FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20429
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ______________________
Commission File Number 0-27227 .
--------------
ALLERGY RESEARCH GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 13-3940486
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
30806 Santana Street, Hayward, California 94544
(Address of principal executive offices)
(Issuer's telephone number) (800) 545-9960.
---------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Checkmark whether the issuer (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 14,722,105 shares of Issuer's voting
common stock were outstanding on April 30, 2003.
ALLERGY RESEARCH GROUP, INC.
INDEX TO QUARTERLY REPORT
ON FORM 10-QSB
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Condensed Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets 2
Consolidated Income Statements 3
Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
ITEM 2. Management's Discussion and Analysis 7
ITEM 3. Controls and Procedures 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 2. Changes in Securities and Use of Proceeds 14
ITEM 3. Defaults Upon Senior Securities 14
ITEM 4. Submission of Matters to a Vote of Security Holders 14
ITEM 5. Other Information 14
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURE 16
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements included in this Form 10-QSB reflect all adjustments (consisting only
of normal recurring accruals) necessary for a fair presentation of the results
of operations for the periods presented. The results of operations for the
periods presented are not necessarily indicative of the results to be expected
for the full year.
ALLERGY RESEARCH GROUP, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2003 (UNAUDITED)
ASSETS
- ------
Current Assets
Cash & Cash Equivalents $ 564,462
Accounts Receivable, Net of Allowance for Doubtful Accounts
of $53,884 683,008
Inventories 1,597,739
Prepaid Expenses and Other Current Assets 259,677
Deferred Tax Asset 404,085
------------
Total Current Assets 3,508,971
Property and Equipment, Net 292,505
Other Assets
Deposits 29,730
Due From Officer 73,967
Intangible Assets, Net of Amortization of $19,988 21,575
------------
Total Other Assets 125,272
Total Assets $ 3,926,748
============
LIABILITIES AND STOCKHOLDERS EQUITY
- -----------------------------------
Current Liabilities
Accounts Payable $ 814,265
Accrued Liabilities 140,973
Capital Lease Obligation, Current Portion 34,486
Income Taxes Payable 48,706
------------
Total Current Liabilities 1,038,430
Stockholders' Equity
Preferred Stock, $.25 Par Value, Authorized 1,000,000 Shares,
Issued and Outstanding None
Common Stock, $.001 Par Value, Authorized 100,000,000 Shares 15,105
Issued: 15,105,355, Outstanding: 14,722,105
Additional Paid In Capital 1,141,377
Retained Earnings 1,813,409
Less: Treasury Stock, at cost (81,573)
------------
Total Stockholders' Equity 2,888,318
------------
Total Liabilities and Stockholders' Equity $ 3,926,748
============
See Notes to Condensed Consolidated Financial Statements.
2
ALLERGY RESEARCH GROUP, INC.
CONSOLIDATED INCOME STATEMENTS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------
2003 2002
---- ----
Revenues $ 3,448,762 $ 3,006,187
Cost of Sales 1,954,840 1,799,210
------------- -------------
Gross Profit 1,493,922 1,206,977
Operating Expenses
Selling, General and Administrative 887,352 892,109
Research and Development 56,962 48,709
------------- -------------
Operating Expenses 944,314 940,818
------------- -------------
Operating Income 549,608 266,159
Other Income (Expense)
Interest Expense (720) (11,981)
Interest Income 2,084 2,777
------------- -------------
Other Income (Expense) 1,364 (9,204)
------------- -------------
Net Income 550,972 256,955
Provision (Benefit) for Income Taxes 48,706 (36,000)
------------- -------------
Net Income Available to Common Stockholders $ 502,266 $ 292,955
Weighted Average Common Shares Outstanding 14,722,105 15,105,355
Basic and Diluted Income Per Common Share $ 0.03 $ 0.02
See Notes to Condensed Consolidated Financial Statements.
