UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For quarterly period ended June 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 000-26973 WHOLE LIVING, INC. ---------------------------------------------------------------- (Exact name of small business issuer as specified in its charter) Nevada 87-0621709 ---------------------- ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 433 East Bay Boulevard, Provo, Utah 84606 ---------------------------------------------------------------- (Address of principal executive offices) Registrant's telephone number: (801) 655-1000 Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 [ ] As of July 27, 2005, Whole Living, Inc. had a total of 66,377,245 shares of common stock outstanding. Transitional small business disclosure format: Yes [ ] No [X] TABLE OF CONTENTS PART I: FINANCIAL INFORMATION Item 1. Financial Statements..............................................2 Item 2. Management's Discussion and Analysis or Plan of Operation.........8 Item 3. Controls and Procedures..........................................11 PART II: OTHER INFORMATION Item 6. Exhibits.........................................................12 Signatures................................................................12 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The financial information set forth below with respect to our statements of operations for the three and six month periods ended June 30, 2005 and 2004, is unaudited. This financial information, in the opinion of management, includes all adjustments consisting of normal recurring entries necessary for the fair presentation of this financial information. The results of operations for the six month period ended June 30, 2005, are not necessarily indicative of results to be expected for any subsequent period. 2 Whole Living, Inc. Consolidated Financial Statements June 30, 2005 3 Whole Living, Inc. Consolidated Balance Sheets ASSETS June 30, December 31, 2005 2004 ------------- ------------- (unaudited) Current Assets Accounts Receivable (Net of Allowance of $27,000) $ 9,736 $ 24,866 Inventory 429,827 516,551 Prepaid Expenses 17,914 7,664 ------------- ------------- Total Current Assets 457,477 549,081 Property & Equipment, Net 683,426 798,824 Other Assets Goodwill, Net 17,318 17,318 Deposits 30,540 30,540 ------------- ------------- Total Other Assets 47,858 47,858 ------------- ------------- Total Assets $ 1,188,761 $ 1,395,763 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Bank Overdraft $ 70,277 $ 94,711 Accounts Payable 333,356 603,939 Accrued Expenses 205,405 350,163 Contingent Liabilities - 286,390 Current Portion of Long-Term Liabilities 1,560,734 212,042 ------------- ------------- Total Current Liabilities 2,169,772 1,547,245 Long Term Liabilities Notes Payable - Related Party 1,560,734 212,042 Less Current Portion (1,560,734) (212,042) ------------- ------------- Total Long Term Liabilities - - ------------- ------------- Total Liabilities 2,169,772 1,547,245 Stockholders' Equity Common Stock, $.001 Par Value; 100,000,000 Shares Authorized: 6,377,245 Shares Issued and Outstanding 66,377 66,377 Additional Paid-In Capital 13,710,194 13,710,194 Retained Deficit (14,727,670) (13,837,486) Prepaid Expenses (29,912) (90,567) ------------- ------------- Total Stockholders' Equity (981,011) (151,482) ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,188,761 $ 1,395,763 ============= ============= 4 <CAPTION Whole Living, Inc. Consolidated Statements of Operations (Unaudited) For the Three Months Ended For the Six Months Ended June 30 June 30, ---------------------------- --------------------------- 2005 2004 2005 2004 -------------- ------------- ------------- ------------- <s> <c> <c> <c> <c> Sales $ 999,957 $ 1,794,230 $ 2,276,685 $ 3,872,856 Cost Of Goods Sold 784,038 1,367,724 1,625,254 3,000,169 -------------- ------------- ------------- ------------- Gross Profit 215,919 426,506 651,431 872,687 Operating Expenses Selling Expenses 187,159 110,828 291,130 260,979 General and Administrative 421,122 744,761 1,194,923 1,539,455 -------------- ------------- ------------- ------------- Total Operating Expenses 608,281 855,589 1,486,053 1,800,434 -------------- ------------- ------------- ------------- OPERATING INCOME (LOSS) (392,362) (429,083) (834,622) (927,747) OTHER INCOME(EXPENSE) Interest Expense (45,294) (55,126) (68,664) (97,525) Other Income 56 56 13,102 56 -------------- ------------- ------------- ------------- Total Other Income(Expense) (45,238) (55,070) (55,562) (97,469) -------------- ------------- ------------- ------------- NET INCOME(LOSS) BEFORE INCOME TAXES (437,600) (484,153) (890,184) (1,025,216) PROVISION FOR INCOME TAXES - - - - -------------- ------------- ------------- ------------- NET INCOME (LOSS) $ (437,600) $ (484,153) $ (890,184) $ (1,025,216) ============== ============= ============= ============= WEIGHTED AVERAGE INCOME (LOSS) PER SHARE $ (0.01) $ (0.01) $ (0.01) $ (0.02) ============== ============= ============= ============= WEIGHTED AVERAGE SHARES OUTSTANDING 66,377,245 43,079,640 66,377,245 43,079,640 ============== ============= ============= ============= 5 Whole Living, Inc. Consolidated Statements of Cash Flows (Unaudited) For the Six Months Ended June 30, ---------------------------- 2005 2004 -------------- ------------- <s> <c> <c> Cash