities include the following:
• | approving the compensation and benefits of our executive officers; |
| |
• | reviewing the performance objectives and actual performance of our officers; and |
| |
• | administering our stock option and other equity compensation plans. |
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Our Compensation Committee is comprised of Messrs. Goldman and Franke. Mr. Goldman serves as Chairman. The Board has determined that all members of the Compensation Committee are independent under the Nasdaq rules.
Corporate Governance and Nominating Committee. Our Corporate Governance and Nominating Committee assists the Board by identifying and recommending individuals qualified to become members of our Board of Directors, reviewing correspondence from our stockholders, and establishing, evaluating and overseeing our corporate governance guidelines. Specific responsibilities include the following:
• | evaluating the composition, size and governance of our Board of Directors and its committees and make recommendations regarding future planning and the appointment of directors to our committees; |
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• | establishing a policy for considering stockholder nominees for election to our Board of Directors; |
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• | evaluating and recommending candidates for election to our Board of Directors; |
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• | reviewing our corporate governance principles and providing recommendations to the Board regarding possible changes; and |
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• | reviewing and monitoring compliance with our Code of Ethics and our insider trading policy. |
Our Corporate Governance and Nominating Committee is comprised of Messrs. Franke, Farley and Goldman. Mr. Franke serves as Chairman. The Board has determined that all members of the Corporate Governance and Nominating Committee are independent under the Nasdaq rules.
Director Compensation
Upon joining the Board, each director receives an option to purchase 10,000 shares of common stock, which vests over three years. Thereafter, in each year of service on the Board, the director is eligible to receive an option to purchase 7,500 shares. Each director also receives an option to purchase an additional 500 shares for each committee on which that director serves, except that each year the chairman of the Audit Committee receive an option to purchase 4,000 shares and the chairmen of the Compensation Committee and the Corporate Governance and Nominating Committee each receive an annual option to purchase 2,000 shares. See “ – 2004 Directors Stock Option Plan.”
Non-employee directors are reimbursed for their reasonable out-of-pocket expenses incurred in attending meetings of the Board of Directors.
Executive Compensation
The following table sets forth certain information concerning total compensation received by our Chief Executive Officer and our two other most highly compensated executive officers during the last year (the “Named Officers”) for services rendered to NuVim in all capacities for the three
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years ended December 31, 2003. No other executive officer received more than $100,000 in total compensation during the last fiscal year.
Summary Compensation Table
| | | | | Annual
Compensation | | Long-Term
Compensation –
Awards | |
| | | | |
| |
| |
Name and Principal Position | | | Year | | | Salary
($) | | | Bonus
($) | | | Securities
Underlying
Options (#) | |
| |
|
| |
|
| |
|
| |
|
| |
Richard P. Kundrat | | | 2003 | | $ | 175,000 | | | 110,000 | | | 0 | |
Chairman of the Board and CEO | | | 2002 | | $ | 175,000 | | | 0 | | | 0 | |
| | | 2001 | | $ | 175,000 | | | | | | 0 | |
Paul J. Young | | | 2003 | | $ | 150,000 | | | 0 | | | 0 | |
Vice President of Operations | | | 2002 | | $ | 104,000 | | | 0 | | | 1,128 | |
| | | 2001 | | $ | 44,002 | | | 0 | | | 5,746 | |
John L. Sullivan | | | 2003 | | $ | 150,000 | | | 0 | | | 0 | |
Vice President of Sales | | | 2002 | | $ | 110,000 | | | 0 | | | 1,128 | |
| | | 2001 | | $ | 110,000 | | | 0 | | | 4,655 | |
The salaries and bonuses reflected in the above table have been accrued since August 2002. In November 2004, we issued shares of our common stock to each of the Named Officers in payment of the deferred salaries and bonuses through December 31, 2003. See “Related Party Transactions – Accrued Executive Salaries.” We have continued to accrue salaries throughout 2004 but intend to pay $250,000 of accrued salaries out of the proceeds of the State of New Jersey tax benefits expected to be received in December 2004 and $210,000 of accrued salaries out of the net proceeds of this offering. See “Use of Proceeds.”
Option Grants in Last Year
No options were granted to the Named Officers during the year ended December 31, 2003.
Option Exercises and Holdings
None of the Named Officers acquired any shares of common stock upon exercise of options during the year ended December 31, 2003. The following table sets forth, as to those Named Officers, certain information concerning the number of shares subject to both exercisable and unexercisable stock options as of December 31, 2003. None of the outstanding options at December 31, 2003 were “in-the-money.”
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Aggregated Option Exercises in Last Year
And Year-End Option Values
| | | | | | | | Number of Shares Underlying
Unexercised Options at
December 31, 2003(#) | | Value of Unexercised In-The-
Money Options at December 31, 2003
($) | |
| | | | | | | |
| |
| |
Name | | Shares Acquired
on Exercise(#) | | Value
Realized($)(2) | | Exercisable | | Unexercisable | | Exercisable | | Unexercisable | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Richard P. Kundrat | | | — | | | — | | | — | | | — | | | — | | | — | |
Paul J. Young | | | — | | | — | | | 4,207 | | | 2,667 | | | — | | | — | |
John L. Sullivan | | | — | | | — | | | 3,479 | | | 2,304 | | | — | | | — | |
Employment Agreements
Each of our officers serves at the discretion of our Board of Directors. In September 2004, we entered into employment agreements with Richard P. Kundrat, our President and Chief Executive Officer, John L. Sullivan, our Vice President of Sales and Paul Young, our Vice President of Operations. These agreements expire in 2007. Mr. Kundrat’s base salary is $225,000 per year; Messrs. Sullivan and Young are entitled to receive $175,000 in base salary annually. These base salaries are subject to increase at the discretion of the Board. Under each employment agreement, the executive is entitled to participate in an annual bonus program, if and when such program is adopted by the Board. Each executive’s receipt of bonus compensation is within the sole discretion of the Board of Directors, and the Board has the right to alter, amend or eliminate all or any part of any bonus at any time, without compensation. Each executive also is entitled to participate in all of our employee benefit plans, including any stock plan adopted by the Board that permits participation by executive officers. The executive officers currently do not receive company-provided health insurance or any similar benefits under their respective agreements. The Board may terminate each agreement at any time for “cause” or in the event of the executive’s disability or death. If the agreement is terminated without “cause,” the executive is entitled to one year’s base salary, in addition to any other accrued benefits which have been earned or become payable as of the date of the termination. In the event that the agreement is terminated because of death or disability, we will continue to pay the executive’s full salary through the end of the month in which his period of employment ends, together with any benefits which have been earned or become payable as of the termination date. As part of each agreement, the executive has signed a nondisclosure, developments and nonsolicitation agreement, in which he agrees, among other things, to protect our confidential information, not to solicit our employees, and not to breach any agreements with third parties.
2004 Incentive Stock Option Plan
Our Board of Directors recently adopted, and stockholders approved, the 2004 NuVim Incentive Stock Option Plan, which will expire in November 2014. The plan will be effective as of the closing of this offering. The plan authorizes us to issue options to purchase, in the aggregate, up to 500,000 shares of our common stock to employees, officers and consultants.
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The plan is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of this plan, the committee determines who will receive the options, the number of options granted, the manner of exercise and the exercise price of the options. The term of incentive stock options granted under the plan may not exceed ten years, or five years for options granted to an optionee owning more than 10% of our voting stock. The exercise price of an incentive stock option granted under this plan must be equal to or greater than the fair market value of the shares of our common stock on the date the option is granted. The exercise price of a non-qualified option granted under this plan must be equal to or greater than 85% of the fair market value of the shares of our common stock on the date the option is granted. An incentive stock option granted to an optionee owning more than 10% of our voting stock must have an exercise price equal to or greater than 110% of the fair market value of our common stock on the date the option is granted.
2004 Directors Stock Option Plan
Our Board of Directors recently adopted, and the stockholders approved, the 2004 NuVim Directors Stock Option Plan, under which we have established in advance the option grants we will make to our directors when they join the Board, annual option grants thereafter and compensation for serving on our Board committees. The plan, which expires in November 2014, initially provides for the grant of 200,000 incentive and non-qualified stock options, although only employee directors are eligible to receive grants of incentive stock options. The plan will be effective as of the closing of this offering.
Under the plan, each director, including any director who is an employee, is awarded 10,000 options upon the effective date of the plan, or upon joining the Board, whichever is later. These options, which will have an exercise price equal to the fair market value of our common stock on the date of grant, will vest in equal installments over three years. Thereafter, in each year of service on the Board, the plan provides that each director is eligible to receive an option to purchase 7,500 shares, with an exercise price equal to the fair market value of our common stock on the date of grant. These options will immediately vest and be exercisable. The plan further provides that directors will also annually receive an option to purchase an additional 500 shares for each committee on which that director serves, except that each year the chairman of the Audit Committee receive an option to purchase 4,000 shares and the chairmen of the Compensation Committee and the Corporate Governance and Nominating Committees each receive an annual option to purchase 2,000 shares.
The term of incentive stock options granted under the plan may not exceed ten years, or five years for options granted to an optionee owning more than 10% of our voting stock. The exercise price of an incentive stock option granted under this plan must be equal to or greater than the fair market value of the shares of our common stock on the date the option is granted. The exercise price of options under the plan is equal to the fair market value of our stock on the date of grant, except if the option is an incentive stock option granted to an employee director owning more than 10% of our voting stock. In that case, the option must have an exercise price equal to or greater than 110% of the fair market value of our common stock on the date the option is granted.
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Historical Incentive Stock Plans
Stock Option Plans
We established stock option plans in 2000, 2001 and 2002, pursuant to which our officers, directors, other key executives, consultants, employees, service providers and independent contractors were granted options to purchase shares of our common stock at a per share exercise price equal to or greater than the fair market price of the common stock at the time the option was granted. We currently have an aggregate of 33,428 outstanding options under these past plans. No further awards will be granted under any of these plans.
Equity Incentive Plans
We established equity incentive plans for the years 2000 and 2001, pursuant to which our officers, directors, other key executives, consultants, employees, service providers and independent contractors were granted restricted shares of our common stock. We awarded 11,660 restricted shares under the 2000 plan and 3,075 under the 2001 plan, of which 2,784 shares were issued in lieu of accrued salaries. As of November 30, 2004, there are 14,735 restricted shares outstanding under these plans. The plans do not provide for any additional grants in subsequent years so there will be no further awards made under any of these plans. The plans provide that to the extent a restricted stock award that has not vested at the time of termination of employment for any reason other than death, permanent disability or retirement after age 65, such unvested portion shall be forfeited. If employment terminates as a result of death, permanent disability or retirement after the age of 65, the unvested award vests on the vesting date set forth in the equity grant agreement.
Limitation of Liability and Indemnification Matters
Our Certificate of Incorporation and By-laws provide for indemnification against liabilities of our directors, officers, employees and agents, and any person who serves at our request as a director, officer, employee, member or agent of another corporation, partnership, or other enterprise as provided by Delaware law. Our obligation to indemnify the individuals described above is limited to those instances in which the individual either: (i) is successful in the lawsuit; or (ii) acted in good faith in the transaction which is the subject of the lawsuit, and in a manner he or she reasonably believed to be in, or not opposed to, the best interests of the Company. In the case of a suit brought by or in the right of the Company against any of the above-described individuals, such individuals will not be indemnified to the extent that they have been found liable for gross negligence or willful misconduct, unless the court involved determines that the individual is entitled to indemnification. Our indemnity obligations require us to indemnify these individuals or entities against certain liabilities, including attorneys’ fees, which may arise by reason of their status with or service for the Company. In connection with our indemnification obligation, we may advance expenses to these individuals as they are incurred, provided that they undertake to repay the amount advanced unless it is determined that they are entitled to indemnification. We maintain insurance covering our directors and officers.
Our Certificate of Incorporation and By-laws make provisions for the indemnification of officers, directors and other corporate agents in terms sufficiently broad to indemnify such persons,
51
under certain circumstances, for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. Insofar as we may permit indemnification for liabilities arising under the Securities Act to directors, officers, and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy, as expressed in the Securities Act and is, therefore, unenforceable.
RELATED PARTY TRANSACTIONS
Our Relationship with Spencer Trask Specialty Group, LLC (“Spencer Trask”) and Stolle Milk Biologics, Inc. (“SMBI”)
Prior to this offering and assuming conversion of all outstanding shares of Series A and Series C preferred stock, Spencer Trask and its wholly-owned subsidiary, SMBI, collectively own 579,426 shares of our common stock, which represents 56.3% of our outstanding capital stock. After the offering, Spencer Trask and SMBI will own approximately 23% of our common stock. Donald F. Farley, the Chairman of the Board and Chief Executive Officer of both Spencer Trask and SMBI, is also a member of our board of directors. Our interests may not always be aligned with the interests of Spencer Trask and SMBI. Any future dealings with Spencer Trask of SMBI will require approval by the board of directors and a separate review and approval of the transaction by the Audit Committee.
Following is a description of our current relationships with SMBI and Spencer Trask or those transactions or series of transactions with them that have occurred during the past two years where the amount involved was at least $60,000. There were other transactions with affiliates of Spencer Trask more than two years ago.
Transactions with SMBI
In 2001, we entered into a License Agreement with SMBI. In May 2004, we amended and restated the License Agreement, the new term of which will expire in May 2014. Under the amended agreement, we have the exclusive worldwide license (except in New Zealand, Australia and Asia) to use all of SMBI’s issued and pending patents covering SMBI milk-derived products, the intellectual property for the manufacture of such products, trade secrets, formulae, processes, know-how and methods (collectively, “SMBI Intellectual Property”) for the development, manufacture and sale of carbonated and non-carbonated beverages (and powders based on such beverages designed for reconstitution). Our license does not include fluid milk, milk concentrates or powders, milk blend beverages, yogurt or yogurt blend beverages and nutritional meal replacement products. We have the right to sublicense the SMBI Intellectual Property to other beverage companies or suppliers in the licensed territory solely for uses consistent with the uses contemplated by the License Agreement, subject to SMBI’s consent, which cannot be unreasonably withheld.
The License Agreement expires in May 2014 and will be automatically renewed for two two-year terms, unless terminated sooner in accordance with the License Agreement. The License Agreement may be terminated by mutual agreement, if a party breaches or defaults in the performance or observance of such party’s material obligations under the License Agreement that is not cured within 60 days after receipt of written notice by the other party or in the event of
52
bankruptcy, upon 15 days written notice. In addition, SMBI has the right to terminate the License Agreement if the Supply Agreement with SMBI is terminated by its terms.
For the licensed right, we have agreed to pay SMBI annual royalty payments on a sliding scale as follows: (i) 2% on the first $75 million of net annual sales, (ii) 1.5% royalty for the next $75 million; and (iii) a 1% royalty thereafter. We also have agreed to share royalties equally on sales by sublicensees. During 2002 and 2003, we paid royalties of $56,000 and $36,000, respectively, to SMBI under the License Agreement. As of November 30, 2004, we are indebted to SMBI in the amount of $76,166 under the License Agreement.
In connection with the bridge loan we received in 2004 (see “— Bridge Financing,” below), SMBI consented to an amendment to License Agreement under which SMBI would assign to us the NuVim trademark upon our written request following payment of at least $200,000 of the amount we currently owe SMBI. We anticipate making that $200,000 payment out of the Bridge Loan proceeds prior to the effective date of this offering.
SMBI whey protein concentrate (“WPC”), which contains SMBI’s patented micronutrients, LactoMune and LactoActin, is the key ingredient in our products. In connection with the License Agreement, we also entered into the Supply Agreement with SMBI, which also was amended and restated in May 2004 and will expire in May 2014. Under the Supply Agreement, SMBI agrees to use commercially reasonable efforts to supply us with our full requirement of WPC upon which our product depends. The current agreement expires in 2014, with automatic renewals for two two-year terms unless either party gives notice, six months prior to the end of any term, of intent not to renew. Under the Supply Agreement, SMBI will not give such notice if we demonstrate, to its satisfaction, that we have used our best reasonable commercial efforts to meet the established minimum purchase requirements.
The minimum purchase requirements will be negotiated each year by the parties, with provision in the Supply Agreement to establish the minimum purchase requirements of WPC if an agreement cannot be reached in a particular year. For 2005 and 2006, we currently anticipate needing three metric tons and four metric tons, respectively, and these amounts will constitute the minimum purchase amounts under the Supply Agreement if the parties are unable to agree upon an amount in either of those years. For each calendar year in which we fail to purchase the “minimum purchase requirement,” we are required to pay SMBI a sum equal to the contract price for the shortfall of the amount of product we did not purchase. If we fail to purchase the “minimum purchase requirement” for two consecutive years, regardless of whether we make the required shortfall payment, then SMBI agrees to negotiate in a good faith a non-exclusive supply agreement with us on terms similar to those offered to other SMBI customers.