3
ALLERGY RESEARCH GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
March 31,
2003 2002
---- ----
Cash Flows From Operating Activities
Net Income $ 502,266 $ 292,955
---------- ----------
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities
Depreciation and Amortization 41,796 55,156
Changes in Assets and Liabilities
(Increase) Decrease in Accounts Receivable (91,451) (147,621)
(Increase) Decrease in Inventory 3,880 304,814
(Increase) Decrease in Prepaid Expenses and Other Assets (140,868) 34,054
(Increase) Decrease in Deferred Tax Assets -- (36,000)
Increase (Decrease) in Accounts Payable and Accrued Liabilities (108,593) (435,478)
Increase (Decrease) in Income Taxes Payable (22,009) (862)
---------- ----------
Total Adjustments (317,245) (225,937)
---------- ----------
Net Cash Flows Provided By Operating Activities 185,021 67,018
Cash Flows From Investing Activities
Acquisition of Property and Equipment -- (2,329)
Repayments From (Advances To) Officers 53,724 (2,776)
---------- ----------
Net Cash Flows Provided By (Used In) Investing Activities 53,724 (5,105)
Cash Flows From Financing Activities
Repayment on Notes Payable -- (100,000)
Repayment on Capital Lease Obligations (14,285) (18,032)
---------- ----------
Net Cash Flows Used In Financing Activities (14,285) (118,032)
Increase (Decrease) in Cash and Cash Equivalents 224,460 (56,119)
Cash and Cash Equivalents, Beginning of Period 340,002 199,499
---------- ----------
Cash and Cash Equivalents, End of Period $ 564,462 $ 143,380
========== ==========
See Notes to Condensed Consolidated Financial Statements.
4
ALLERGY RESEARCH GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2003
(UNAUDITED)
Note 1 - Statement of Information Furnished
- -------------------------------------------
The accompanying unaudited Consolidated Financial Statements of Allergy
Research Group, Inc. ("the Company") have been prepared in accordance
with generally accepted accounting principles for interim financial
information and the instructions to Form 10-QSB. Accordingly, they do
not include all the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial
position, results of operations and cash flows for all periods
presented have been made. Preparing financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. Examples include
provisions for returns, accounting for income taxes, bad debts, and
length of product life cycles and property, plant and equipment lives
for depreciation purposes. Actual results may differ from these
estimates. The results of operations for the three-month period ended
March 31, 2003 are not necessarily indicative of the operating results
that may be expected for the entire year ending December 31, 2003.
These financial statements should be read in conjunction with the
Management's Discussion and Analysis and financial statements and notes
thereto included in the Company's financial statements and accompanying
notes thereto as of and for the year ended December 31, 2002, filed
with the Company's Annual Report on Form 10-KSB on March 31, 2003.
Certain accounts from prior years have been reclassified to conform to
the current year's presentation. These changes had no effect on
previously reported results of operations or total stockholders'
equity.
Note 2 - Earnings Per Share
- ---------------------------
Basic earnings per share is based on the weighted average number of
common shares outstanding. Diluted earnings or loss per share is based
on the weighted average number of common shares outstanding and
dilutive common stock equivalents. All earnings per share amounts in
these financial statements are basic earnings per share as defined by
SFAS No. 128, "Earnings Per Share." Diluted weighted average shares
outstanding exclude the potential common shares from options because to
do so would be antidilutive.
The computation of basic and diluted earnings per share is as follows:
Three Months Three Months
Ended Ended
3/31/03 3/31/02
Numerator-Net Income Available
to Common Stockholders $ 502,266 $ 292,955
============ ============
Denominator-Weighted Average Number
of Common Shares Outstanding 14,722,105 15,105,355
============ ============
Basic and Diluted Earnings Per Common
Share $ 0.03 $ 0.02
============ ============
5
Note 3 - Line of Credit
- -----------------------
On August 19, 2002, a Merrill Lynch Working Capital Management Account
(WCMA) was activated. The WCMA replaced the line of credit with City
National Bank and provides for a line of credit up to $500,000 for
twelve months bearing interest at the London Interbank Offered Rate
(LIBOR) plus 3.15%. The LIBOR plus 3.15% at March 31, 2003 was 4.45%.
Interest is due monthly; however, the balance due on the line of credit
was zero throughout the entire first quarter of 2003. The note is
secured by substantially all of the assets of the Company and is
personally guaranteed by the officers of the Company. The WCMA account
immediately pays down the line of credit when deposits are received.