Flows From Operating Activities Net Income (Loss) $ (890,184) $ (1,025,216) Adjustments to Reconcile Net Income(Loss) to Net Cash Provided(Used) in Operating Activities: Depreciation & Amortization 140,837 312,570 Stock Issued for Services - - Amortization of Prepaid Expenses (Equity) 60,655 - Change in Assets and Liabilities (Increase) Decrease in: Accounts Receivable 15,130 79,577 Inventory 86,724 (15,220) Prepaid Expenses (10,250) (63,037) Deposits - (8,900) Increase (Decrease) in: Bank Overdraft (24,434) 118,183 Accounts Payable and Accrued Expenses (701,731) (91,274) -------------- ------------- Net Cash Provided(Used) by Operating Activities (1,323,253) (693,317) Cash Flows from Investing Activities Proceeds from Escrow - 50,000 Cash Paid for Property & Equipment (25,439) (197,302) -------------- ------------- Net Cash Provided(Used) by Investing Activities (25,439) (147,302) Cash Flows from Financing Activities Cash Proceeds from Debt Financing 1,348,692 840,619 -------------- ------------- Net Cash Provided(Used) by Financing Activities 1,348,692 840,619 -------------- ------------- Increase (Decrease) in Cash - - Cash and Cash Equivalents at Beginning of Period - - -------------- ------------- Cash and Cash Equivalents at End of Period $ - $ - ============== ============= Supplemental Disclosures of Cash Flow Information: Cash Paid for: Interest $ 3,089 $ 4,422 Income Taxes $ - $ - Non-Cash Activities: Common Stock Issued for Services $ - $ - Common Stock Issued for Infomercial $ - $ - Common Stock Issued for Notes Payable and Accrued Interest $ - $ - 6 Whole Living, Inc. Notes to the Consolidated Financial Statements June 30, 2005 GENERAL - ------- Whole Living, Inc. (the Company) has elected to omit substantially all footnotes to the financial statements for the six months ended June 30, 2005 since there have been no material changes (other than indicated in other footnotes) to the information previously reported by the Company in their Annual Report filed on the Form 10-KSB for the year ended December 31, 2004. UNAUDITED INFORMATION - --------------------- The information furnished herein was taken from the books and records of the Company without audit. However, such information reflects all adjustments that are, in the opinion of management, necessary to properly reflect the results of the interim period presented. The information presented is not necessarily indicative of the results from operations expected for the full fiscal year. 7 References in this quarterly report to "Whole Living" "we," "us," and "our" refer to Whole Living, Inc. and its subsidiary. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS The Securities and Exchange Commission ("SEC") encourages companies to disclose forward-looking information so that investors can better understand future prospects and make informed investment decisions. This report contains these types of statements. Words such as "may," "will," "expect," "believe," "anticipate," "estimate," "project," or "continue" or comparable terminology used in connection with any discussion of future operating results or financial performance identify forward-looking statements. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. All forward-looking statements reflect our present expectation of future events and are subject to a number of important factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION EXECUTIVE OVERVIEW Whole Living is a holding company that operates through its wholly-owned subsidiary, Brain Garden, Inc. We are a total lifestyle company focused on bringing our customers convenient whole foods, personal care products, household cleaners and synthetic free alternatives to medicines. We employ a network marketing system to introduce our products to customers and independent distributors, and our distributors sponsor new distributors. During 2004 we increased our product offerings to include hot cereals and healthy meal makers, plus introduced a complete new line of Pulse. We launched our new essential oils World of Wellness program as part of our return to our focus on a total lifestyle company. Also, in December 2004 we opened a new fulfillment center in Brisbane, Australia to reduce costs and shipping time from ten days to three days for products to Australia and New Zealand. During early 2005 we focused our marketing efforts on the "90 Days to Freedom" program that gave customers a first hand experience of primary whole-food nutrition. We relied on our two-hour nutritional seminar format and we planned eleven seminars around the United States and Australia. We followed up each seminar with a conference approximately 45 days after the initial seminar with the intent to provide distributors with the opportunity to bring potential customers to sample our products. In late April 2005, we launched a new marketing initiative to increase sales and awareness of our expanded product lines. We called this series the "Changing Lives Seminars." The Changing Lives Seminars includes a 90-minute presentation that introduces our company message, offers product samples, and focuses on healthier lifestyles and presents the benefits of whole foods in modern diets. We conducted an eleven city tour and followed it up with a second round city tour in the continental United States, Hawaii and