The Supply Agreement may be terminated by mutual agreement, if a party breaches or defaults in the performance or observance of its material obligations under the License Agreement that is not cured within 60 days (10 days for a monetary breach) after receipt of written notice by the other party, in the event of bankruptcy, upon 15 days written notice, or upon six months written notice by either party if any statute, rule or regulation is enacted or deemed applicable to the products covered by the Supply Agreement that would impose a substantial economic burden if the supply arrangement is continued. In addition, SMBI has the right to terminate the Supply Agreement if the License Agreement with SMBI is terminated by its terms.
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SMBI measures and tests every batch of WPC ingredient for the micronutrients, LactoActin and LactoMune, to ensure that quality specifications for biological activity are met. SMBI has agreed to keep in inventory in the United States, an amount of product equal to our average one-month order for the most recent calendar quarter for such product. Costs for any special product development or improvement projects are shared between SMBI and us following both parties’ agreement to the costs.
In 2002 and 2003, we purchased $810,000 and $245,000, respectively, of product under the Supply Agreement. As of November 30, 2004, we are indebted to SMBI under the Supply Agreement in the amount of $285,896, including accrued interest.
Transactions with Spencer Trask
Spencer Trask has guaranteed our obligations under a $2,500,000 line of credit from Bank of Wachovia pursuant to which we have borrowed the full amount. In consideration for the guarantee, we issued five-year warrants to purchase 54,546 shares of our common stock at an exercise price of $55 per share. In connection with our restructuring and recapitalization efforts in the fall of 2004, Spencer Trask agreed to pay the entire indebtedness owed by us to Bank of Wachovia and cancel its warrants concurrently with the closing of this offering.
We have borrowed money from Spencer Trask, Spencer Trask Private Equity Fund I LP and Spencer Trask Private Equity Fund II LP, all of which are stockholders of our company, from time to time since September 2002. All of the loans are at 8% interest and the proceeds were used for working capital and general corporate purposes. These loans are summarized below:
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Date | | Principal | | Maturity Date | | Balance as of
November 30,
2004,
including
Interest | |
| |
|
| |
|
| |
|
| |
September 13, 2002 | | $ | 200,000 | | | December 31, 2002 | | $ | 303,818 | |
September 13, 2002 | | | 100,000 | | | December 31, 2002 | | | 151,909 | |
September 13, 2002 | | | 1,700,000 | | | December 31, 2002 | | | 2,233,589 | |
February 10, 2003 | | | 200,000 | | | August 10, 2003 | | | 243,300 | |
February 27, 2003 | | | 100,000 | | | August 27, 2003 | | | 121,250 | |
March 3, 2003 | | | 50,000 | | | September 3, 2003 | | | 60,547 | |
March 18, 2003 | | | 130,000 | | | September 3, 2003 | | | 157,047 | |
| | | | | | | |
|
| |
| | | | | | | | $ | 3,291,860 | |
| | | | | | | |
|
| |
In connection with these loans, we also issued to Spencer Trask an aggregate of 2,000,000 Series C preferred stock warrants in September 2002 and 2,500,000 Series C preferred stock warrants for the 2003 loans.
In November 2004, Spencer Trask agreed to accept a total of 461,700 shares of our common stock as payment in full for the approximately $5.9 million of indebtedness we owed to Spencer Trask, including loans Spencer Trask made directly to us or through the indemnity provisions of the Bank of Wachovia line of credit transaction. Spencer Trask has also agreed to cancel all of the warrants mentioned above in connection with the issuance of the 461,700 shares of common stock. This agreement is conditioned upon the closing of this offering.
Loans from Officers and Directors
From time to time beginning in June 2001, we borrowed funds for working capital from certain of our officers and directors. In September 2002, the then-existing loan obligations were replaced by 8% subordinated convertible promissory notes. The loans were originally due on September 13, 2003 but were not paid at that date, and under the terms of the subordinated convertible promissory notes, the interest rate increased at the maturity date from 8% to 14%. Under the terms of the subordinated convertible promissory notes, the debt may be converted into Series C Preferred Stock at the option of the noteholder at a conversion price of $0.20. The Series C Preferred Stock is thereafter convertible into common stock at $11.00 per share. In connection with these loans, we issued five-year warrants to purchase one share of common stock for every $1.00 of principal loaned at an exercise price of $55.00 per share. In November 2004, Messrs. Kundrat, Sullivan and Young agreed to accept shares of common stock as payment in full for the outstanding obligations and cancellation of their warrants. Those notes that were not cancelled in exchange for stock will be repaid out of the net proceeds of this offering. The loans we have received from our current officers and directors since June 2001 are as follows:
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Name | | Principal | | Balance as of
November 30,
2004 | | Shares of Common
Stock Issued | |
| |
|
| |
|
| |
|
| |
Richard P. Kundrat | | $ | 100,000 | | $ | 138,226 | | | 34,229 | |
John L. Sullivan | | $ | 50,000 | | $ | 69,009 | | | 16,104 | |
Paul Young | | $ | 100,000 | | $ | 136,217 | | | 24,801 | |
Donald F. Farley | | $ | 100,000 | | $ | 138,017 | | | — | |
Accrued Executive Salaries
Richard P. Kundrat, Paul Young and John L. Sullivan, our executive officers, have deferred their salaries and any bonuses earned in 2002, 2003 and 2004. In November 2004, we agreed to issue a total of 150,197 shares of our common stock to Messrs. Kundrat, Young and Sullivan in full satisfaction of the outstanding accrued cash compensation owed to each of them through December 31, 2003. We are continuing to accrue their unpaid salaries for 2004. The following table sets forth the cash compensation for each executive officer that has been extinguished through the issuance of common stock:
Name | | 2002 and 2003
Accrued Salary | | 2002 and 2003
Bonuses | | Shares of Common Stock Issued to
Extinguish Cash Compensation Obligation | |
| |
|
| |
|
| |
|
| |
Richard P. Kundrat | | $ | 188,500 | | $ | 110,000 | | | 77,271 | |
John L. Sullivan | | $ | 162,500 | | | — | | | 39,646 | |
Paul Young | | $ | 162,500 | | | — | | | 30,949 | |
Bridge Financing
In July 2004, we entered into a series of agreements with Dick Clark, a stockholder of our company and our spokesperson, and Stanley H. Moger, one of our directors. Under the terms of a loan agreement, Messrs. Clark and Moger agreed to loan us up to $1,000,000 in four tranches, each of which is conditioned upon completion of specified actions or events (the “Bridge Loan”). As of November 30, 2004, we have received the first three tranches, or $750,000. The loan accrues interest at 10% per annum, unless it is in default, in which case the interest increases to 15%. The principal and accrued interest are due and payable on the earlier of the consummation of this offering or January 1, 2005. The loan is secured by all of the assets of NuVim, and certain company creditors were required to execute subordination agreements in favor of Messrs. Clark and Moger. The proceeds from this loan were used for advertising, partial payment of amounts owed to SMBI, which payment is required to obtain the assignment of the NuVim trademark, and partial payment of legal fees.
Among the conditions of the Bridge Loan was an amendment to the Services Agreement with Olive Enterprises, Inc. (the “Services Agreement”), which is Dick Clark’s production
56
company. Prior to the July 2004 transactions, we owed Mr. Clark $175,000 under the Services Agreement. Pursuant to an amendment to Services Agreement, we acknowledged that indebtedness and agreed to issue a convertible promissory note in the amount of $245,000 in consideration for his forbearance until a “maturity date,” as defined in the convertible note. The convertible note is automatically convertible into units identical to the units sold in this offering, at the initial public offering price, provided the offering is consummated on or before March 31, 2005. If the offering does not occur by March 31, 2005, the convertible note is convertible, at the option of the holder at the conversion price of $1.00 per share (or unit, if the offering is consummated).
A second amendment to the Services Agreement, executed in September 2004, provides for the payment to Mr. Clark of services fees through January 2006 with a value of $650,000, plus the issuance of 30,000 shares of common stock. In connection with the $650,000 services fees obligation, we issued a 10-year warrant. If the services fees obligation is repaid on or prior to a “maturity event,” as defined in the amended agreement and the warrant, the warrant will be exercisable into the number of shares calculated by dividing $650,000 by the initial public offering price of this offering, assuming the maturity event is this offering. If the maturity event is a sale of assets or a merger or acquisition, the share calculation price is determined depending on the nature of the maturity event. The foregoing notwithstanding, if the services fees obligation is not repaid by March 31, 2005, the share calculation price will be the lesser of $1.00 or 80% of the purchase price per share in any subsequent financing, including this offering.
Also in connection with the Bridge Loan, we issued a 10-year warrant to Mr. Clark that entitles him to acquire up to 9.9% of the total fully-diluted issued and outstanding capital stock of our company following the consummation of this offering. The exercise price is equal to the initial public offering price of this offering. The warrant contains a net exercise provision.
Finally, the Bridge Loan required the formation of NuVim Powder LLC, of which Mr. Clark was given a 25% ownership interest. See “Business – Distribution.”
Mr. Clark and Mr. Moger participated in the Bridge Loan equally, and the ancillary agreements and benefits provided to Mr. Clark are being shared with Mr. Moger. Therefore, Mr. Moger has been given a 12.5% interest in the powder company and a 50% interest in both of the warrants.
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PRINCIPAL STOCKHOLDERS
Set forth below is information regarding the beneficial ownership of our common stock, as of November 30, 2004 and as adjusted to reflect the sale of 1,500,000 units in this offering, by (i) each person whom we knew owned, beneficially, more than 5% of the outstanding shares of our common stock, (ii) each of our directors, (iii) each of our Named Officers, and (iv) all of the current directors and executive officers as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and includes voting and investment power with respect to the securities. We believe that, except as otherwise noted below, each named beneficial owner has sole voting and investment power with respect to the shares listed. Unless otherwise indicated herein, beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission, and includes voting or investment power with respect to shares beneficially owned. Shares of common stock subject to options or warrants currently exercisable or exercisable on or before January 29, 2005 are deemed outstanding for computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person.
| | | | | Percentage of the Class
Beneficially Owned | |
| | | | |
| |
Name and Address of Beneficial Owner | | Number of Shares
Beneficially Owned | | Before This
Offering | | After This
Offering | |
| |
|
| |
|
| |
|
| |
Spencer Trask Specialty Group, LLC | | | 579,429 | (1) | | 54.1 | % | | 22.5 | % |
535 Madison Avenue
New York, NY 10022 | | | | | | | | | | |
Dick Clark | | | 427,474 | (2) | | 29.2 | % | | 16.6 | % |
c/o Dick Clark Productions
3003 West Olive Avenue
Burbank, CA 91505 | | | | | | | | | | |
Stanley H. Moger | | | 275,382 | (3) | | 20.5 | % | | 10.7 | % |
1180 6th Avenue, Suite 2010
New York, NY 10036 | | | | | | | | | | |
Stolle Milk Biologics, Inc. | | | 99,546 | (4) | | 9.3 | % | | 3.9 | % |
6954 Cornell Road, Suite 400
Cincinnati, OH 45242 | | | | | | | | | | |
Richard P. Kundrat | | | 136,905 | (5) | | 12.7 | % | | 5.3 | % |
Paul Young | | | 81,709 | (6) | | 7.6 | % | | 3.2 | % |
John L. Sullivan | | | 62,400 | (7) | | 5.8 | % | | 2.4 | % |
Donald F. Farley | | | 3,181 | (8) | | * | | | * | |
William Franke | | | 0 | | | * | * | | * | |
Frederick S. Pierce | | | 0 | | | * | * | | * | |
Marc Goldman | | | 0 | | | * | * | | * | |
| | | | | | * | * | | * | |
All directors and executive officers as a group (9 persons) | | | 559,577 | (9) | | 41.0 | % | | 21.6 | % |
(See footnotes on following page.)
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|
* | Less than 1%. |
| |
(1) | Reflects the issuance of 461,700 shares of common stock in the Spencer Trask debt extinguishment transaction and 18,183 shares of common stock upon the conversion of the preferred stock owned by Spencer Trask, which will take place concurrently with the closing of this offering. Includes shares owned by Spencer Trask Private Equity Fund I LP and Spencer Trask Private Equity Fund II, LP, both of which are affiliates of Spencer Trask Specialty Group, LLC. Also includes 99,545 shares of common stock owned by Stolle Milk Biologics, Inc., a wholly-owned subsidiary of Spencer Trask Specialty Group, LLC. Does not include an aggregate of 90,910 warrants owned by Spencer Trask and an affiliate, which warrants will be cancelled as part of the Spencer Trask debt extinguishment transaction. |
(2) | Reflects the issuance of 40,834 shares of common stock issuable in the Clark note conversion transaction and an additional 81,668 shares of common stock issuable upon exercise of the underlying warrants issuable in the Clark note conversion transaction. Includes 273,246 shares of common stock issuable upon exercise of currently exercisable warrants. Mr. Clark has been granted two warrants, one of which entitles him to purchase $650,000 worth of our common stock at the initial public offering price if bridge financing notes are repaid before March 31, 2005 and one of which entitles him to purchase that number of shares of our common stock that will bring his total ownership 9.9% following completion of this offering. Mr. Clark has entered into an agreement with Stanley H. Moger under which he has agreed to share a 50% interest in these two warrants with Mr. Moger. The share total in the table reflects Mr. Clark’s 50% interest and assumes exercise and conversion at $6 for the two warrants and the Clark note conversion transaction. Mr. Clark’s beneficial ownership could be materially different from the total reflected in this table if the initial public offering price varies materially from the $6 assumed price. |
(3) | Reflects the issuance of 2,954 shares of common stock issuable upon conversion of the preferred stock concurrently with the closing of this offering. Includes (i) 1,182 shares of common stock issuable upon exercise of currently exercisable options and (ii) 271,246 shares of common stock issuable upon exercise of currently exercisable warrants. See Note (2) regarding the details of the two warrants Mr. Moger is sharing with Mr. Clark. The share total in the table reflects Mr. Moger’s 50% interest and assumes an exercise price of $6 for the two warrants. Mr. Moger’s beneficial ownership could be materially different from the total reflected in this table if the initial public offering price varies materially from the $6 assumed price. |
(4) | Does not include any securities owned by Spencer Trask. See Note (1). Does not include the shares owned by Mr. Kundrat that are subject to a voting proxy in favor of Stolle Milk Biologics because this proxy will terminate upon completion of this offering. |
(5) | Includes 3,269 shares issuable upon exercise of outstanding warrants. Mr. Kundrat has given a voting proxy to Stolle Milk Biologics, Inc. that expires upon completion of this offering. |
(6) | Reflects the issuance of 909 shares of common stock issuable upon conversion of the preferred stock concurrently with the closing of this offering. Includes (i) 3,069 shares of common stock issuable upon exercise of outstanding warrants and (ii) 6,872 shares of common stock issuable upon exercise of outstanding options. |
(7) | Reflects the issuance of 1,509 shares of common stock issuable upon conversion of the preferred stock concurrently with the closing of this offering. Includes (i) 2,160 shares of common stock issuable upon exercise of outstanding warrants and (ii) 5,782 shares of common stock issuable upon exercise of outstanding options. |
(8) | Reflects the issuance of 2,727 shares of common stock issuable upon conversion of the preferred stock concurrently with the closing of this offering. Includes 909 shares held by an inter vivos family trust. Mr. Farley is the Chief Executive Officer of Spencer Trask and the Chairman of the Board of Stolle Milk Biologics, Inc., but his share total does not include any securities owned by Spencer Trask or Stolle Milk Biologics, Inc. Mr. Farley disclaims beneficial ownership of all such securities except to the extent of his pecuniary interest in those entities. |
(9) | Reflects the issuance of 8,099 shares of common stock issuable upon conversion of the preferred stock concurrently with the closing of this offering. Includes (i) 279,744 shares of common stock issuable upon exercise of outstanding warrants and (ii) 13,836 shares of common stock issuable upon exercise of outstanding options. |
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DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 120,000,000 shares of common stock and 65,000,000 shares of preferred stock, all with a par value of $0.00001 per share. Following this offering, we will have 2,571,219 shares of common stock and no shares of preferred stock outstanding.
Units
Each unit consists of one share of common stock, one Class A redeemable public warrant to purchase one share of common stock and one Class B non-redeemable public warrant to purchase one share of common stock. The common stock and public warrants will trade as a unit for at least 30 days following this offering. The representative of the underwriters will then determine when the units separate, after which the common stock, the Class A public warrants, and the Class B public warrants will trade separately.