When checks are issued, the line of credit is utilized if no cash is
available. If the line of credit has a zero balance, the WCMA account
pays interest on deposits at Merrill Lynch's money market rate which as
of March 31, 2003 was .89%.
Note 4 - Stockholders' Equity and Subsequent Events
- ---------------------------------------------------
On May 3, 2002, the Company announced a stock repurchase plan, whereby
the Company may repurchase between 1,000,000 and 2,500,000 shares of
the Company's common stock in open market transactions, from time to
time during the next two years in compliance with Rule 10b-18 of the
Securities Exchange Act of 1934 and all other applicable securities
regulations. Repurchases of common shares in the open market will
provide shares for issuance to employees under stock option and stock
purchase plans. Since inception of the plan through March 31, 2003, the
Company repurchased 383,250 shares of common stock for $81,573. No
purchases have been made under the repurchase plan since October 18,
2002.
On May 12, 2003, the Company issued stock options for 383,250 shares
which vest immediately to many of its employees and to selected
independent contractors who are sales representatives for the Company.
The options were issued with an exercise price of $.40 per share based
on the closing price of the Company's common stock on the
Over-The-Counter Bulletin Board on the date of grant. The options
terminate on the five-year anniversary of the date of grant.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
INTRODUCTION
- ------------
Management's discussion and analysis of results of operations and
financial condition ("MD&A") is provided as a supplement to the accompanying
consolidated financial statements and footnotes to help provide an understanding
of Allergy Research Group, Inc. (the "Company") financial condition, changes in
financial condition and results of operations. The MD&A is organized as follows:
o CAUTION CONCERNING FORWARD-LOOKING STATEMENTS AND RISK
FACTORS. This section discusses how certain forward-looking
statements made by the Company throughout the MD&A and in the
consolidated financial statements are based on our present
expectations about future events and are inherently
susceptible to uncertainty and changes in circumstances.
o OVERVIEW. This section provides a general description of the
Company's business, as well as recent developments that we
believe are important in understanding the results of
operations, as well as to anticipate future trends in those
operations.
o RESULTS OF OPERATIONS. This section provides an analysis of
our results of operations for the first quarter 2003 compared
to 2002. A brief description is provided of transactions and
events, including related party transactions that impact the
comparability of the results being analyzed.
o LIQUIDITY AND CAPITAL RESOURCES. This section provides an
analysis of our financial condition and cash flows as of and
for the three months ended March 31, 2003.
o CRITICAL ACCOUNTING POLICIES. This section provides an
analysis of the significant estimates and judgments that
affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and
liabilities.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS/RISK FACTORS
- ----------------------------------------------------------
The following discussion should be read in conjunction with the
Company's financial statements and the notes thereto and the other financial
information appearing elsewhere in this document. In addition to historical
information, the following discussion and other parts of this document contain
certain forward-looking information. When used in this discussion, the words
"believes," "anticipates," "expects," and similar expressions are intended to
identify forward-looking statements. Such statements are subject to certain
risks and uncertainties, which could cause actual results to differ materially
from those projected due to a number of factors beyond our control. The Company
does not undertake to publicly update or revise any of its forward-looking
statements even if experience or future changes show that the indicated results
or events will not be realized. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. You
are also urged to carefully review and consider our discussions regarding the
various factors, which affect our business, included in this section and
elsewhere in this report.
Factors that might cause actual results, performance or achievements to
differ materially from those projected or implied in such forward-looking
statements include, among other things: (i) the impact of competitive products;
(ii) changes in law and regulations; (iii) adequacy and availability of
insurance coverage; (iv) limitations on future financing; (v) increases in the
cost of borrowings and unavailability of debt or equity capital; (vi) the effect
of adverse publicity regarding nutritional supplements; (vii) the inability of
the Company to gain and/or hold market share; (viii) exposure to and expense of
resolving and defending product liability claims and other litigation; (ix)
consumer acceptance of the Company's products; (x) managing and maintaining
growth; (xi) customer demands; (xii) market and industry conditions including
pricing, demand for products, levels of trade inventories and raw materials
7
availability, (xiii) the success of product development and new product
introductions into the marketplace; (xiv) slow or negative growth in the
nutritional supplement industry; (xv) the departure of key members of
management; (xvi) the ability of the Company to efficiently manufacture its
products; as well as other risks and uncertainties that are described from time
to time in the Company's filings with the Securities and Exchange Commission.