Common Stock
As of November 30, 2004, we have 414,073 shares of common stock outstanding. Concurrently with the closing of this offering, we will issue an additional 461,700 shares of common stock in extinguishment of outstanding indebtedness we owe to Spencer Trask, 40,834 shares of common stock upon the automatic conversion of a convertible note held by Dick Clark and 154,613 shares of common stock upon the automatic conversion of 4,875,850 shares of Series A preferred stock and 3,623,000 shares of Series C preferred stock outstanding. Taking into account these issuances, we will have 1,071,219 shares of Common Stock immediately before the offering. We also have reserved for issuance an aggregate of (i) 93,428 shares of common stock upon exercise of outstanding options; and (ii) 578,858 shares upon exercise of outstanding warrants.
Holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Subject to the preference in dividend rights of any series of preferred stock which we may issue in the future, the holders of common stock are entitled to receive such cash dividends, if any, as may be declared by our Board of Directors out of legally available funds. Upon liquidation, dissolution or winding up, after payment of all debts and liabilities and after payment of the liquidation preferences of any shares of preferred stock then outstanding, the holders of the common stock will be entitled to participate pro rata in all assets that are legally available for distribution.
Other than the rights described above, the holders of common stock have no preemptive subscription, redemption, sinking fund or conversion rights and are not subject to further calls or assessments. The rights and preferences of holders of common stock will be subject to the rights of any series of preferred stock which we may issue in the future.
Class A Public Warrants
General
Each Class A public warrant entitles the holder to purchase one share of our common stock at an exercise price per share of 150% of the initial public offering price of the units. The
60
exercise price is subject to adjustment upon the occurrence of certain events as provided in the Class A public warrant certificate and summarized below. Subject to our redemption rights, our Class A public warrants may be exercised at any time during the period commencing the later of 30 days after the effective date of this offering or the date on which the units separate, and ending on the fifth anniversary of the effective date of this offering, which is the expiration date. Those of our Class A public warrants which have not previously been exercised or redeemed will expire on the expiration date. A Class A public warrant holder will not be deemed to be a holder of the underlying common stock for any purpose until the Class A public warrant has been properly exercised.
Separate transferability
Our common stock, Class A public warrants, and Class B public warrants will trade as a unit for at least 30 days following this offering. The representative of the underwriters will determine when the units separate, after which the common stock, the Class A public warrants, and the Class B public warrants each will trade separately. The representative intends to separate the units 30 days after the effective date of this offering absent unforeseen circumstances. We will announce in advance the separation of the units by a press release. Upon separation, unit holders will receive certificates for the common stock, Class A public warrants, and Class B public warrants in exchange for their unit certificates.
Redemption
After the units separate, we have the right to redeem the Class A public warrants issued in this offering at a redemption price of $0.25 per public warrant (subject to adjustment in the event of a stock split, dividend or the like) under the following circumstances. The redemption right arises if the last reported sale price per share of our common stock as reported by the principal exchange or trading facility on which our common stock trades equals or exceeds 200% of the unit price in this offering for five consecutive trading days ending prior to the date of the notice of redemption. We are required to provide 30 days prior written notice to the Class A public warrant holders of our intention to redeem the warrants. We will send the written notice of redemption by first class mail to Class A public warrant holders at their last known addresses appearing on the registration records maintained by the transfer agent for our Class A public warrants. No other form of notice or publication will be required. If we call the Class A public warrants for redemption, they will be exercisable until the close of business on the last business day before the specified redemption date.
Exercise
A Class A public warrant holder may exercise the Class A public warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of common stock underlying our Class A public warrants are qualified for sale under the securities laws of the state in which the holder resides.
Our Class A public warrants may be exercised by delivering to our transfer agent the applicable Class A public warrant certificate on or prior to the expiration date or prior to the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of Class A public warrants being exercised. Class A public warrants may only be exercised to purchase whole
61
shares. Fractional shares will not be issued upon exercise of our Class A public warrants. Class A public warrant holders will receive cash equal to the current market value of any fractional interest, which will be the value of one whole interest multiplied by the fraction thereof, in the place of fractional Class A public warrants that remain after exercise if they would then hold Class A public warrants to purchase less than one whole share.
Adjustments of exercise price
The exercise price of our Class A public warrants is subject to adjustment if we declare any stock dividend to stockholders or effect any split or reverse split with respect to our common stock. Therefore, if we effect any stock split or reverse split with respect to our common stock, the exercise price in effect immediately prior to such stock split or reverse split will be proportionately reduced or increased, respectively. Any adjustment of the exercise price also will result in an adjustment of the number of shares purchasable upon exercise of a Class A public warrant.
The exercise price is also subject to adjustment in the event of a capital reorganization or reclassification of the common stock, or in the event we consolidate with, or merge into, or sell our property to another corporation (other than a consolidation or merger that does not result in any reclassification or change of the outstanding common stock). Therefore, if we effect any capital reorganization or reclassification, consolidation, merger, or sale, the exercise price in effect immediately prior to that event will be proportionately reduced or increased, respectively. Any adjustment of the exercise price will also result in an adjustment of the number or kind of securities or property purchasable upon exercise of a Class A public warrant.
Class B Public Warrants
General
Each Class B public warrant entitles the holder to purchase one share of our common stock at an exercise price per share of 250% of the initial public offering price of the units. The exercise price is subject to adjustment upon the occurrence of certain events as provided in the Class B public warrant certificate and summarized below. Our Class B public warrants may be exercised at any time during the period commencing the later of 30 days after the effective date of this offering or the date on which the units separate, and ending on the fifth anniversary of the effective date of this offering, which is the expiration date. Those of our Class B public warrants which have not previously been exercised will expire on the expiration date. A Class B public warrant holder will not be deemed to be a holder of the underlying common stock for any purpose until the Class B public warrant has been properly exercised.
Separate transferability
Our common stock, Class A public warrants, and Class B public warrants will trade as a unit for at least 30 days following this offering. The representative of the underwriters will determine when the units separate, after which the common stock, the Class A public warrants, and the Class B public warrants each will trade separately. The representative intends to separate the units 30 days after the effective date of this offering absent unforeseen circumstances. We will announce in advance the separation of the units by a press release. Upon separation, unit
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holders will receive certificates for the common stock, Class A public warrants, and Class B public warrants in exchange for their unit certificates.
Redemption
We have no right to redeem the Class B public warrants issued in this offering.
Exercise
A Class B public warrant holder may exercise our Class B public warrants only if an appropriate registration statement is then in effect with the Securities and Exchange Commission and if the shares of common stock underlying our Class B public warrants are qualified for sale under the securities laws of the state in which the holder resides.
Our Class B public warrants may be exercised by delivering to our transfer agent the applicable Class B public warrant certificate on or prior to the expiration date or the redemption date, as applicable, with the form on the reverse side of the certificate executed as indicated, accompanied by payment of the full exercise price for the number of Class B public warrants being exercised. Class B public warrants may only be exercised to purchase whole shares. Fractional shares will not be issued upon exercise of our Class B public warrants. Class B public warrant holders will receive cash equal to the current market value of any fractional interest, which will be the value of one whole interest multiplied by the fraction thereof, in the place of fractional Class B public warrants that remain after exercise if they would then hold Class B public warrants to purchase less than one whole share.
Adjustments of exercise price
The exercise price of our Class B public warrants is subject to adjustment if we declare any stock dividend to stockholders or effect any split or reverse split with respect to our common stock. Therefore, if we effect any stock split or reverse split with respect to our common stock, the exercise price in effect immediately prior to such stock split or reverse split will be proportionately reduced or increased, respectively. Any adjustment of the exercise price will also result in an adjustment of the number of shares purchasable upon exercise of a Class B public warrant or, if we elect, an adjustment of the number of Class B public warrants outstanding.
The exercise price is also subject to adjustment in the event of a capital reorganization or reclassification of the common stock, or in the event we consolidate with, or merge into, or sell our property to another corporation (other than a consolidation or merger that does not result in any reclassification or change of the outstanding common stock). Therefore, if we effect any capital reorganization or reclassification, consolidation, merger, or sale, the exercise price in effect immediately prior to that event will be proportionately reduced or increased, respectively. Any adjustment of the exercise price also will result in an adjustment of the number or kind of securities or property purchasable upon exercise of a Class B public warrant.
Preferred Stock
Our Certificate of Incorporation provides for the issuance of up to 65,000,000 shares of preferred stock. As of the date of the offering, there will be no shares of preferred stock outstanding because the 4,875,850 shares of Series A preferred stock and 3,623,000 shares of
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Series C preferred stock will automatically convert to common stock concurrently with this offering. As a result of the 1-for-55 reverse stock split effected in November 2004, the outstanding preferred shares will convert into an aggregate of 154,613 shares of common stock.
The Board of Directors has the authority, without further action by the stockholders, to issue up to an additional 56,335,150 shares of preferred stock in one or more series, and to fix the rights, preferences and privileges thereof, including voting rights, terms of redemption, redemption prices, liquidation preference and number of shares constituting any series or the designation of such series. The purpose of the provisions of our certificate of incorporation authorizing the issuance of preferred stock is to provide us with the flexibility to take advantage of opportunities to raise additional capital through the issuance of shares that address competitive conditions in the securities markets. The rights of the holders of our common stock are subject to, and may be adversely affected by, the rights of holders of any preferred stock that we may issue in the future. Although we have no present plans to do so, the Board of Directors, without stockholder approval, may issue preferred stock with voting or conversion rights which could adversely affect the voting power of the holders of our common stock. This provision may be deemed to have a potential anti-takeover effect, because the issuance of such preferred stock may delay or prevent a change of control of the Company. Furthermore, shares of preferred stock, if any are issued, may have other rights, including economic rights, senior to our common stock, and, as a result, the issuance of preferred shares could depress the market prices of our shares of common stock.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate of Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. Subject to certain exceptions, the statute prohibits a publicly held Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder; unless:
• | prior to such date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| |
• | upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (1) by persons who are directors and also officers and (2) by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or |
| |
• | on or after such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66-2/3% of the outstanding voting stock which is not owned by the interested stockholder. |
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For purposes of Section 203, a “business combination” includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder, and an “interested stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the date of determination whether the person is an “Interested Stockholder,” did own, 15% or more of the corporation’s voting stock.
In addition, our authorized but unissued shares of common stock and preferred stock are available for our Board to issue without stockholder approval. We may use these additional shares for a variety of corporate purposes, including future public offerings to raise additional capital, corporate acquisitions and employee benefit plans. The existence of our authorized but unissued shares of common stock and preferred stock could render more difficult or discourage an attempt to obtain control of our company by means of a proxy contest, tender offer, merger or other transaction. Our authorized but unissued shares may be used to delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. The Board of Directors is also authorized to adopt, amend or repeal our bylaws which could delay, defer or prevent a change in control.
Transfer Agent, Warrant Agent and Registrar
Our transfer agent and registrar for our common stock and the warrant agent for our Class A public warrants and Class B public warrants is American Stock Transfer & Trust Company, New York, New York.
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SHARES ELIGIBLE FOR FUTURE SALE
This Offering
Upon completion of the offering, we expect to have 2,571,219 shares of common stock outstanding. This number assumes no exercise of the underwriters’ over-allotment option, the Class A public warrants, the Class B public warrants, the representative’s warrants or any other outstanding options and warrants. We expect to have 2,796,219 shares of common stock outstanding if the underwriters’ over-allotment is exercised in full. Of these shares, the 1,500,000 shares of common stock issued as part of the units sold in this offering (1,725,000 shares if the underwriters’ over-allotment is exercised in full) will be freely tradeable without restrictions or further registration under the Securities Act of 1933, except that any shares purchased by our “affiliates,” as that term is defined under the Securities Act, may generally only be sold in compliance with the limitations of Rule 144 under the Securities Act. The 1,500,000 shares of common stock underlying the Class A public warrants and the 1,500,000 shares of common stock underlying the Class B public warrants issued as part of the units sold in this offering (1,725,000 shares of common stock in the case of the Class A public warrants and 1,725,000 shares of common stock in the case of the Class B public warrants if the underwriters’ over-allotment is exercised in full) will also be freely tradeable after exercise of the warrants, except for shares held by our affiliates.
Outstanding Restricted Stock
The remaining 1,071,219 outstanding shares of common stock will be restricted securities within the meaning of Rule 144 and may not be sold in the absence of registration under the Securities Act unless an exemption from registration is available, including the exemption from registration offered by Rule 144. The holders of these shares have agreed not to sell or otherwise dispose of any of their shares of common stock for a period of one year after completion of this offering, without the prior written consent of Paulson Investment Company, Inc., the representative of the underwriters, subject to certain limited exceptions. After the expiration of the lock-up period, or earlier with the prior written consent of Paulson Investment Company, Inc., all of the outstanding restricted shares subject to the lock-up that are not also subject to escrow arrangements imposed by state securities regulators may be sold in the public market pursuant to Rule 144.
In general, under Rule 144, as currently in effect, beginning 90 days after the date of this prospectus, a person who has beneficially owned restricted shares for at least one year, including a person who may be deemed to be our affiliate, may sell within any three-month period a number of shares of common stock that does not exceed a specified maximum number of shares. This maximum is equal to the greater of 1% of the then outstanding shares of our common stock or the average weekly trading volume in the common stock during the four calendar weeks immediately preceding the sale. Sales under Rule 144 are also subject to restrictions relating to manner of sale, notice and availability of current public information about us. In addition, under Rule 144(k) of the Securities Act, a person who is not our affiliate, has not been an affiliate of ours within three months prior to the sale and has beneficially owned shares for at least two years would be entitled to sell such shares immediately without regard to volume limitations, manner of sale provisions, notice or other requirements of Rule 144.
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Options and Warrants
Stock Options
As of November 30, 2004, we had granted and have outstanding a total of 33,428 options to purchase shares of common stock under our several options plans. We have 500,000 options available for grant under our 2004 Incentive Stock Option Plan and an additional 200,000 options available for grant under our 2004 Directors Stock Option Plan. We will not grant any additional options under our 2000, 2001 or 2002 stock option plans.
We intend to file a registration statement under the Securities Act to register all shares of common stock issued, issuable or reserved for issuance under our stock option plans. This registration statement is expected to be filed as soon as practicable after the date of this prospectus and will automatically become effective upon filing. Following this filing, shares exercisable pursuant to vested options that are registered under this registration statement will, subject to the lock-up agreements and market standoff provisions described above and Rule 144 volume limitations applicable to our affiliates, be available for sale in the open market.
Warrants Immediately prior to the closing of this offering, we will have an aggregate of 578,858 warrants outstanding. None of these warrants carry registration rights and accordingly, in the event any warrants are exercised, the holders will be required to hold the underlying shares for at least one year, unless they are subsequently registered.
Representative’s Warrants
In connection with this offering, we have agreed to issue to the representative of the underwriters warrants to purchase 150,000 units. The representative’s warrants will be exercisable for units at any time beginning 180 days after the effective date of this offering until the fifth anniversary of the effective date. We will cause the registration statement to remain effective until the earlier of the time that all of the representative’s warrants have been exercised and the date which is five years after the effective date of the offering or will file a new registration statement covering the exercise and resale of those securities. The common stock and Class A and Class B public warrants issued to the representative upon exercise of these representative’s warrants will be freely tradeable.
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UNDERWRITING
The underwriters named below have entered into an underwriting agreement with respect to the units being offered in connection with this offering. In connection with this offering and subject to certain conditions, the underwriters named below has agreed to purchase, and we have agreed to sell, 1,500,000 units at the price set forth on the cover page of this prospectus, each unit consisting of one share of common stock, one Class A public warrant to purchase one share of common stock and one Class B public warrant to purchase one share of common stock, in accordance with the following table:
Underwriter | | Number of
Units | |
| | | |
| |
|
| |
Paulson Investment Company, Inc. | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| |
|
| |
Total | | | 1,500,000 | |
| |
|
| |
Information regarding the aforementioned underwriters (including that relating to licensing, registration and disciplinary actions, if any) may be retrieved from state securities regulators who use the Central Registration Depository (CRD) system.
Nature of the Underwriting Commitment
The underwriting agreement between the underwriters and us provides that the underwriters are committed to purchase the 1,500,000 units offered by this prospectus if any units are purchased. This commitment does not apply to 225,000 units subject to the over-allotment option granted by us to the underwriters to purchase additional units in this offering. The underwriting agreement also provides that the obligations of the several underwriters to pay for and accept delivery of the units are subject to the approval of certain legal matters by counsel and certain other conditions. These conditions include, among other things, the requirements that no stop order suspending the effectiveness of the registration statement shall be in effect and that no proceedings for such purpose have been instituted or threatened by the Securities and Exchange Commission.
Conduct of the Offering
We have been advised by Paulson Investment Company, Inc. that the underwriters propose to offer the units to be sold in this offering directly to the public at the public offering price set forth on the cover page of this prospectus, and to certain securities dealers at that price less a concession of not more than $ per unit. The underwriters may allow, and those dealers may reallow, a concession not in excess of $ per unit to certain other dealers. After the units are released for sale to the public, the underwriters may change the offering price and other selling terms from time to time. No change in those terms will change the amount of proceeds to be received by us as set forth on the cover page of this prospectus. The initial public offering
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price of the units will be determined by negotiations between us and Paulson Investment Company, Inc., the representative of the underwriters.
The underwriters have informed us that they will not confirm sales of units offered by this prospectus to accounts over which they exercise discretionary authority without obtaining the specific approval of the account holder.
Over-allotment Option
Pursuant to the underwriting agreement, we have granted to the underwriters an option, exercisable once during a period of 45 days from the date of this prospectus, to purchase up to an additional 225,000 units on the same terms as the other units being purchased by the underwriters from us. The underwriters may exercise the option solely to cover over-allotments, if any, in the sale of the units that the underwriters have agreed to purchase. If the over-allotment option is exercised in full, the total public offering price, underwriting discounts and proceeds to us before offering expenses will be $ , $ and $ , respectively.
Offering Discounts
The following table shows the per unit and total underwriting discounts to be paid by us to the underwriters. These amounts are shown assuming no exercise and full exercise, respectively, of the underwriters’ over-allotment option described above:
| | Per Unit | | Total without
Over-Allotment
Option | | Total with
Over-Allotment
Option | |
| |
|
| |
|
| |
|
| |
Total underwriting discount to be paid by us | | $ | | $ | | | | $ | | |
Expense Allowance
We have agreed to pay to Paulson Investment Company, Inc. a non-accountable expense allowance equal to three percent of the aggregate public offering price of the units sold by us in this offering, including units sold on exercise of the underwriters’ over-allotment option.
Loan from Paulson Investment Company, Inc.
Paulson Investment Company, Inc. loaned $20,000 to us on July 9, 2004. Interest accrues at a rate of 10% per annum. We must repay the loan at the closing of this offering, if not previously repaid.
Representative’s Warrants
On completion of this offering, we will issue to the representative of the underwriters warrants to purchase up to 150,000 units, for a price of per unit equal to 120% of the initial offering price of the units. The representative’s warrants will be exercisable for units at any time beginning 180 days after the effective date of this offering, and will expire on the fifth anniversary of the effective date. These warrants cannot be sold, transferred, assigned, pledged or hypothecated by any person for a period of 180 days following the effective date of the
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offering, except by operation of law or to an individual who is an officer or partner of the underwriters of this offering and members of the selling group.
The holder of these warrants will have, in that capacity, no voting, dividend or other stockholder rights. Any profit realized on the sale of the units issuable upon exercise of these warrants may be deemed to be additional underwriting compensation. The securities underlying these warrants are being registered pursuant to the registration statement of which this prospectus is a part. During the term of these warrants, the holder thereof is given the opportunity to profit from a rise in the market price of our common stock. We may find it more difficult to raise additional equity capital while these warrants are outstanding. At any time at which these warrants are likely to be exercised, we may be able to obtain additional equity capital on more favorable terms.
Indemnification
We have agreed to indemnify the underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments that the underwriters may be required to make in respect thereof. We have been advised that, in the opinion of the Securities and Exchange Commission, indemnification for liabilities under the Securities Act is against public policy as expressed in the Securities Act and is therefore unenforceable.
Lock-up Agreements
Our officers, directors and all of our stockholders have agreed that for a period of one year from the date this registration statement becomes effective that they will not offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of our common stock, or any securities of that are substantially similar to our common stock, or any securities convertible into or exercisable or exchangeable for common stock, without the prior consent of Paulson Investment Company, Inc., as the representative of the underwriters. Paulson Investment Company, Inc. may consent to an early release from the one-year lock-up period. Currently, there are no agreements by Paulson to release any of the securities from the lock-up agreements.
Stabilization and Other Transactions
The rules of the SEC generally prohibit the underwriters from trading in our securities on the open market during this offering. However, the underwriters are allowed to engage in some open market transactions and other activities during this offering that may cause the market price of our securities to be above or below that which would otherwise prevail in the open market. These activities may include stabilization, short sales and over-allotments, syndicate covering transactions and penalty bids.
• | stabilizing transactions consist of bids or purchases made by the managing underwriter for the purpose of preventing or slowing a decline in the market price of our securities while this offering is in progress; |
| |
• | short sales and over-allotments occur when the managing underwriter, on behalf of the underwriting syndicate, sells more of our units than it purchases from us in this offering. In |
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| order to cover the resulting short position, the managing underwriter may exercise the over-allotment option described above or may engage in syndicate covering transaction; there is no contractual limit on the size of any syndicate covering transaction; the underwriters will deliver a prospectus in connection with any such short sales; purchasers of units sold short by the underwriters are entitled to the same remedies under the federal securities laws as any other purchaser of units covered by the registration statement; |
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• | syndicate covering transactions are bids for or purchases of our securities on the open market by the managing underwriter on behalf of the underwriters in order to reduce a short position incurred by the managing underwriter on behalf of the underwriters; and |
| |
• | a penalty bid is an arrangement permitting the managing underwriter to reclaim the selling concession that would otherwise accrue to an underwriter if the common stock originally sold by the underwriter was later repurchased by the managing underwriter and therefore was not effectively sold to the public by such underwriter. |
If the underwriters commence these activities, they may discontinue them at any time without notice. The underwriters may carry out these transactions on the Nasdaq SmallCap Market or otherwise.
Determination of Offering Price
Before this offering, there has been no public market for our units, the common stock or public warrants. Accordingly, the initial public offering price of the units offered by this prospectus and the exercise price of the public warrants were determined by negotiation between us and the underwriters. Among the factors considered in determining the initial public offering price of the units and the exercise price of the public warrants were:
• | our history and our prospects; |
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• | the industry in which we operate; |
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• | the status and development prospects for our proposed products; |
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• | our past and present operating results; |
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• | the previous experience of our executive officers; and |
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• | the general condition of the securities markets at the time of this offering. |
The offering price stated on the cover page of this prospectus should not be considered an indication of the actual value of the units. That price is subject to change as a result of market conditions and other factors, and we cannot assure you that the units, or the common stock and public warrants contained in the units, can be resold at or above the initial public offering price.
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Expenses
The following table sets forth an itemization of all expenses we will pay in connection with the issuance and distribution of the securities being registered. Except for the SEC registration fee and NASD filing fee, the amounts listed below are estimates:
Nature of Expense | | Amount | |
| |
|
| |
SEC registration fee | | $ | 7,746 | |
NASD filing fee | | | 6,614 | |
Underwriters’ non-accountable expense allowance | | | 270,000 | |
Nasdaq SmallCap listing fee | | | 35,000 | |
Accounting fees and expenses | | | 75,000 | |
Legal fees and expenses | | | 325,000 | |
Printing and related expenses | | | 40,000 | |
Blue Sky fees and expenses | | | 80,000 | |
Transfer agent fees and expenses | | | 2,000 | |
Miscellaneous expenses | | | 48,933 | |
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|
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Total | | $ | 890,293 | |
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|
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LEGAL MATTERS
The validity of the issuance of the securities offered by this prospectus will be passed upon for the Company by Wickersham & Murphy, a Professional Corporation, Palo Alto, California. Certain legal matters in connection with this offering will be passed upon for the underwriters by Holland & Knight LLP, Portland, Oregon.
EXPERTS
The financial statements included in this prospectus and elsewhere in the registration statement have been audited by WithumSmith + Brown, P.C., independent auditors, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing.
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WHERE YOU CAN FIND MORE INFORMATION
In connection with the units offered by this prospectus, we have filed a registration statement on Form SB-2 under the Securities Act of 1933 with the SEC. This prospectus, filed as part of the registration statement, does not contain all of the information included in the registration statement and the accompanying exhibits and schedules. For further information with respect to our units, shares and warrants, and us, you should refer to the registration statement and the accompanying exhibits. Statements contained in this prospectus regarding the contents of any contract or any other document are not necessarily complete, and you should refer to the copy of the contract or other document filed as an exhibit to the registration statement, each statement being qualified in all respects by the actual contents of the contract or other document referred to. You may inspect a copy of the registration statement and the accompanying exhibits without charge at the Securities and Exchange Commission’s public reference facilities, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies of all or any part of the registration statement from those offices for a fee. You may obtain information on the operation of the public reference facilities by calling the Securities and Exchange Commission at 1-800-SEC-0330. The SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically. The address of the site is http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing financial statements audited by our independent auditors.
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NUVIM, INC.
INDEX TO FINANCIAL STATEMENTS
| | Page |
| |
|
Report of WithumSmith+Brown, P.C. Independent Auditors | | F-2 |
Balance Sheets - December 31, 2002 and 2003; and September 30, 2003 and 2004 (unaudited) | | F-3 |
Statements of Operations - Years ended December 31, 2002 and December 31, 2003; and Nine Months Ended September 30, 2003 and September 30, 2004 (unaudited) | | F-4 |
Statements of Cash Flows – Years ended December 31, 2002 and December 31, 2003; and Nine Months Ended September 30, 2003 and September 30, 2004 (unaudited) | | F-5 |
Statements of Stockholders’ Equity – Years ended December 31, 2002 and December 31, 2003; and Nine Months Ended September 30, 2004 (unaudited) | | F-6 |
Notes to Financial Statements | | F-7 |
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of:
NuVim, Inc.
We have audited the accompanying balance sheets of NuVim, Inc. as of December 31, 2002 and 2003, and the related statements of operations, stockholders’ deficit, and cash flows for each of the two years in the period ended December 31, 2003. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2002 and 2003, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ WithumSmith+Brown, P.C.
November 17, 2004
(Except for Note #10A, as to which the date is November 30, 2004)
Flemington, New Jersey
F - 2
NUVIM, INC.
BALANCE SHEETS
DECEMBER 31, 2002 AND 2003
SEPTEMBER 30, 2003 AND 2004 (UNAUDITED)
| | December 31, | | September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | Unaudited | |
ASSETS | | | | | | | | | | | | | |
Current Assets: | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 542 | | $ | 54,609 | | $ | 16,054 | | $ | 31,250 | |
Accounts receivable, net | | | 95,619 | | | 53,718 | | | 74,472 | | | 65,053 | |
Inventory | | | 372,333 | | | 160,664 | | | 138,241 | | | 82,106 | |
Prepaid expenses and other current assets | | | 5,574 | | | 40,192 | | | 5,000 | | | 8,678 | |
| |
|
| |
|
| |
|
| |
|
| |
Total Current Assets | | | 474,068 | | | 309,183 | | | 233,767 | | | 187,087 | |
Equipment and furniture, net | | | 102,993 | | | 60,873 | | | 71,538 | | | 30,677 | |
Cash restricted for letter of credit | | | 100,000 | | | — | | | — | | | — | |
Prepaid royalty | | | 339,812 | | | — | | | 312,806 | | | — | |
Deposits and other assets | | | 8,147 | | | 8,147 | | | 8,146 | | | 8,146 | |
Deferred offering costs | | | — | | | — | | | — | | | 117,800 | |
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|
| |
|
| |
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|
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TOTAL ASSETS | | $ | 1,025,020 | | $ | 378,203 | | $ | 626,257 | | $ | 343,710 | |
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|
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|
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | | | | | | |
Current Liabilities: | | | | | | | | | | | | | |
Senior note payable- related party | | $ | — | | $ | — | | $ | — | | $ | 500,000 | |
Demand note payable - bank | | | 2,500,000 | | | 2,500,000 | | | 2,500,000 | | | 2,500,000 | |
Accrued Interest-demand payable note-bank | | | — | | | 59,519 | | | 37,956 | | | 133,672 | |
Senior convertible promissory notes - related party | | | 2,000,000 | | | 2,480,000 | | | 2,480,000 | | | 2,480,000 | |
Accrued interest-senior convertible promissory notes-related party | | | 152,649 | | | 473,194 | | | 315,334 | | | 740,750 | |
Convertible note-related party | | | — | | | — | | | — | | | 245,000 | |
Stockholder loans- subordinated convertible promissory notes | | | 657,544 | | | 635,000 | | | 635,000 | | | 635,000 | |
Accrued interest stockholder loans | | | 69,881 | | | 156,853 | | | 134,089 | | | 223,529 | |
Accounts payable | | | 930,514 | | | 631,998 | | | 731,178 | | | 436,723 | |
Accounts payable and accrued expenses to related parties | | | 1,094,000 | | | 1,019,000 | | | 1,147,000 | | | 776,000 | |
Accrued expenses | | | 20,000 | | | 55,000 | | | 18,195 | | | 235,449 | |
Accrued compensation | | | 200,943 | | | 714,443 | | | 443,443 | | | 1,101,938 | |
Rescinded series B offering payable | | | 78,500 | | | 42,000 | | | 42,000 | | | 42,000 | |
Related party advances | | | 27,000 | | | 27,000 | | | 27,000 | | | 82,000 | |
Other note payable | | | — | | | — | | | 71,400 | | | 120,000 | |
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| |
|
| |
|
| |
|
| |
Total Current Liabilities | | | 7,731,031 | | | 8,794,007 | | | 8,582,595 | | | 10,252,061 | |
| |
|
| |
|
| |
|
| |
|
| |
Commitments and Contingencies | | | | | | | | | | | | | |
Stockholders’ Deficit: | | | | | | | | | | | | | |
Preferred Stock - 65,000,000 shares authorized: | | | | | | | | | | | | | |
Preferred Stock Series A, convertible, non cumulative, participating, par value $.00001 per share; 4,875,850 shares designated, issued and outstanding in 2002 and 2003 (liquidation preference of $4,875,850) | | | 49 | | | 49 | | | 49 | | | 49 | |
Preferred Stock Series C, convertible, non cumulative, participating, par value $.00001 per share; designated 50,000,000 shares, 3,523,000 and 3,623,000 issued and outstanding in 2002 and 2003, respectively (liquidation preference of $724,600) | | | 35 | | | 36 | | | 35 | | | 36 | |
Common Stock, 120,000,000 shares authorized, $.00001 par value, issued and outstanding, 134,000 at December 31, 2002 and 155,073 at December 31, 2003 and 155,073 at September 30, 2003 and 185,073 at September 30, 2004 | | | 1 | | | 2 | | | 1 | | | 2 | |
Additional paid-in capital | | | 6,771,042 | | | 7,300,687 | | | 7,200,687 | | | 7,778,495 | |
Accumulated deficit | | | (13,477,138 | ) | | (15,716,578 | ) | | (15,157,110 | ) | | (17,382,511 | ) |
Deferred stock compensation | | | — | | | — | | | — | | | (304,422 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Total Stockholders’ Deficit | | | (6,706,011 | ) | | (8,415,804 | ) | | (7,956,338 | ) | | (9,908,351 | ) |
| |
|
| |
|
| |
|
| |
|
| |
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | | $ | 1,025,020 | | $ | 378,203 | | $ | 626,257 | | $ | 343,710 | |
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|
| |
|
| |
|
| |
|
| |
The Notes to Financial Statements are an integral part of these statements.