OVERVIEW
- --------
BUSINESS DESCRIPTION. Allergy Research Group, Inc. (SYMBOL: ALRG) (the
"Company" or "ARG"), through its wholly owned subsidiary, Nutricology, Inc.,
strives to be an innovative leader in nutraceutical research and product
formulation. Our shares are traded on the Over The Counter Bulletin Board. Since
1980, the Company has produced quality, hypoallergenic nutritional supplements
and supplies products to physicians and health care practitioners worldwide.
These professionals recognize the Company for the quality, purity and efficacy
of its targeted nutritional supplement line. Currently, we supply products to
approximately 4,000 physicians and health care practitioners, including accounts
in the United States, Japan, Taiwan, the United Kingdom, South Korea, Jamaica,
New Zealand, Mexico, Turkey, Norway, Sweden, Switzerland, Italy, Ireland,
Philippines, Russia, South Africa and Singapore. We develop, contract
manufacture, market and sell branded and private label products, including
vitamins and nutritional supplements, throughout the world under the NutriCology
and Allergy Research Group(R) labels. Our products are distributed through
distributors to medical and professional accounts and to retailers. We offer a
line of approximately 200 products, including vitamins in both multivitamin and
single-entity formulas, minerals, and herbals. Our products are manufactured in
various forms, including capsules, tablets, softgels, powders (drink mixes) and
liquids. Our principal executive offices are located at 30806 Santana Street,
Hayward, California 94544 and the telephone number is (800) 545-9960.
FUTURE OPERATIONS. The success of our future operations will depend to
a great extent on the operations, financial condition, and management of the
Company. We intend to expand our position in the vitamin and nutritional
supplements markets. Specifically, our strategy continues to be to: (i) develop
new brands and product line extensions, as well as new products, through our
commitment to research and development; (ii) continue the growth of our balanced
distribution network; (iii) build our execution skills through new operations
processes and decision support systems; (iv) achieve cost superiority through
formal productivity benchmarking and continuous improvement programs; and (v)
implement a comprehensive e-commerce plan. We believe that our history and
reputation in the field, multiple distribution channels, broad portfolio of
products and packaging and distribution capabilities position the Company to be
a long-term competitor in the vitamin and nutritional supplements industries.
We continue to work with Dr. Hoang on his proprietary herbal formulas
with a view to developing additional research that can be marketed to the
pharmaceutical and nutraceutical industries. This process is limited to
literature work, including patent submissions for potential products. The
research can be marketed to pharmaceutical companies either through direct sell
of the research to the pharmaceutical company, or through a joint venture
arrangement between the pharmaceutical company and the Company whereby the
parties will jointly own the patent and continue development of the products. It
is our hope that, during the process of research into possible pharmaceutical
and nutraceutical products, we will test new herbal products, or additional uses
for existing herbal products, that can be added to our current line of products
as health food or dietary supplements.
PRODUCT DEVELOPMENT. In addition to our work in the pharmaceutical and
nutraceutical fields of research, we continue to add new products to our
existing product line. During the latter part of 2002 and through the date of
this filing, the Company has added the following new products to its existing
product line: AndroBalance Androstenedione Cream (may enhance hormonal balance
8
in men), Progestex Natural Progesterone Cream (natural progesterone cream),
Progestex Plus Progesterone Cream with Phytoestrogens (same pure formulation of
natural progesterone as Progestex with weak estrogenic phytochemicals added that
can help regulate and support estrogenic function), Hepagenesis (Ayurvedic herb
Eclipta alba used to support the liver), Liver Saver (contains three herbs from
traditional Chinese Medicine), and Phytostatin (immune support.) These
statements have not been evaluated by the Food and Drug Administration. The
products are not intended to diagnose, treat, cure, or prevent any disease.
We believe that the Company has good relations with all of its current
manufacturers and suppliers. During 2002 and during the period ending March 31,
2003, we experienced a concentration of approximately 54% of our manufacturing
with four separate vendors. We do not currently have written contracts with any
of our manufacturers, but rely on long-term personal and professional
relationships with our four largest vendors. However, we believe that, due to
the large number of businesses performing this type of service in the industry,
the Company would have little difficulty in finding viable alternatives in the
event any one of these vendors became unable or determined not to continue
manufacturing our products.
RESULTS OF OPERATIONS
- ---------------------
Please refer to the consolidated financial statements, which are a part
of this report, for further information regarding the results of operations of
the Company.
QUARTER ENDED MARCH 31, 2003 COMPARED TO MARCH 31, 2002
REVENUES. We had net sales of $3,448,762 for the first quarter ended
March 31, 2003, compared with $3,006,187 for the same period in 2002. The
increase of $442,575, or 15%, is due to increased sales to our distributors and
increased demand at retail for current and new products.
COSTS OF SALES. Cost of sales increased $155,630 to $1,954,840 for the
three months ended March 31, 2003, compared to $1,799,210 for the three months
ended March 31, 2002. The increase in cost of sales corresponds with the
increase in sales. Gross profit margins increased approximately 3.2% for the
first quarter, approximating 43.3% for 2003 as a result of higher margins
associated with retail sales. It is unlikely that the increase in gross profit
will be sustained throughout the year due to price adjustments that may be
necessary to respond to pricing pressures from our competitors.
OPERATING EXPENSES. Total operating expenses were $944,314 for the
first quarter 2003 and $940,818 for the same period in 2002. The increase of
$3,496 for the three months ended March 31, 2003 was primarily due to an
increase in rent expense resulting from the loss of sublease income associated
with excess warehouse space. Our lease was renegotiated effective June 1, 2003
and the excess warehouse space will be eliminated.
INTEREST EXPENSE. Interest expense was $720 for the first quarter ended
March 31, 2003 compared to $11,981 for the same period in 2002. The decrease is
a result of paying down the line of credit from $470,064 at March 31, 2002 to
zero at March 31, 2003.
PROVISION FOR INCOME TAXES. As of March 31, 2003, the Company recorded
a deferred tax asset of $404,085 to be realized as a result of future taxable
income offset by net operating loss carryforwards. As of fiscal year ended
December 31, 2002, we have approximately $2,200,000 and $1,400,000,
respectively, available in federal and state net operating loss carryforwards to
offset future taxable income, which expire principally in the year 2021
(federal) and 2013 (state). For taxable years beginning in 2002 and 2003, the
State of California has suspended the net operating loss carryover deduction for
two years for losses incurred before January 1, 2002, and for one year for
losses incurred after January 1, 2002. As a result, income taxes payable at
March 31, 2003, represent estimated 2003 California taxes based on income.
9
NET INCOME. During the quarter March 31, 2003, we recorded net income
of $502,266 compared to net income of $292,955 for the same period in 2002. The
increase of $209,311 is a result of the increase in sales and higher profit
margins.
EARNINGS PER SHARE. Earnings per share have increased to $0.03 per
share for the quarter ended March 31, 2003 from $0.02 per share for the same
period in 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
CURRENT FINANCIAL CONDITION
During the quarter ended March 31, 2003, the Company increased its
working capital by approximately $600,000 to $2,470,541 compared to a working
capital at December 31, 2002 of $1,873,215. The Company reduced outstanding
current liabilities by approximately $123,000 provided by cash flows available
from operating activities. . The Company continues to finance its inventory and
accounts receivable through its income from operations and did not require the
use of its line of credit during the quarter then ended. Management believes
that the Company's operating cash flow, cash and equivalents, and borrowing
capacity under committed bank credit agreements is sufficient to fund its
capital and liquidity needs for the next twelve months.