F - 3
NUVIM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2004 (UNAUDITED)
| | December 31, | | September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | Unaudited | |
Gross Sales | | $ | 3,539,118 | | $ | 2,335,676 | | $ | 1,897,844 | | $ | 1,068,564 | |
Less: Discounts, Allowances and Promotional Payments | | | 858,359 | | | 581,394 | | | 487,209 | | | 244,132 | |
| |
|
| |
|
| |
|
| |
|
| |
Net Sales | | | 2,680,759 | | | 1,754,282 | | | 1,410,635 | | | 824,432 | |
Cost of Sales | | | 2,340,695 | | | 1,270,656 | | | 1,010,999 | | | 558,373 | |
Write down of obsolete inventory | | | 165,306 | | | 256,760 | | | 189,162 | | | 46,144 | |
| |
|
| |
|
| |
|
| |
|
| |
Cost of Sales | | | 2,506,001 | | | 1,527,416 | | | 1,200,161 | | | 604,517 | |
| |
|
| |
|
| |
|
| |
|
| |
Gross Profit | | | 174,758 | | | 226,866 | | | 210,474 | | | 219,915 | |
Selling, General and Administrative Expenses | | | 3,506,886 | | | 1,967,795 | | | 1,438,431 | | | 1,372,727 | |
| |
|
| |
|
| |
|
| |
|
| |
Loss From Operations | | | (3,332,128 | ) | | (1,740,929 | ) | | (1,227,957 | ) | | (1,152,812 | ) |
Other Income (Expense): | | | | | | | | | | | | | |
Interest Expense | | | (420,910 | ) | | (709,210 | ) | | (452,015 | ) | | (573,379 | ) |
Interest Income | | | 3,683 | | | 407 | | | — | | | — | |
Miscellaneous Income (Expense) | | | (26,217 | ) | | (839 | ) | | — | | | — | |
Gain on Forgiveness of Accounts Payable | | | — | | | — | | | — | | | 60,258 | |
| |
|
| |
|
| |
|
| |
|
| |
Total Other Income (Expense) - Net | | | (443,444 | ) | | (709,642 | ) | | (452,015 | ) | | (513,121 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net Loss Before Income Tax Benefit | | | (3,775,572 | ) | | (2,450,571 | ) | | (1,679,972 | ) | | (1,665,933 | ) |
Income Tax Benefit | | | 216,470 | | | 211,131 | | | — | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
Net Loss | | $ | (3,559,102 | ) | $ | (2,239,440 | ) | $ | (1,679,972 | ) | $ | (1,665,933 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Basic and Diluted Loss Per Share | | $ | (26.99 | ) | $ | (15.25 | ) | $ | (11.66 | ) | $ | (10.30 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Weighted Average Number of Common Shares Outstanding - Basic and Diluted | | | 131,864 | | | 146,866 | | | 144,135 | | | 161,726 | |
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|
| |
|
| |
|
| |
|
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The Notes to Financial Statements are an integral part of these statements.
F - 4
NUVIM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2004 (UNAUDITED)
| | December 31, | | September 30, | |
| |
| |
| |
| | | 2002 | | | 2003 | | | 2003 | | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | | | | | | Unaudited | |
Cash Flow From Operating Activities: | | | | | | | | | | | | | |
Net Loss | | $ | (3,559,102 | ) | $ | (2,239,440 | ) | $ | (1,679,972 | ) | $ | (1,665,933 | ) |
Adjustment to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | | |
Depreciation | | | 42,120 | | | 42,120 | | | 31,455 | | | 31,590 | |
Stock-based compensation | | | 74,512 | | | 231,647 | | | 231,647 | | | 101,474 | |
Non-cash interest expense warrants | | | 168,000 | | | 178,000 | | | 178,000 | | | — | |
Inventory obsolescence | | | 165,306 | | | 256,760 | | | 189,162 | | | 46,144 | |
Gain on forgiveness of accounts payable | | | — | | | — | | | — | | | (60,258 | ) |
Non-cash revenue adjustments | | | 858,359 | | | 581,394 | | | 487,209 | | | 244,132 | |
Change in Operating Assets and Liabilities: | | | | | | | | | | | | | |
Accounts receivable, net | | | (911,529 | ) | | (539,493 | ) | | (466,063 | ) | | (255,467 | ) |
Inventory | | | (137,553 | ) | | (45,091 | ) | | 44,930 | | | 32,414 | |
Prepaid expenses and other current assets | | | 22,434 | | | (34,618 | ) | | 27,581 | | | 31,515 | |
Deposits and other assets | | | 31,922 | | | — | | | — | | | — | |
Cash restricted for letter of credit | | | 150,000 | | | 100,000 | | | 100,000 | | | — | |
Accounts payable | | | 113,181 | | | 141,296 | | | (199,347 | ) | | (63,105 | ) |
Accrued compensation | | | 200,943 | | | 513,500 | | | 242,500 | | | 387,495 | |
Accrued expenses | | | 20,000 | | | 35,000 | | | (1,795 | ) | | 180,449 | |
Accrued Interest | | | 144,209 | | | 467,036 | | | 264,849 | | | 408,385 | |
Accounts payable to related parties | | | 488,728 | | | (75,000 | ) | | 53,000 | | | (243,000 | ) |
Proceeds from related party advances | | | 27,000 | | | — | | | — | | | 55,000 | |
| |
|
| |
|
| |
|
| |
|
| |
Net Cash Used in Operating Activities | | | (2,101,470 | ) | | (386,889 | ) | | (496,844 | ) | | (769,165 | ) |
Cash Flow From Investing Activities: | | | | | | | | | | | | | |
Purchase of equipment and furniture | | | — | | | — | | | — | | | (1,394 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net Cash Used in Investing Activities | | | — | | | — | | | — | | | (1,394 | ) |
Cash Flow From Financing Activities: | | | | | | | | | | | | | |
Repayment of shareholder loans | | | (77,456 | ) | | (22,544 | ) | | (22,544 | ) | | — | |
Repayment of rescinded series B offering payable | | | — | | | (36,500 | ) | | (36,500 | ) | | — | |
Proceeds from issuance of series C preferred stock | | | 156,000 | | | 20,000 | | | 20,000 | | | — | |
Proceeds from senior convertible promissory notes - related party | | | 1,700,000 | | | 480,000 | | | 480,000 | | | — | |
Proceeds from senior note payable - related party | | | — | | | — | | | — | | | 500,000 | |
Issuance of convertible note in payment of accounts payable-related party | | | — | | | — | | | — | | | 245,000 | |
Proceeds from other notes payable | | | — | | | — | | | 71,400 | | | 120,000 | |
Deferred offering costs | | | — | | | — | | | — | | | (117,800 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Net Cash Provided By Financing Activates | | | 1,778,544 | | | 440,956 | | | 512,356 | | | 747,200 | |
| |
|
| |
|
| |
|
| |
|
| |
Increase (Decrease) in Cash and Cash Equivalents | | | (322,926 | ) | | 54,067 | | | 15,512 | | | (23,359 | ) |
Cash and Cash Equivalents at Beginning of Period | | | 323,468 | | | 542 | | | 542 | | | 54,609 | |
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|
| |
|
| |
|
| |
|
| |
Cash and Cash Equivalents at End of Period | | $ | 542 | | $ | 54,609 | | $ | 16,054 | | $ | 31,250 | |
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|
| |
|
| |
|
| |
|
| |
Supplemental Disclosure of Cash Flow Information: | | | | | | | | | | | | | |
Cash paid for interest | | $ | 386,402 | | $ | 38,808 | | $ | 16,499 | | $ | — | |
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The Notes to Financial Statements are an integral part of these statements.
F - 5
NUVIM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2003
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 (UNAUDITED)
| | Preferred Stock
Series A | | Preferred Stock
Series C | Common Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Deferred
Stock
Compensation | | Total
Stockholders’
Deficit | |
| |
| |
| |
| | | | | |
| | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | | | |
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|
| |
|
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| |
Balance, December 31, 2001 | | | 4,875,850 | | $ | 49 | | | — | | $ | — | | | 129,727 | | $ | 1 | | $ | 6,091,678 | | $ | (9,918,036 | ) | $ | (27,512 | ) | $ | (3,853,820 | ) |
Issuance of common shares for compensation | | | — | | | — | | | — | | | — | | | 4,273 | | | — | | | 47,000 | | | — | | | — | | | 47,000 | |
Amortization of deferred compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 27,512 | | | 27,512 | |
Net proceeds from sale of series C preferred stock | | | — | | | — | | | 3,523,000 | | | 35 | | | — | | | — | | | 464,364 | | | — | | | — | | | 464,399 | |
Warrants issued in connection with notes payable | | | — | | | — | | | — | | | — | | | — | | | — | | | 168,000 | | | — | | | — | | | 168,000 | |
Net loss for the year ended December 31, 2002 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,559,102 | ) | | — | | | (3,559,102 | ) |
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Balance at December 31, 2002 | | | 4,875,850 | | | 49 | | | 3,523,000 | | | 35 | | | 134,000 | | | 1 | | | 6,771,042 | | | (13,477,138 | ) | | — | | | (6,706,011 | ) |
Proceeds from sale of preferred stock series C | | | — | | | — | | | 100,000 | | | 1 | | | — | | | — | | | 19,999 | | | — | | | — | | | 20,000 | |
Issuance of common shares for compensation | | | — | | | — | | | — | | | — | | | 21,073 | | | 1 | | | 231,646 | | | — | | | — | | | 231,647 | |
Warrants issued in connection with notes payable | | | — | | | — | | | — | | | — | | | — | | | — | | | 178,000 | | | — | | | — | | | 178,000 | |
Related party debt extinguishment | | | — | | | — | | | — | | | — | | | — | | | — | | | 100,000 | | | — | | | — | | | 100,000 | |
Net loss for the year ended December 31, 2003 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (2,239,440 | ) | | — | | | (2,239,440 | ) |
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Balance at December 31, 2003 | | | 4,875,850 | | | 49 | | | 3,623,000 | | | 36 | | | 155,073 | | | 2 | | | 7,300,687 | | | (15,716,578 | ) | | — | | | (8,415,804 | ) |
Warrants issued in connection with service agreement | | | — | | | — | | | — | | | — | | | — | | | — | | | 225,896 | | | — | | | (225,896 | ) | | — | |
Stock issued in connection with service agreement | | | — | | | — | | | — | | | — | | | 30,000 | | | — | | | 180,000 | | | — | | | (180,000 | ) | | — | |
Amortization of deferred stock compensation | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 101,474 | | | 101,474 | |
Related party debt extinguishment | | | — | | | — | | | — | | | — | | | — | | | — | | | 71,912 | | | — | | | — | | | 71,912 | |
Net loss for the nine months ended September 30, 2004 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,665,933 | ) | | — | | | (1,665,933 | ) |
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Balance at September 30, 2004 (Unaudited) | | | 4,875,850 | | $ | 49 | | | 3,623,000 | | $ | 36 | | | 185,073 | | $ | 2 | | | 7,778,495 | | $ | (17,382,511 | ) | $ | (304,422 | ) | $ | (9,908,351 | ) |
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The Notes to Financial Statements are an integral part of these statements.
F - 6
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 1 – BUSINESS AND BASIS OF PRESENTATION
A. Business
NuVim, Inc. (the “Company”) markets and distributes dietary supplement beverages, which enhance the immune system, promote sturdy joints and muscle flexibility. The Company distributes its products through supermarkets in approximately 13 states, predominantly on the East Coast, and the District of Columbia. The Company’s beverage products contain certain micronutrients which Stolle Milk Biologics, Inc.’s (“SMBI”), has patented. SMBI is a wholly-owned subsidiary of Spencer Trask Specialty Group, LLC (ST). SMBI and ST collectivelty are significant shareholders of the company. The Company has entered into supply and licensing agreements with SMBI for these patented micronutrients, which can be terminated by SMBI under certain conditions (See Note 13).
The accompanying financial statements as of and for the interim periods ended September 30, 2003 and 2004 are unaudited. However, management believes that all necessary adjustments to provide a fair presentation of the financial position, results of operations and cash flows for the periods presented were made. Results of operations and cash flows for the interim periods are not necessarily indicative of results to be expected for the full fiscal year.
B. Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As shown in the accompanying financial statements, the Company incurred net losses of $3,559,102 and $2,239,440 for the respective years ended December 31, 2002 and 2003, and $1,559,972 and $1,665,933 for the nine months ended September 30, 2003 and 2004, respectively, and is in default as of September 30, 2004, on approximately $6,712,951 of notes payable, stockholder loans, and accrued interest. Management also expects operating losses to continue in 2004 and 2005. The Company’s continued existence is dependent upon its ability to secure adequate financing to fund future operations and commence profitable operations. To date, the Company has supported its activities through equity investments, the sale of preferred stock, a demand note payable to a bank and cash advances from related parties and stockholders. It is the Company’s intention to raise additional capital through additional borrowings and a public offering of its common stock. No assurance can be given that these funding strategies will be successful in providing the necessary funding to finance the operations of the Company. Additionally, there can be no assurance, even if successful in obtaining the maximum net proceeds from a private or public offering, the Company will be able to generate sufficient cash flows to fund future operations. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or amounts and classification of liabilities that might be necessary related to this uncertainty.
F - 7
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
A. Cash Equivalents
Cash equivalents consist of highly-liquid investments with an original maturity of three months or less when purchased.
B. Accounts Receivable
Accounts receivable are unsecured, non-interest bearing obligations that are typically due from customers within 30 days of the invoice date. Management applies collections in accordance with customer remittance advices or to the oldest outstanding invoice if no remittance advice is presented with payment.
The Company estimates an allowance for doubtful accounts and revenue adjustments based on historical trends and other criteria. Further, as accounts receivable outstanding are deemed uncollectible or subject to adjustment, these allowances are adjusted accordingly. At December 31, 2002 and 2003, and at September 30, 2003 and 2004, these allowances approximated $219,000, $84,000, $128,000 and $84,000, respectively.
C. Inventories
Inventories, which are predominantly raw materials, are stated at the lower of cost (first-in, first-out method) or market.
D. Deferred Offering Costs
The Company is deferring the costs of the initial public offering and amounts will be offset against gross proceeds of the offering in additional paid capital or the equity section of the balance sheet. If the offering does not take place, all deferred costs will be expensed.
E. Revenue Recognition
The Company records revenue at the time the related products are shipped and the risk of ownership has passed. Management believes an adequate provision against net sales has been made for estimated returns, allowances and cash discounts based on the Company’s historical experience.
F. Placement Allowances
As an inducement to its customers to display the Company’s products in preferred locations of their stores, the Company provides placement and promotional allowances to certain customers. The Company also provides credits for product which has not been sold by its
F - 8
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
expiration date. These allowances and credits are reflected as a reduction of gross sales as they are determined.
G. Freight Costs
In accordance with Emerging Issues Task Force (“EITF”) No. 00-10, “Accounting for Shipping and Handling Fees and Costs,” reimbursement of freight charges are recorded in net sales. For the years ended December 31, 2002 and 2003, and the nine month periods ended September 30, 2003 and 2004, freight-out costs approximated $359,000, $241,000, $189,000 and $120,000, respectively, and have been recorded in selling, general and administrative expenses.
H. Equipment and Furniture
Equipment and furniture is stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets (5 years).
I. Stock-Based Employee Compensation
The Company accounts for employee stock-based compensation in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, using an intrinsic value approach to measure compensation expense, if any. Under this method, compensation expense is recorded on the grant date only if the current market price of the underlying stock exceeds the exercise price. Options issued to non-employees are accounted for in accordance with SFAS 123, “Accounting for Stock-Based Compensation”, and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods and Services” using a fair value approach.
SFAS No. 123 established accounting and disclosure requirements using a fair value-basis method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic value-based method of accounting described above, and has adopted the disclosure requirements of SFAS No. 123. Had the Company elected to recognize compensation cost based on fair value of the stock options at the date of grant under SFAS 123, such costs would have been recognized ratably over the vesting period of the underlying instruments and the Company’s net loss and net loss per common share would have increased to the pro forma amounts indicated in the table below.
F - 9
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
For the years ended December 31:
| | 2002 | | 2003 | |
| |
|
| |
|
| |
Net loss as reported | | $ | 3,559,102 | | $ | 2,239,440 | |
Net loss pro forma | | $ | 3,578,582 | | $ | 2,266,699 | |
Net loss per share, as reported | | $ | (26.99 | ) | $ | (15.25 | ) |
Net loss per share, pro forma | | $ | (29.63 | ) | $ | (17.63 | ) |
For the nine months ended September 30:
| | 2003 | | 2004 | |
| |
|
| |
|
| |
Net loss as reported | | $ | 1,679,972 | | $ | 1,665,933 | |
Net loss pro forma | | $ | 1,707,231 | | $ | 1,693,192 | |
Net loss per share, as reported | | $ | (11.66 | ) | $ | (10.30 | ) |
Net loss per share, pro forma | | $ | (13.56 | ) | $ | (12.42 | ) |
The pro forma results above are not intended to be indicative of or a projection of future results.
J. Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising expenses, including media advertising, in store sampling programs, and advertisements in customer printed circulars were included in selling, general and administrative expenses, with the exception of coupon expenses which were included as a reduction of net sales. During the years ended December 31, 2002 and 2003, advertising and promotion expense was approximately $1,275,000 and $472,000, respectively.
During the nine months ended September 30, 2003 and 2004, advertising and promotion expense was approximately $304,000 and $303,000, respectively.
K. Income Taxes
Deferred tax assets and liabilities are determined based on differences between financial reporting and income tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Differences that give rise to significant portions of the Company’s deferred tax assets are net operating losses and deferred stock compensation. A valuation allowance is recorded against deferred tax assets in instances where the realization of the deferred tax asset is not considered to be “more likely than not.”
L. Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that
F - 10
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
affect the amounts reported in the financial statements and accompanying notes. These estimates include, but are not necessarily limited to, accounts receivable allowances, depreciation and coupon liability estimates. Actual results could differ from those estimates.