CASH FLOWS
OPERATING ACTIVITIES. Net cash flows provided by operating activities
was $185,021 for the quarter ended March 31, 2003. This was primarily the result
of net income of $502,266, increased by depreciation expense of $41,796. These
figures were offset by an increase in accounts receivable of $91,451, an
increase in prepaid expenses and other assets of $140,868, a decrease of
accounts payable and accrued liabilities of $108,593, and a decrease in income
taxes payable of $22,009. Net cash flows provided by operating activities for
the three months ended March 31, 2002 was $67,018, due to net income of $292,955
increased by depreciation of $55,156, a decrease in inventory of $304,814, and a
decrease in prepaid expenses and other assets of $34,054. These were offset by
an increase in accounts receivable of $147,621, a decrease in accounts payable
and accrued liabilities of $435,478, and an increase in deferred tax assets of
$36,000.
INVESTING ACTIVITIES. Net cash flows provided by investing activities
was $53,724 for the quarter ended March 31, 2003, representing repayments of
loans to officers. Net cash flows used in investing activities as of March 31,
2002 was $5,105 representing the acquisition of property and equipment for
$2,329 and advances to officers of $2,776 (representing accrued interest on
outstanding loans only).
FINANCING ACTIVITIES. Net cash flows used in financing activities was
$14,285 for the three months ended March 31, 2003, representing repayments of
capital lease obligations. For the same period ended March 31, 2002, net cash
flows used in financing activities was $118,032, representing repayments on the
line of credit of $100,000 and capital lease obligations of $18,032.
COMMON STOCK REPURCHASE PROGRAM. On May 3, 2002, the Company announced
a stock repurchase plan, whereby the Company may repurchase between 1,000,000
and 2,500,000 shares of the Company's common stock in open market transactions,
from time to time during the succeeding two years in compliance with Rule 10b-18
of the Securities Exchange Act of 1934 and all other applicable securities
regulations. Repurchases of common shares in the open market will provide shares
for issuance to employees under stock option and stock purchase plans. Since the
inception of the plan through March 31, 2003, the Company repurchased 383,250
shares of common stock for $81,573.
CONCENTRATION OF CREDIT RISK. Approximately 11% of our total sales in
2002 were attributable to a single distributor. In 2003, this distributor
continued to account for over 10% of sales. In the event we were to lose that
account, we anticipate that we would be able to convert the business to sales
directly to the customers of that distributor. As converted sales would be at a
higher margin, we do not believe the loss of the account would have a material
negative impact on sales.
10
CONTRACTUAL OBLIGATIONS. The Company's Contractual Obligations and
Commercial Commitments are detailed below:
Payments Due by Period
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
Less
Contractual Than 1 1-3 4 - 5 After 5
Obligations Total Year Years Years Years
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
Line of Credit (1)
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
Capital Lease
Obligations $34,486 $34,486
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
Operating Leases $390,915 $307,674 $83,241
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
Total Cash
Contractual
Obligations $425,401 $342,160 $83,241
- ----------------------- ------------------ ------------------ ------------------ -------------- -------------
(1) This represents the Company's borrowings under its line of
credit with Merrill Lynch. The Merrill Lynch line of credit
was activated on August 19, 2002 and provides for maximum
financing of $500,000, bearing interest at the London
Interbank Offered Rate (LIBOR) plus 3.15%, computed on a
monthly basis. As of March 31, 2003, the interest rate on the
line of credit was 4.45% per annum. Interest is due monthly;
however, the line has not been utilized throughout the first
quarter thus no interest was due. Because the line of credit
is secured by substantially all of the assets of the Company,
if the Company were to fall into default under the terms of
our agreement with Merrill Lynch it could have material
adverse impact on our business and financial position. The
officers of the Company have personally guaranteed the line of
credit.
RELATED PARTY TRANSACTIONS. In 1999, Dr. Stephen A. Levine, CEO, and
his wife, Susan Levine, formed Inventive Biomedical, LLC, a California limited
liability company ("IBM"), as a research and development firm. For the year
ended December 31, 2001, the Company paid approximately $9,000 to IBM for
research and development and for market testing of new products. As of March 31,
2003, IBM owes Allergy Research Group approximately $13,125. All of this debt
was incurred before July 30, 2002.
When our stock repurchase plan was announced on May 3, 2002, Dr. Levine
and Susan Levine announced that they would also be repurchasing up to 1,000,000
shares under Rule 10b-18. Since the inception of the plan, the Levines have
purchased 383,250 shares of common stock at prices ranging from $.16 to $.28 per
share on the open market. The Levines have made no purchased of the Company's
common stock since October 18, 2002.
LIQUIDITY RESOURCES. Our future funding requirements will depend on
numerous factors, some of which are beyond our control. These factors include
our ability to operate profitably, our ability to recruit and train management
and personnel, and its ability to compete with other, better capitalized and
more established competitors who offer alternative or similar products to those
of the Company. We believe that, given our positive working capital position, we
can satisfy its cash requirements over the next twelve months from operations if
we continue to operate at a profit. Our capital resources and liquidity are
expected to be provided by our cash flow from operations. In addition, we have
available federal net operating loss carryforwards of approximately $2,200,000
to offset future taxable income which will allow our net income from operations
to be generated with potentially little or no tax due until the loss
carryforwards are utilized.
11
The Company expects to continue to purchase equipment and hire new
employees as is commensurate with the growth of the business. In addition, we
will continue to invest time and effort in research for product development. We
know of no trends that are expected to affect the cost of labor or materials,
and sales are expected to be stable over the next twelve months.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
Our discussion and analysis or plan of operations are based upon our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to bad debts, inventories,
intangible assets, income taxes and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our
consolidated financial statements:
INCOME TAXES
SFAS 109, Accounting for Income Taxes, establishes financial accounting
and reporting standards for the effect of income taxes. The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in an entity's
financial statements or tax returns. Judgment is required in assessing the
future tax consequences of events that have been recognized in the Company's
financial statements or tax returns. Fluctuations in the actual outcome of these
future tax consequences could materially impact our financial position or our
results of operations. Our deferred tax asset on the consolidated balance sheet
is recognized primarily as a result of net operating loss carryforwards. In the
event that the Company did not generate any taxable income within the next year,
the asset would be overstated. We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not to be realized.
We have considered future market growth, forecasted earnings, and future taxable
income in determining the need for a valuation allowance. In the event we were
to determine that we would not be able to realize all or part of our net
deferred tax assets in the future, an adjustment to the deferred tax assets
would be charged to earnings in the period such determination is made. Likewise,
if we later determine that it is more likely than not that the net deferred tax
assets would be realized, the previously provided valuation allowance would be
reversed. This asset represents approximately 10.29% of total assets at March
31, 2003. Based on our past operating results for the prior two years, and the
current interim period, we believe our estimate of deferred tax assets to be
reasonable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We evaluate the collectibility of our trade receivables based on a
combination of factors. We regularly analyze our significant customer accounts,
and, when we become aware of a specific customer's inability to meet its
financial obligations to us, such as in the case of bankruptcy filings or
deterioration in the customer's operating results or financial position, we
record a specific reserve for bad debt to reduce the related receivable to the
amount we reasonably believe is collectible. The allowances are calculated based
on detailed review of certain individual customer accounts, historical rates and
an estimation of the overall economic conditions affecting our customer base. We
review a customer's credit history before extending credit. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
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INVENTORY
Our inventory purchases and commitments are made in order to build
inventory to meet future shipment schedules based on forecasted demand for our
products. We perform a detailed assessment of inventory for each period, which
includes a review of, among other factors, demand requirements, product life
cycle and development plans, component cost trends, product pricing and quality
issues. Based on this analysis, we record adjustments to inventory for excess,
obsolescence or impairment, when appropriate, to reflect inventory at net
realizable value. Revisions to our inventory adjustments may be required if
actual demand, component costs or product life cycles differ from our estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
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In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51" (FIN 46). FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity if
the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. We do not anticipate that FIN 46 will have any effect on the on the
Company.
ITEM 3. CONTROLS AND PROCEDURES
The President, who is also the chief executive officer and the chief
financial officer of the Registrant, has concluded based on his evaluation as of
a date within 90 days prior to the date of the filing of this Report, that the
Registrant's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Registrant in the reports filed or
submitted by it under the Securities Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by the
Registrant in such reports is accumulated and communicated to the Registrant's
management, including the president, as appropriate to allow timely decisions
regarding required disclosure.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation.