M. Net Loss Per Share
Basic loss per share has been calculated using the weighted average number of common shares outstanding in accordance with FASB 128 “Earnings Per Share.” All options and warrants have been excluded as common stock equivalents and diluted loss per share has not been presented as such options and warrants are antidilutive for all periods presented.
N. Impairment of Long Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. At December 31, 2002 and December 31, 2003, the Company has not recognized any impairment charges for its long-lived assets.
O. Concentration of Risk
The Company maintains its cash balances in financial institutions located in New Jersey, and periodically has cash balances in excess of Federal Deposit Insurance Corporation limits. The Company distributes its products and grants credit to its customers who are food distributors and retailers located primarily in the eastern portion of the United States. The Company generally does not require collateral or other security with regard to balances due from customers. The Company extends credit to its customers in the normal course of business and performs periodic credit evaluations of its customers, maintaining allowances for potential credit losses. Sales to three customers during the year ended December 31, 2002 approximated 25%, 14% and 11% of sales. Sales to two customers during the year ended December 31, 2003 approximated 20% and 17% of sales.
Sales to two customers during the nine months ended September 30, 2003 approximated 20% and 12% and for the nine months ended September 30, 2004, 31% and 13%, respectively.
Accounts receivable from two customers at December 31, 2002 and one customer at December 31, 2003 approximated 21%, 15% and 21% of accounts receivable, respectively.
Accounts receivable from one customer at September 30, 2003 and 2004 approximated 22% and 31% of accounts receivable, respectively.
One outside vendor manufactures all of the Company’s finished goods. During the years ended December 31, 2002 and 2003, manufacturing costs of approximately $766,500 and $383,000 were incurred at this vendor. The amount due to this vendor at December 31, 2002 was approximately $95,500, secured by a $100,000 letter of credit, collateralized by restricted cash balances held by
F - 11
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
a bank. In 2003, the letter of credit from a bank was no longer required by this vendor, and the $100,000 was used to reduce the accounts payable to this vendor resulting in no balance due at December 31, 2003.
During the nine months ended September 30, 2003 and 2004, manufacturing costs of approximately $323,000 and $163,000, were incurred at this vendor, respectively.
P. Value of Financial Instruments
The Company’s financial instruments consist mainly of cash and cash equivalents, accounts receivable, accounts payable and cash advances payable. The carrying amounts of these financial instruments approximate fair value due to their short-term nature. The carrying amount due to related party, notes payable and stockholder loans are estimated to approximate their fair values as their stated interest rates approximate current interest rates.
Q. Recent Accounting Pronouncements
In January 2003, the FASB issued interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities”. The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity in which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary beneficiary, as well as all other enterprises with a significant variable interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003. In December 2003, the FASB issued FIN 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows: (i) Special-purpose entities (“SPEs”) created prior to February 1, 2003: The Company must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ended after December 15, 2003. (ii) Non-SPEs created prior to February 1, 2003: The Company was required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. (iii) All entities, regardless of whether SPE, that were created subsequent to December 31, 2003: The interpretation applies immediately. The Company does not have any arrangements with variable interest entities that will require consolidation of their financial information in the Company’s financial statements.
F - 12
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 3 – INVENTORY
Inventory consists of the following:
| | Years Ended December 31, | | Nine Months Ended September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
Raw materials | | $ | 343,821 | | $ | 111,541 | | $ | 111,541 | | $ | 45,791 | |
Finished goods | | | 28,512 | | | 26,700 | | | 26,700 | | | 36,315 | |
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 372,333 | | $ | 138,241 | | $ | 138,241 | | $ | 82,106 | |
| |
|
| |
|
| |
|
| |
|
| |
NOTE 4 – EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following:
| | Years Ended December 31, | | Nine Months Ended September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
Equipment | | $ | 155,431 | | $ | 155,431 | | $ | 155,431 | | $ | 155,431 | |
Furniture and fixtures | | | 52,255 | | | 52,255 | | | 52,255 | | | 53,649 | |
| |
|
| |
|
| |
|
| |
|
| |
| | | 207,686 | | | 207,686 | | | 207,686 | | | 209,080 | |
Less: accumulated depreciation | | | (104,693 | ) | | (146,813 | ) | | (136,148 | ) | | (178,403 | ) |
| |
|
| |
|
| |
|
| |
|
| |
Equipment and furniture, net | | $ | 102,993 | | $ | 60,873 | | $ | 71,538 | | $ | 30,677 | |
| |
|
| |
|
| |
|
| |
|
| |
NOTE 5 – DEMAND NOTE PAYABLE – BANK
The note payable to a bank is due on demand with interest due monthly at the LIBOR Index plus 1.25% (2.42% at December 31, 2003), is secured by all of the assets of the Company and was guaranteed by a stockholder in 2001. In consideration for providing the guarantee, the stockholder was granted warrants to purchase 54,546 shares of common stock at an exercise price of $55.00 per share, of which the warrants to purchase 36,364 shares expire in May 2006 and warrants to purchase 18,182 shares expire in December 2006. Since the note is due on demand, the Company included $650,000, representing the fair value of the warrants, in interest expense in the year of issue, which was 2001. The Company has not paid interest due on the note since April 30, 2003 and is in default of the loan terms. Interest expense on the demand note was $71,858 and $76,441 for the year ended December 31, 2002 and 2003, respectively, and accrued interest payable on the note was $0 and $59,519 at December 31, 2002 and 2003, respectively.
Interest expense on the demand note was $54,455 and $74,153 for the nine months ended September 30, 2003 and 2004, respectively, and accrued interest payable on the note was $37,956 and $133,672 at September 30, 2003 and 2004, respectively.
F -13
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 6 – SENIOR CONVERTIBLE PROMISSORY NOTES PAYABLE – RELATED PARTY
Notes payable related party consists of a series of notes issued to a group of related investors in the Company’s common and preferred stock.
On November 18, 1999, the Company issued a promissory demand note in the amount of $300,000 to a preferred stockholder with interest at 8%. The principal and interest portions of this obligation were originally due November 2001 and were subsequently extended through November 2002.
On May 31, 2002 and July 5, 2002 the Company issued a series of senior convertible promissory notes with principal amounts of $700,000, $300,000, $200,000, $100,000 and $400,000 with maturity dates through January 6, 2003, to investors in its preferred stock. The notes bore interest at 8% and were convertible into equity securities of the Company if certain conditions were met in a proposed preferred stock sale.
On September 13, 2002, these investors agreed to cancel these notes which aggregated $2,000,000 in exchange for three 8% senior secured convertible promissory notes in the amount of $2,000,000, along with seven-year warrants to purchase 2,000,000 shares of series C preferred stock at an exercise price of $.20 per share. As of December 31, 2002, the notes were in default on certain provisions of the notes, and the Company has accrued interest at the default rate of 14%. Since the notes defaulted in the year of issue, the Company has expensed $168,000 of debt discount in regard to the warrants and conversion feature as interest expense during 2002. The notes are collateralized by all the assets of the Company. Each note holder has the option to convert the principal and accrued interest due, in whole or in part, into a number of shares of series C preferred stock calculated by dividing the amount of debt and accrued interest by $.20 per share. Accrued interest on the notes was $152,649 and $473,194 at December 31, 2002 and 2003, and $315,334 and $740,750 at September 30, 2003 and 2004, respectively.
On February 10, 2003, the Company entered into an agreement with a preferred stockholder to borrow up to $500,000. During 2003, the Company borrowed $480,000 under this agreement and executed 8% senior secured convertible promissory notes, convertible into the Company’s series C preferred stock at $.20 per share, due through September 18, 2003 and collateralized by all assets of the Company. In connection these notes, the Company issued warrants to the holder to purchase up to 2,500,000 shares of series C preferred stock at an exercise price of $.20 per share. These convertible notes were in default in September 2003 and became subject to a default interest rate of 14%. As a result of this default, the Company has expensed debt discount in 2003 related to the value of the warrants and the conversion feature of $178,000.
F - 14
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 7 – STOCKHOLDER LOANS – SUBORDINATED CONVERTIBLE PROMISSORY NOTES
On September 13, 2002, the Company issued subordinated convertible promissory notes to eleven stockholders with an aggregate principal balance of $735,000, in replacement of outstanding demand notes, issued in June 2001, of the same principal amount. The notes had a maturity date of September 13, 2003, bear interest at a rate of 8% and default interest at 14%. The notes are subordinated to all the senior debt of the Company. The notes were in default as of September 13, 2003.
The holder of these notes may convert the notes (or a portion thereof) into a number of shares of Company’s series C preferred stock, calculated by dividing the amount of the debt being converted by $.20 per share rounded to the nearest whole share.
At the holder’s election, unless converted, the accrued interest on this note shall be paid to the holder in cash on the conversion date.
The Company repaid principal notes totaling $77,456 and $22,544 in 2002 and 2003, respectively.
Interest expense on stockholder loans was $57,331 and $65,393 for the years ended December 31, 2002 and 2003, respectively. Accrued interest payable was $69,881 and$156,853 as of December 31, 2002 and 2003, respectively, and $134,089 and $223,529 at September 30, 2003 and 2004, respectively.
NOTE 8 – ACCRUED COMPENSATION
Accrued compensation consists of salary and bonuses earned and not paid to certain officers and employees of the Company and related payroll taxes thereon. Compensation expense approximated $201,000 and $513,400 for the years ended December 31, 2002 and 2003, and $335,000 and $352,000 for the nine months ended September 30, 2003 and 2004, respectively.
NOTE 9 – RESCINDED SERIES B OFFERING PAYABLE
Pursuant to a private placement memorandum, dated October 5, 2001, the Company offered to sell shares of series B convertible preferred stock. The Company, however, did not have a sufficient amount of preferred stock authorized to issue and sell the series B convertible preferred stock and had not taken certain legal steps to designate the terms of the series B convertible preferred stock. Accordingly, the series B convertible preferred stock was invalidly issued and holders thereof did not own an equity interest in the Company as a result of their purported investment therein. As a result, the Company was legally obligated to offer to rescind, or return, the payment made by such holders for such shares, plus any interest required by applicable state law. Proceeds of $647,100 were collected in the series B offering and accounted for as offering payable from the Company.
F - 15
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
In November 2002, the Company consummated its offer to rescind the series B offering and refund the original purchase price, or issue replacement shares of the Company’s series C convertible preferred stock at the proposed offering price of $.20 per share, at the investors’ option. Investors representing $568,600 elected to receive, and were issued, 2,843,000 replacement shares of the series C convertible preferred stock, and $78,500 elected a cash refund. The Company paid $36,500 of the refunded proceeds due during 2003 and has recorded a liability of $78,500 and $42,000 at December 31, 2002 and 2003, and $42,000 at both September 30, 2003 and 2004.
NOTE 10 – STOCKHOLDERS’ DEFICIT
A. Reverse Stock Split
A one-for-fifty five reverse stock split was effected November 30, 2004. The Company retained the current par value of $.00001 per share for all shares of common stock. All references in the financial statements to the number of shares outstanding, per share amounts, and stock option and warrant data pertaining to the Company’s common stock have been restated to reflect the effect of the reverse stock split for all periods presented. Stockholders’ deficit reflects the reverse stock split by reclassifying from “common stock” to “additional paid in capital” an amount equal to the par value of the reduced shares arising from the reverse split.
B. Capital Stock
The Company is authorized to issue 185,000,000 shares of all classes of capital stock, including 120,000,000 as common. The Company has authorized 65,000,000 shares of all classes preferred stock, of which 4,875,850 shares are designated as series A and 50,000,000 as series C.
C. Preferred Stock Series A
In November 2000, the Company completed a private offering for the sale of 4,875,850 shares of series A convertible preferred stock for $4,875,850. The gross proceeds of this offering were reduced by $527,975 of placement agent fees, legal fees and expenses incurred in connection with the private offering, paid to a preferred stockholder. In connection with the private offering of series A convertible preferred stock, the Company issued to the placement agent, who is a preferred stockholder and its representatives, warrants to purchase 17,730 shares of common stock.
Each 55 shares of series A convertible preferred stock is convertible at any time by the holder or automatically in the event of a merger or firmly underwritten public offering of common stock and is subject to anti-dilution provisions as defined in the instrument. Series A convertible preferred stock votes on an as converted basis with common stock, except as required by law. Holders of the series A convertible preferred stock are entitled to preferential non-cumulative dividends payable at the discretion of the Board of Directors and have preference in liquidation of $1.00 per share.
F - 16
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
D. Preferred Stock Series C
In November 2002 and January 2003, the Company completed a private offering for the sale of 3,523,000 and 100,000 shares, respectively, of series C convertible preferred stock for a total of $724,600, including $568,600 of advances from the rescinded offering of Series B convertible preferred stock. The gross proceeds of this offering were reduced by approximately $240,000 of placement agent fees, legal fees and expenses incurred in connection with the private offering, paid to a preferred stockholder.
Each 55 shares of series C convertible preferred stock is convertible, at any time by the holder, or automatically in the event of a merger or public offering of common stock into one share of common stock and is subject to anti-dilution provisions as defined in the instrument. series C convertible preferred stock votes on an as converted basis with common stock. Holders of the series C convertible preferred stock are entitled to preferential non-cumulative dividends payable at the discretion of the Board of Directors and have preference in liquidation of $.20 per share. No dividends were declared during any periods presented in these financial statements.
The series C preferred stock, with respect to dividend rights, rights on liquidation, winding up and dissolution, ranked pari pasu with the Company’s series A preferred stock to the extent set forth in the amended and restated Certificate of Incorporation.
E. Stock Issued As Compensation
The Company issued 4,273 and 21,073 shares of common stock to employees, board members and consultants in exchange for services or in lieu of salary for services provided in the years ended December 31, 2002 and 2003, respectively.
The Company recorded compensation expense of approximately $47,000 and $232,000 for the years ended December 31, 2002 and 2003, respectively.
F - 17
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
F. Warrants
The following is a summary of warrants issued:
Date Issued | | Basis for Warrant Issuance | | Number of
Shares of
Common
Stock
Pertaining to
Warrant | | Number of
Shares of
Preferred
Stock
Pertaining to
Warrant | | Approximate
Fair Value
Assigned To
Warrant | |
| |
| |
|
| |
|
| |
|
| |
November 2000 | | Placement agent fees for series A preferred stock (a) (b) | | | 17,732 | | | — | | $ | — | (c) |
June 2001 | | Stockholder guarantee for bank demand note payable (d) | | | 54,546 | | | — | | $ | 630,000 | (e) |
June 2001 | | Stockholder demand notes payable (f) | | | 13,371 | | | — | | $ | 154,000 | |
September 2002 | | Senior convertible promissory notes payable (b) (g) (h) | | | — | | | 2,000,000 | | $ | 84,000 | (i) |
November 2002 | | Placement agent fees for series C preferred stock (b) (g) (j) | | | 1,273 | | | — | | $ | — | (c) |
March 2003 | | Accrued compensation | | | 6,527 | | | — | | $ | — | |
September 2003 | | Senior convertible promissory notes (b) (g) | | | — | | | 2,500,000 | | $ | 89,000 | |
July 2004 | | Amended services agreement (k) | | | — | | | — | | $ | 225,896 | |
July 2004 | | Amended services agreement (l) | | | — | | | — | | $ | — | |
|
(a) | Exercise price $55.00 per share and expires November 2007. |
(b) | Includes anti-dilution agreement and cashless exercise right. |
(c) | As these warrants were issued as cost of the preferred stock issuance, such costs are netted with the proceeds of preferred stock as a component of additional paid-in-capital. |
(d) | Exercise price $55.00 per share and expires May through December 2006. |
(e) | Charged to interest expense due to default of debt in 2001. |
(f) | Exercise price $55.00 per share and expires September 2006. |
(g) | Exercise price $0.20 per share. |
(h) | Expires the earlier of September 2009 or within three years of an initial public offering. |
(i) | Charged to interest expense due to default of debt in December 2002. |
(j) | Expires the earlier of November 2009 or within three years of an initial public offering. |
(k) | Warrant to purchase $650,000 of common stock, shares to be determined by future events. |
F - 18
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
(l) | Warrant to purchase an amount of common stock to bring spokesperson’s total holdings to 9.9% of outstanding common shares of the Company, shares and value to be determined by future events. |
G. Stock Options
Tthe Company adopted three Stock Option Plans (the “Plans”) in 2000, 2001 and 2002 under which incentive stock options (“ISOs”) and non-qualified stock options (“NQSOs”) to acquire shares of common stock that may be granted to employees, officers, directors and consultants of the Company.
Each Plan expires ten years from the date of adoption. The Company is authorized to grant options for up to 35,273 common shares. Under each Plan, the option price of an ISO may not be less than the fair market value of a share of common stock on the date of grant. An ISO may not be granted to a “ten percent stockholder” (as such term is defined in Section 422A of the Internal Revenue Code) unless the exercise price is at least 110% of the fair market value of the common stock and the term of the option may not exceed five years from the date of grant. The maximum term of each stock option granted to persons other than ten percent stockholders is ten years from the date of the grant.
A summary of the activity in the Plans is as follows:
| | Number of
Shares | | Weighted-
Average
Exercise Price | |
| |
|
| |
|
| |
Outstanding December 31, 2001 | | | 26,004 | | $ | 21.77 | |
| | | | |
|
| |
Cancelled | | | (1,182 | ) | $ | 11.00 | |
| | | | |
|
| |
Issued | | | 8,606 | | $ | 11.00 | |
| |
|
| |
|
| |
Outstanding December 31, 2002 | | | 33,428 | | $ | 19.38 | |
| |
|
| |
|
| |
Cancelled | | | — | | | — | |
Issued | | | — | | | — | |
Outstanding December 31, 2003 | | | 33,428 | | $ | 19.38 | |
| |
|
| |
|
| |
Exercisable at December 31, 2002 | | | 13,306 | | $ | 19.46 | |
| |
|
| |
|
| |
Exercisable at December 31, 2003 | | | 21,916 | | $ | 26.96 | |
| |
|
| |
|
| |
The options generally expire 10 years from the date of grant. However, in the event a participant’s employment is terminated for any reason other than the result of death, disability or retirement, as defined, the options expire 90 days after termination. If a participant’s employment is terminated as a result of death, permanent disability or retirement, the options expire one year from the date of termination.
The weighted-average remaining contractual life of options outstanding was 8 and 7 years as of December 31, 2002 and December 31, 2003.
F - 19
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
The weighted-average remaining contractual life of options exercisable at December 31, 2003 was 7.5 years.
Pro-forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. Since there is no trading history for the Company’s stock, the fair value of the options was estimated at the date of grant using the fair value method with the following assumptions:
Assumptions: | | | | |
Risk – free rate | | | 4.85 | % |
Dividend yield | | | 0 | |
Volatility factor of the expected market | | | 0.10 | % |
Price of the Company’s common stock | | | 0 | |
Average life | | | 7 years | |
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s option, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Additionally, in January 2000, the Company granted an option to its spokesperson to purchase 5,455 shares of common stock at an exercise price of $55.00 per share. The options vested immediately and were exercisable through December 2003. These options were not exercised and were cancelled at December 31, 2003.
F - 20
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
H. Stock Reserved
At September 30, 2004, the Company had reserve shares of its common and preferred stock as follows:
| | Common | | Preferred | |
| |
|
| |
|
| |
Conversion of series A preferred stock | | | 88,732 | | | | |
Conversion of series C preferred stock | | | 65,881 | | | | |
Exercise of preferred stock warrants | | | 81,819 | | | 4,500,000 | |
Exercise of common stock warrants | | | 93,449 | | | | |
Exercise of stock options | | | 33,428 | | | | |
Conversion of senior convertible promissory notes | | | 309,097 | | | 17,000,000 | |
Conversion of subordinated convertible promissory notes | | | 63,636 | | | 3,500,000 | |
Exercise of spokesperson warrants | | | * | | | * | |
| |
|
| |
|
| |
Total | | | 736,042 | | | 25,000,000 | |
| |
|
| |
|
| |
|
* | Amount to be determined based on future events. See subsequent events Note 15. |
NOTE 11 – INCOME TAXES
Based on the Company’s operating losses, no provision for income taxes have been provided for the years ended December 31, 2002 and 2003. At December 31, 2003, the Company had a net operating loss carry forward of approximately $12,082,000, which expires through the year 2023.
At December 31, 2002 and 2003, the Company had deferred tax assets of approximately $4,100,000 and $3,300,000, respectively. A valuation allowance for the full amount of the deferred tax assets was established since it is more likely than not all of the deferred tax assets will not be realized. Deferred tax assets principally consist of net operating losses and accrued compensation expense.
In December 2002 and 2003, the Company received proceeds from the sale of the rights to approximately $2,798,000 and $2,852,000 of New Jersey state income tax losses, respectively. Based on an agreement with the State of New Jersey, the Company was allowed to allocate and sell their net operating loss representing $251,709 and $256,664 in 2002 and 2003, respectively, in potential tax benefits under the Technology Business Tax Certificate Program administered by the New Jersey Economic Development Authority. The Company received net proceeds of $216,470 and $211,131 in 2002 and 2003, respectively, related to the sale and accordingly recorded them as a tax benefit in the year received.
F - 21
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
NOTE 12 – SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
| | December 31, | | September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
Replacement of related party notes | | $ | 2,000,000 | | | — | | | — | | | — | |
Replacement of stockholder notes | | $ | 635,000 | | | — | | | — | | | — | |
Settlement of rescinded series B payable with seies C preferred stock | | $ | 568,600 | | | — | | | — | | | — | |
Prepaid royalty off-set against accounts payable | | | — | | $ | 312,806 | | | — | | | — | |
Adjustment for related party debt extinguishments through equity | | | — | | $ | 100,000 | | | — | | $ | 71,912 | |
Warrants issued – spokesperson consulting services | | | — | | | — | | | — | | $ | 225,896 | |
Common stock issued – spokesperson consulting services | | | — | | | — | | | — | | $ | 180,000 | |
NOTE 13 – COMMITMENTS
A. Royalty, License and Supply Agreement - Related Party
In March 2000 and amended in May 2004, the Company entered into an agreement for the exclusive licensing rights, in specific territories, to produce and market certain beverage products, patented and trademarked by SMBI. The agreement is for a term of 10 years commencing on the date of the amendment, May 2004, and provides for royalties of between 1% and 2% of net sales for the duration of the agreement. The original agreement also provided for an upfront royalty payment of $500,000, which was used to offset 50% of royalties due to SMBI under the agreement.
At December 31, 2003, as agreed by all parties, prepaid royalties were used to offset royalties payable and accounts payable due SMBI. In connection with this agreement, the Company recorded an increase to additional paid in capital of $100,000, representing the utilization of prepaid royalties, which were subject to an impairment write down during 2001. This increase in additional paid in capital has been recorded pursuant to Accounting Principle Board Opinion No. 28.
Royalty expense of approximately $56,000 and $36,000 was recorded in the years ended December 31, 2002 and 2003, respectively, of which $34,638 and $0 are payable to SMBI at December 31, 2002 and 2003, respectively.
Royalty expense of approximately $39,000 and $20,000 was recorded in the nine month periods ended September 30, 2003 and 2004, respectively.
F - 22
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
In January 2000 and amended in May 2004, the Company entered into a supply agreement with SMBI for the purchase of SMBI’s proprietary immune whey protein concentrate. The agreement is for a term of 10 years, commencing on the date of amendment, May 2004. During the years ended December 31, 2002 and 2003, the Company purchased approximately $810,000 and $245,000, respectively, of the whey protein concentrate from SMBI.
SMBI is the Company’s sole source of this whey protein concentrate. If the Company is unable to obtain this product from SMBI, the Company’s manufacturing and distribution processes could be severely disrupted and operations could be adversely affected.
During the nine months ended September 30, 2003 and 2004, the Company purchased approximately $168,000 and $36,000, respectively, of the whey protein concentrate from SMBI.
The license and supply agreements are subject to the Company maintaining minimum purchases of SMBI’s proprietary immune whey protein concentrate. The minimum purchases are determined annually by mutual agreement. Should the Company fail to meet the annual purchase requirement, SMBI has represented to the Company it will negotiate the license and supply agreements in good faith and execute a non-exclusive supply agreement.
B. Lease
The Company entered into a lease for office space, which expires December 2004. During the years ended December 31, 2002 and 2003, rent expense was approximately $56,000 and $58,000, respectively. Future minimum annual payments under the lease for the year 2004 are approximately $58,000.
In November 2004, the lease was renewed and extended through December 2006 at an annual lease of approximately $55,000.
Rent expense was approximately $49,000 for each of the nine month periods ended September 30, 2003 and 2004.
NOTE 14 – RELATED PARTY TRANSACTIONS
A. Consulting Fees
Included in selling, general and administrative expenses are consulting fees to stockholders of the Company and their affiliates of approximately $273,700 and $149,500 for the years ended December 31, 2002 and 2003, respectively, and $152,500 and $76,000 for the nine months ended September 30, 2003 and 2004, respectively.
F - 23
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
B. Legal Fees
The Company incurred approximately $22,000 and $3,400 of legal fees for the years ended December 31, 2002 and 2003, respectively, and $0 and $27,000 for the nine months ended September 30, 2003 and 2004, respectively, to two law firms, who are minority stockholders of the Company.
C. Advertising Fees
The Company incurred approximately $229,000 and $0 of advertising expenses for the years ended December 31, 2002 and 2003, respectively, and no advertising expenses for the nine months ended September 30, 2003 and 2004, respectively, to an advertising agency, who is a minority stockholder of the Company.
D. Accounts Payable - Related Parties
Accounts payable – related parties consists of the following:
| | December 31, | | September 30, | |
| |
| |
| |
| | 2002 | | 2003 | | 2003 | | 2004 | |
| |
|
| |
|
| |
|
| |
|
| |
Materials – (a) | | $ | 695,000 | | $ | 525,000 | | $ | 705,000 | | $ | 526,000 | |
Advertising – (b) | | | 227,000 | | | 185,000 | | | 188,000 | | | 87,000 | |
Consulting fees – (c) | | | 25,000 | | | 69,000 | | | 61,000 | | | 72,000 | |
Legal fees – (d) | | | 47,000 | | | 65,000 | | | 43,000 | | | 91,000 | |
Spokesperson fees payable (e) | | | 100,000 | | | 175,000 | | | 150,000 | | | — | |
| |
|
| |
|
| |
|
| |
|
| |
Total | | $ | 1,094,000 | | $ | 1,019,000 | | $ | 1,147,000 | | $ | 776,000 | |
| |
|
| |
|
| |
|
| |
|
| |
|
(a) | Payable to SMBI, an approximate 41% stockholder of the Company. |
(b) | Payable to an advertising agency that is a stockholder of the Company. |
(c) | Payable to several consultants that are stockholders of the Company. |
(d) | Payable to two law firms that are stockholders of the Company. |
(e) | See Note 15C for amended services agreement. |
NOTE 15 – SUBSEQUENT EVENTS
A. Debt Conversion
In November 2004, three members of management agreed to cancel $250,000 of senior subordinated convertible notes and accrued interest thereon and accrued salary through December 2003 in the amount of $623,500 in exchange for 223,000 shares of common stock.
Also, several vendors also agreed to convert trade accounts payable to them for approximately $36,000 in exchange for 6,000 shares of common stock.
F - 24
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
B. Bridge Loan
On July 26, 2004, the Company entered into a series of agreements with Dick Clark, a stockholder of the Company and a Company spokesperson, and Stanley H. Moger, one of the Company’s directors. Under the terms of a loan agreement, Messrs. Clark and Moger agreed to loan up to $1,000,000 in four tranches, each of which is conditioned upon completion of specified actions or events (the “Bridge Loan”). As of November 30, 2004, the Company has received the first three tranches, or $750,000. The loan accrues interest at 10% per annum, unless it is in default, in which case the interest increases to 15%. The principal and accrued interest are due and payable on the earlier of the consummation of this offering or January 1, 2005. The loan is secured by all of the assets of the Company, and certain Company creditors were required to execute subordination agreements in favor of Messrs. Clark and Moger. The proceeds from this loan were used for advertising, partial payment of amounts owed to SMBI, and partial payment of legal fees.
The Bridge Loan also required the formation of NuVim Powder LLC, of which Mr. Clark was given a 25% ownership interest.
Mr. Clark and Mr. Moger participated in the Bridge Loan equally, and the ancillary agreements and benefits provided to Mr. Clark are being shared with Mr. Moger. Therefore, Mr. Moger has been given a 12.5% interest in the powder company and a 50% interest in both of the warrants issued in connection with the Services Agreement.
C. Services Agreement
On July 26, 2004, the Company entered into an amended services agreement with Olive Enterprises, Inc. (the “Services Agreement”), which is Dick Clark’s production company. Prior to this transaction, the Company owed Mr. Clark $175,000 under the Services Agreement. Pursuant to an amendment to Services Agreement, the Company acknowledged that indebtedness and agreed to issue a convertible promissory note in the amount of $245,000 in consideration for his forbearance until a “maturity date,” as defined in the convertible note. The convertible note is automatically convertible into units identical to the units sold in this offering, at the initial public offering price, provided the offering is consummated on or before March 31, 2005. If the offering does not occur by March 31, 2005, the convertible note is convertible, at the option of the holder, at the conversion price of $1.00 per share (or unit, if the offering is consummated). The Company recognized $70,000 as interest expense for the nine months ended September 30, 2004 for the increased settlement amount.
On September 14, 2004, the Company entered into a second amendment to the services agreement, providing for the issuance of 30,000 shares of common stock and a warrant to purchase $650,000 of common stock at a fair market price to be determined based on a “maturity event,” as defined in the agreement, in consideration for services to be provided during the years 2004, 2005 and 2006. The warrant expires 10 years after issuance. The number of shares and exercise price of the warrant are set according to the sooner of a “maturity event,” as defined in
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NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
the amended service agreement and the warrant, or March 31, 2005. In the event of a public stock offering on or prior to March 31, 2005, the warrant will be exercisable at the IPO price into the number of shares of common stock calculated by dividing $650,000 by the initial public offering price. If the maturity event is a sale of assets or a merger or acquisition, the share calculation price is determined depending on the nature of the maturity event. If a “maturity event” does not occur on or prior to March 31, 2005, the share calculation price will be the lesser of $1 or 80% of the purchase price per share in any subsequent financing, including this offering. The Company has recorded the common stock and value of the warrant issued as deferred stock compensation as a component of stockholders’ deficit, at an estimated fair value of $180,000 and $225,896 at September 30, 2004 and is amortizing the balance to promotional expense over the three-year service period life of the agreement. The Company has recognized $101,474 as promotional expense for the nine months ended September 30, 2004.
An additional condition to the loan transaction was a requirement that the Company issue a 10-year warrant to the spokesperson that entitles him to acquire up to 9.9% of the total fully-diluted issued and outstanding common stock of the Company following the consummation of the proposed offering. The exercise price is equal to fair value, which will equal the initial public offering price of the units in the initial public offering. The value of this warrant, if any, has not been recorded as part of the financial statements as its fair value is based on a number of future events and cannot be determined.
D. Other Matters
On July 9, 2004 the Company borrowed $20,000 from the managing underwriter of the proposed public offering. The amount accrues interest at 10% and must be repaid with proceeds from the offering.
On August 20, 2004, the Company entered into a agreement with a law firm to settle past due legal fees of $240,000 as follows: (i) two payments of $30,000, one within two days of the agreement, the second within two days of receipt of the third tranche of the bridge financing; and (ii) issuance of a promissory note for $120,000 payable the earlier of the consummation of the proposed public offering or February 5, 2005. The note bears interest at 5% and default interest at 7%. If the second payment was not paid by September 1, 2004, the Company was required to issue a promissory note in the amount of the unpaid portion under the same terms. The Company recognized a gain on the extinguishment of this debt in the amount of approximately $60,000 during the nine months ended September 30, 2004.
On August 23, 2004, NuVim Powder LLC was formed. NuVim Powder LLC is owned 51% by the Company, 12.5% by a spokesperson, 12.5% by a director and 24% by a related vendor providing advertising services to the company. The Company will distribute a powered supplement based on the Company’s proprietary whey protein. As of September 30, 2004, NuVim Powder LLC is an inactive shell company.
In September 2004, the Company entered into employment agreements with several of its officers which collectively call for total annual salaries of $575,000 and expire in 2007.
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NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Information for the Nine Months Ended September 30, 2003 and 2004 is Unaudited.)
On November 30, 2004, the Board of Directors approved the 2004 Incentive Stock Option Plan for the benefit of its officers, employees and consultants. The Board also approved the 2004 Directors’ Stock Option Plan for the Company’s board members. These plans expire in November 2014 and have various terms and conditions as described in the respective plans. As of November 30, no options have been granted.
E. Initial Public Offering
The Company entered into a letter of intent with an investment bank to consummate a firmly under written public offering of its common stock (the proposed “IPO”) as of May 10, 2004. In connection with the proposed IPO, the Company has implemented the restructuring events described below.