13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In 1993, a lawsuit was filed in the Circuit Court of the 15th Judicial
Circuit in and for Palm Beach County, Florida by NutriSupplies, Inc., successor
in the interest to rights of Robert H. Harris and the Earth Harvest, Inc.
against NutriCology, Inc. (which has since become a wholly-owned subsidiary of
the Company), Stephen A. Levine (officer, director and beneficial shareholder of
the Company) and Nicholas Gonzales, M.D. This matter is a contract dispute
between Dr. Gonzales and NutriSupplies, Inc., which alleges that Dr. Gonzales
violated their contract agreement and then returned to NutriCology to supply his
patients' needs. NutriCology and Dr. Levine were named in the suit only because
NutriCology had been Dr. Gonzales' supplier. Dr. Gonzales has agreed to fully
indemnify NutriCology and Dr. Levine from any wrongdoing. A motion for summary
judgment was granted in favor of NutriCology, but was appealed. On June 6, 2001,
the appellate court affirmed the grant of that motion, and NutriSupplies filed a
Motion for Rehearing and Request for Oral Argument. That motion was denied and
no further appeals have been filed. NutriCology requested reimbursement of
attorneys' fees, which were denied. NutriCology appealed that decision, and won.
The court has ordered the payment of attorneys' fees of approximately $120,000,
as well as costs (expected to be approximately $10,000) to NutriCology. At this
time, no estimate can be made as to the time or the amount, if any, of ultimate
recovery.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 13, 2003, the Company issued stock options for 383,250 shares
which vest immediately to many of its employees and to selected independent
contractors who are sales representatives for the Company. The options were
issued with an exercise price of $.40 per share based on the closing price of
the Company's common stock on the Over-The-Counter Bulletin Board on the date of
grant. The options terminate on the five-year anniversary of the date of grant.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Registrant's Articles of Incorporation*
3.2 Registrant's Articles of Amendment to Articles of
Incorporation dated January 15, 1998*
3.3 Registrant's Bylaws*
4.1 Form of Common Stock Certificate*
4.2 Form of Non-Qualified Stock Option*
4.3 Form of Incentive Stock Option*
4.4 Form of Common Stock Purchase Warrant*
4.5 1998 Stock Option Plan*
10.1 License Agreement between Registrant and Jim Cassidy dated March 21, 2000*
10.2 Option Agreement between Registrant, Dr. Ba Hoang and PhytoPharm PLC*#
10.3 Loan and Security Agreement between Registrant and Aerofund Financial, Inc.*
10.4 Code of Business Conduct and Ethics**
99.1 Haight-Ashbury Free Medical Clinic Design Research Survey*
99.2 Certificate of Stephen A. Levine Pursuant to Section 1350 of Chapter 63 of Title 18 U.S. Code
* Incorporated by reference to the corresponding Exhibit previously filed as an
Exhibit to Registrant's Form 10-SB (File #0-27227).
** Incorporated by reference to the corresponding Exhibit previously filed as an
Exhibit to Registrant's Form 10-KSB on March 31, 2003 (File #03629529).
# Registrant requested confidential treatment pursuant to Rule 406 for a portion
of the referenced exhibit and separately filed such exhibit with the Commission
in conjunction with the filing of its registration statement on Form 10-SB.
(b) Reports on Form 8-K
None
15
ALLERGY RESEARCH GROUP, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLERGY RESEARCH GROUP, INC.
Registrant
Dated: May 15, 2003 /S/ Stephen A. Levine
--------------------------------
By: Stephen A. Levine
Chief Executive Officer and
Chief Financial Officer
16
ALLERGY RESEARCH GROUP, INC.
a Florida corporation
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER
I, Stephen A. Levine, certify that:
1. I have reviewed this quarterly report on Form 10QSB of Allergy
Research Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role
in the registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: May 15, 2003
/s/ Stephen A. Levine
- --------------------------
Stephen A. Levine
Chief Executive Officer and Chief Financial Officer
17