A group of related investors in the Company’s preferred stock, concurrently with the closing of the proposed offering, agreed to pay unpaid principal and interest on the Company’s $2,500,000 demand note payable to a bank, cancel $2,480,000 in senior convertible notes and accrued interest thereon and cancel warrants to purchase 63,563 of series C preferred stock in exchange for 461,700 shares of common stock.
The extinguishment of loans and accrued interest and accrued salaries and bonuses owed to the Company’s Executive Officers in exchange for 223,000 shares of common stock.
An exchange of trade accounts payable in the amount of $36,000 for 6,000 shares of common stock.
The conversion of preferred stock into common stock.
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1,500,000 Units
NUVIM, INC.
PROSPECTUS
PAULSON INVESTMENT COMPANY, INC.
, 2005
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The General Corporation Law of the State of Delaware (the “General Corporation Law”) provides for the indemnification of directors, officers, employees and other agents of the corporation under certain circumstances as set forth in section 145. Section 145 permits a corporation to indemnify its agents, typically directors and officers, for expenses incurred or settlements or judgments paid in connection with certain legal proceedings. Only those legal proceedings arising out of such persons’ actions as agents of the corporation may be grounds for indemnification.
Whether or not indemnification may be paid in a particular case depends upon whether the agent wins, loses or settles the suit and upon whether a third party or the corporation itself is the plaintiff. The section provides for mandatory indemnification, no matter who the plaintiff is, when an agent is successful on the merits of a suit. In all other cases, indemnification is permissive.
If the agent loses or settles a suit brought by a third party, he or she may be indemnified for expenses incurred and settlements or judgments paid. Such indemnification may be authorized upon a finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation.
If the agent loses or settles a suit brought by or on behalf of the corporation, his or her right to indemnification is more limited. If he or she is adjudged liable to the corporation, the court in which such proceeding was held must determine whether it would be fair and reasonable to indemnify him or her for expenses which such court shall determine. If the agent settles such a suit with court approval, he or she may be indemnified for expenses incurred in connection with the defense and settlement of the suit, upon a finding that the agent acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation and its stockholders.
Under Section 145, the indemnification discussed above may be authorized by a majority vote of the disinterested directors or stockholders (the person to be indemnified is excluded from voting his or her shares) or the court in which the proceeding was brought.
Under Section 145, a corporation may authorize, by by-law, agreement or otherwise, the indemnification of its agents in excess of that expressly permitted by Section 145. The Registrant’s By-laws provide that indemnification shall be mandatory in all cases where it is permitted by Section 145.
Section 102(b) of the General Corporation Law permits corporations to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of the fiduciary duty as a director. The Registrant’s Certificate of Incorporation provides for elimination of personal liability of directors for breach of fiduciary duty as a director except
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for the following: (i) for any breach of such director’s duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the General Corporation Law; or (iv) for any transaction from which such director derived an improper personal benefit. The Registrant’s Certificate of Incorporation further provides that modification or repeal of this provision may not affect the elimination of liability therein provided with respect to a director’s personal liability for any act or omission that occurs prior to such modification or repeal.
Finally, a corporation has the power to purchase indemnity insurance for its agents, even if it would not have the power to indemnify them. The Registrant has purchased such insurance.
Insofar as indemnification for liabilities under the Securities Act of 1933, as amended (the “Act”) may be permitted to directors, officers or persons controlling the Registrant pursuant to the foregoing provisions, the Registrant has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth an itemization of all expenses we will pay in connection with the issuance and distribution of the securities being registered, other than the underwriters’ non-accountable expense allowance. Except for the SEC registration fee and NASD filing fee, the amounts listed below are estimates:
Nature of Expense | | Amount | |
| |
|
| |
SEC registration fee | | $ | 7,746 | |
NASD filing fee | | | 6,614 | |
Nasdaq SmallCap listing fee | | | 35,000 | |
Accounting fees and expenses | | | 75,000 | |
Legal fees and expenses | | | 325,000 | |
Printing and related expenses | | | 40,000 | |
Blue Sky fees and expenses | | | 80,000 | |
Transfer agent and warrant agent fees and expenses | | | 2,000 | |
Miscellaneous expenses | | | 48,933 | |
| |
|
| |
Total | | $ | 620,293 | |
| |
|
| |
Item 26. Sales of Unregistered Securities
We have issued without registration the following securities since November 1, 2001:
Between January 1, 2002 and December 31, 2002, we issued an aggregate of 8,606 options to executive officers and directors under our stock option plans. The options are exercisable at $11. These options were granted pursuant to the exemption from registration provided in Section 4(2) of the Securities Act.
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In May and July 2002, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued Senior Convertible Promissory Notes aggregating $1,600,000 to certain of its preferred stockholders. These notes, together with $400,000 of convertible promissory notes issued in November 1999, were cancelled in September 2002. In exchange, the registrant issued 8% Senior Secured Convertible Promissory Notes to three Spencer Trask-related entities. The principal and accrued interest on the notes, which are in default, are convertible into shares of Series C Preferred Stock at a conversion price of $0.20. The conversion price for converting the Series C Preferred Stock to Common Stock is $11, taking into account the effects of the reverse stock split. The registrant also issued warrants to the noteholders entitling them purchase up to 2,000,000 shares of Series C Preferred Stock at $0.20 per share in connection with this transaction. The November 2004 reverse stock split had the effect of reducing the number of shares of Common Stock into which the Series C Preferred Stock is convertible to 36,364 shares and increasing the conversion price to $11.00. These convertible notes and warrants will be cancelled as of the closing of the offering in connection with an agreement with Spencer Trask.
In September 2002, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued Subordinated Convertible Promissory Notes to 11 accredited investors and stockholders, aggregating $735,000, which replaced outstanding demand notes issued in June 2001 in the same principal amount. The notes are convertible into Series C Preferred Stock at a conversion price of $0.20. The conversion price for converting the Series C Preferred Stock to Common Stock is $11, taking into account the effects of the reverse stock split. The registrant also issued an aggregate of 735,000 warrants to purchase shares of Series C Preferred Stock at an exercise price of $0.20. The
In November 2002 and January 2003, pursuant to the exemptions provided by Section 4(2) of the Securities Act and Rule 506 promulgated thereunder, the registrant sold an aggregate of 3,623,000 shares of Series C Convertible Preferred Stock in a private placement to 28 accredited investors for total cash consideration of $724,600. Giving effect to the 55-for-1 reverse stock split, these shares are convertible into 65,881 shares of common stock, which will automatically occur concurrently with the closing of the offering.
In November 2002, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued to the placement agent in the Series C financing an aggregate of 70,000 warrants to purchase Series C Convertible Preferred Stock. The placement agent was an affiliate of Spencer Trask Specialty Group, LLC, a founder and principal stockholder. These warrants are exercisable at $0.20. The November 2004 reverse stock split had the effect of reducing the number of shares of Common Stock issuable upon conversion of the Series C Preferred Stock to 1,273 and increasing the conversion price to $11.00. These warrants will be cancelled concurrently with the closing of this offering.
From time to time between February 2003 and March 2003, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued to a single accredited investor, who was a preferred stockholder, additional 8% Senior Secured Convertible Promissory Notes in the aggregate amount of $480,000 and warrants to purchase up to 2,500,000 shares of Series C Preferred Stock, exercisable at $0.20. The Series C Preferred Stock is
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convertible into Common Stock at $11.00. The November 2004 reverse stock split had the effect of reducing the number of warrant shares to 45,455 and increasing the exercise price to $11.00.
In July 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, in connection with a series of bridge financing agreements, including an amendment to the Services Agreement between the Registrant and Dick Clark’s production company, the registrant issued a convertible promissory note to its spokesman, Dick Clark. The face amount of the convertible note is $175,000, which reflects past due services rendered under the Services Agreement. The convertible note is convertible into unregistered units otherwise identical to the units being sold in the offering, the exact number of which shall be calculated by dividing $245,000 by the conversion price, which is equal to the initial public offering price if the public offering is completed on or before March 31, 2005, or $1.00 per unit thereafter. Assuming a $6 initial public offering price, the convertible note is convertible in 40,834 unregistered units of common stock, Class A Warrants and Class B Warrants.
In July 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, in furtherance of the bridge financing referred to in the previous paragraph, the registrant issued a warrant to Dick Clark under the terms of which he or his assignee has the right to purchase that number of shares of the registrant’s common stock such that Mr. Clark’s ownership interest in the registrant, fully diluted after the offering, equals 9.9%. The warrant is exercisable at the initial public offering price of the units being sold in this offering. The rights under this warrant have been equally divided between Mr. Clark and Stanley H. Moger, one of the registrant’s directors and the other party participating in the bridge financing. Based on the information available and assumptions regarding the initial public offering price, the warrant will entitled Mr. Clark and Mr. Moger collectively to purchase up to 425,120 shares of common stock.
In September 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, in furtherance of the bridge financing referred to in the previous paragraphs and the second amendment to the Services Agreement in particular, the registrant issued a warrant to Dick Clark in consideration for his agreement to provide promotional and advertising services for the period 2004 through January 31, 2006. Under the terms of the warrant, Mr. Clark or his assignee has the right to purchase that number of shares of the registrant’s common stock calculated by dividing $650,000 by the initial public offering price of the units being offered in this offering, provided the bridge loan is repaid on or before March 31, 2005. In the event the loan has not been repaid, the exercise price is reduced depending on the “Maturity Event,” as defined in the warrant. The rights under this warrant have been equally divided between Mr. Clark and Stanley H. Moger, one of the registrant’s directors and the other party participating in the bridge financing. Assuming a $6 initial public offering price, this warrant will entitle Mr. Clark and Mr. Moger to purchase 108,334 shares of common stock.
In September 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, in connection with the second amendment to the Services Agreement referred to above, Dick Clark was also issued 30,000 shares of Common Stock in consideration for Mr. Clark agreeing to provide promotional and advertising services through December 31, 2006.
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In November 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued an aggregate of 223,000 shares of common stock to three of its executive officers to pay them deferred salaries and bonuses through 2003 of $743,333 and principal and accrued interest on outstanding loans totaling $313,036. Of these shares, 72,802 were issued in payment of the outstanding loans and 150,197 shares were issued to pay accrued salaries and bonuses. The number of shares issued was determined by negotiation between the registrant and each executive officer.
In November 2004, pursuant to the exemption from registration provided in Section 4(2) of the Securities Act, the registrant issued an aggregate of 6,000 shares of common stock at a value of $6 per share to the registrant’s former chief financial officer, a firm that is one of the four owners, including the registrant, of NuVim Powder LLC and a firm that provides advertising to the registrant. The shares were issued for amounts due and owing in the aggregate amount of $36,000.
Item 27. Exhibits
Exhibit No. | | Description |
| |
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1.1 | | Form of Underwriting Agreement |
3.1 | | Registrant’s Certificate of Incorporation, as amended |
3.2 | | Registrant’s Certificate of Amendment of Certificate of Incorporation |
3.3 | * | Registrant’s Second Amended and Restated Designation and Description of Series A Preferred Stock |
3.4 | * | Registrant’s Amended and Restated Designation and Description of Series C Preferred Stock |
3.5 | | Registrant’s By-laws |
4.1 | * | Form of Common Stock Certificate |
4.2 | * | Form of Class A Public Warrant |
4.3 | * | Form of Class B Public Warrant |
4.4 | * | Form of Unit Certificate |
4.5 | | Form of Warrant Agreement |
4.6 | | Form of Representative’s Purchase Warrant |
5.1 | * | Opinion of Wickersham & Murphy, a Professional Corporation |
10.1 | | Employment Agreement between the Registrant and Richard P. Kundrat, dated as of September 9, 2004 |
10.2 | | Employment Agreement between the Registrant and John L. Sullivan, dated as of September 9, 2004 |
10.3 | | Employment Agreement between the Registrant and Paul Young, dated as of September 9, 2004 |
10.4 | | [Intentionally left blank] |
10.5 | | Form of Indemnification Agreement between the Registrant and its directors |
10.6 | * | 2004 Incentive Stock Option Plan |
10.7 | * | 2004 Directors’ Stock Option Plan |
10.8 | | 2000 Employee Stock Option Plan |
10.9 | | 2001 Employee Stock Option Plan |
10.10 | * | 2002 Employee Stock Option Plan |
10.11 | | 2000 Employee Equity Incentive Plan |
10.12 | | Amended and Restated License Agreement between the Registrant and Stolle Milk Biologics, Inc., dated as of May 1, 2004 |
10.13 | | Amended and Restated Supply Agreement between the Registrant and Stolle Milk Biologics, Inc., dated as of May 1, 2004 |
10.14 | | Loan Agreement between the Registrant and Dick Clark dated as of July 26, 2004 |
10.15 | | Security Agreement between the Registrant and Dick Clark dated as of July 26, 2004 |
10.16 | | Form of Secured Promissory Notes Up to $1 Million (Bridge Financing) |
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10.17 | | Convertible Note dated as of July 26, 2004 payable to Dick Clark |
10.18 | | Warrant to Purchase $650,000 of Common Stock dated as of September 14, 2004 |
10.19 | | Warrant to Purchase up to 9.9% of the Outstanding Capital Stock, dated as of July 26, 2004 |
10.20 | | Services Agreement between the Registrant and Olive Enterprises, Inc., dated February 20, 2000 |
10.21 | | Amendment to Services Agreement between the Registrant and Olive Enterprises, Inc., dated as of July 26, 2004 |
10.22 | | Second Amendment to Services Agreement between the Registrant and Olive Enterprises, Inc., dated as of September 14, 2004 |
10.23 | | Form of Subordination Agreement (Bridge Financing) |
10.24 | | Consent to Grant Security Interest, Waiver, Subordination and Amendment Agreement between Registrant and Stolle Milk Biologics, Inc., dated August 5, 2004 |
10.25 | | Processing and Packing Agreement between the Registrant and Clover Farms Dairy Company, dated June 27, 2000 |
10.26 | | Amendment to Processing and Packing Agreement between the Registrant and Clover Farms Dairy Company, effective April 1, 2003 |
10.27 | | Second Amended and Restated Stockholders Agreement dated as of August 2, 2004 |
10.28 | | Amended and Restated Registration Rights Agreement, dated as of August 2, 2004 |
10.29 | * | Wachovia line of credit documents |
10.30 | | Lease between the Registrant and Paramus Plaza IV Associates, dated December 8, 1999 and Addendum II to Lease, dated December 8, 1999 |
10.31 | | First Amendment to Lease between the Registrant and Paramus Plaza IV Associates, dated November 5, 2002 |
10.32 | | Second Amendment to Lease between the Registrant and Paramus Plaza IV Associates, dated November 23, 2004 |
| 21 | | Subsidiaries of the Registrant |
23.1 | * | Consent of Wickersham & Murphy, a Professional Corporation (included in Exhibit 5.1) |
23.2 | | Consent of WithumSmith+Brown, P.C., Independent Registered Public Accounting Firm |
24 | | Power of Attorney (included on Page II-8) |
| | |
|
|
| * | To be filed by amendment. |
Item 28. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act);
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement; and
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notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(4) For purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective.
(5)For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.
In addition, the undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Paramus, State of New Jersey, on the 2nd day of December, 2004.
| NUVIM, INC. |
| |
| By: | /s/ RICHARD P. KUNDRAT |
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| | Richard P. Kundrat, President and
Chief Executive Officer |
POWER OF ATTORNEY
We, the undersigned directors and officers of NuVim, Inc., do hereby constitute and appoint Richard P. Kundrat and Michael Vesey or either of them, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, may deem necessary or advisable to enable said corporation to comply with the Securities Act of 1933, as amended, and any rules, regulations, and requirements of the Securities and Exchange Commission, in connection with this Registration Statement, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments (including post-effective amendments) to this Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
Signature | | Title | | Date |
| |
| |
|
/s/ RICHARD P. KUNDRAT | | President, Chief Executive Officer and Director | | December 2, 2004 |
| | (Principal Executive Officer) | | |
Richard P. Kundrat | | | | |
| | | | |
/s/ MICHAEL VESEY | | Chief Financial Officer (Principal Financial and | | December 2, 2004 |
| | Accounting Officer) | | |
Michael Vesey | | | | |
| | | | |
| | Director | | |
| | | | |
Donald F. Farley | | | | |
| | | | |
/s/ WILLIAM FRANKE | | Director | | December 2, 2004 |
| | | | |
William Franke | | | | |
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| | Director | | |
| | | | |
Marc Goldman | | | | |
| | | | |
/s/ STANLEY H. MOGER | | Director | | December 2, 2004 |
| | | | |
Stanley H. Moger | | | | |
| | | | |
/s/ FREDERICK S. PIERCE | | Director | | December 2, 2004 |
| | | | |
Frederick S. Pierce | | | | |
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