Brisbane. Management believes this model will help brand our products and programs, as well as assist new distributors in attracting new clients. Our major challenge for the next twelve months will be to increase our sales through our business model. Management will also continue to evaluate expenses related to operating activities, especially production and order fulfillment, and we intend to make adjustments to improve profitability. LIQUIDITY AND CAPITAL RESOURCES Our revenues are not at a level that can support our operations and we recorded a net loss of $890,184 for the six month period ended June 30, 2005. Net cash used by operating activities was $1,323,253 for the six month period ended June 30, 2005 (the "2005 six month period") compared to $693,317 for the six month period ended June 30, 2004 (the "2004 six month period"). Net cash used by investing activities was $25,439 for the 2005 six month period compared to $147,302 for the 2004 six month period. The investing activities for both periods were 8 primarily related to the purchase of property and equipment. We will need additional financing to fund operations and to further develop our business plan. If we are unable to obtain additional funding we may be required to reduce personnel or scale back our business plans. For the short term management believes that revenues and additional financing will provide funds for operations. For the long term, management expects that the development of our Changing Lives Seminars and our World of Wellness programs will increase our revenues. We will likely continue to raise additional funds through loans, as needed. Management intends to use any available cash to fund our operations. FINANCING Historically, we have financed our operations through revenues and debt financing. Net cash provided by financing activities was $1,348,692 for the 2005 six month period compared to $840,619 for the 2004 six month period and was primarily related to debt financing in both periods. Management anticipates that additional capital for cash shortfalls will be provided by debt financing. We may pay these loans with cash, if available, or convert these loans into common stock. We may also issue private placements of stock to raise additional funding. Any private placement likely will rely upon exemptions from registration provided by federal and state securities laws. The purchasers and manner of issuance will be determined according to our financial needs and the available exemptions. We also note that if we issue more shares of our common stock, our shareholders may experience dilution in the value per share of their common stock. COMMITMENTS AND CONTINGENT LIABILITIES We have an operating lease for our office and manufacturing facility at $17,400 per month. Future minimum payments on operating leases for office space and warehouse space were $208,800 through 2005 at December 31, 2004. Our total current liabilities at June 30, 2005, were $2,169,772. The total current liabilities include a bank overdraft of $70,277, accounts payable of $333,356, accrued expenses of $205,405, and the current portion of long-term liabilities of $1,560,734. Our long term liabilities are notes payable to shareholders. OFF-BALANCE SHEET ARRANGEMENTS None. RESULTS OF OPERATIONS The following discussions are based on the consolidated financial statements of Whole Living and Brain Garden, Inc. These discussions summarize our financial statements for the three and six month periods ended June 30, 2004 and 2005 and should be read in conjunction with the financial statements, and notes thereto, included with this report at Part I, Item I, above. Comparison of 2004 and 2005 Three and Six Month Period Operations - ----------------------------------------------------------------- Six month Six month Three month Three month period ended period ended period ended period ended June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004 -------------- -------------- -------------- -------------- <s> <c> <c> <c> <c> Sales $ 2,276,685 $ 3,872,856 $ 999,957 $ 1,794,230 Cost of goods sold 1,625,254 3,000,169 784,038 1,367,724 9 Gross profit 651,431 872,687 215,919 426,506 Total operating expenses 1,486,053 1,800,434 608,281 855,589 Total other expense (55,562) (97,469) (45,238) (55,070) Net loss (890,184) (1,025,216) (437,600) (484,153) Net loss per share $ (0.01) $ (0.02) $ (0.01) $ (0.01) We recognize revenue upon the receipt of the sales order, which is simultaneous with the payment and delivery of goods. Sales are net of returns, which have historically been less than 2% of sales. Sales for the 2005 six month period decreased 41.2% from the 2004 six month period and sales for the 2005 second quarter decreased 44.3% from the 2004 second quarter. This reduction in sales was primarily due to reduced marketing while we focused our energy on the development of our a business model. Cost of goods sold consists primarily of the cost of procuring and packaging products, sales commissions paid to our independent distributors, the cost of shipping product to distributors, plus credit card sales processing fees. As sales have decreased so have cost of goods sold. Cost of goods sold was 71.4% of total sales for the 2005 six month period compared to 77.5% of total sales for the 2004 six month period. Cost of goods sold was approximately 78.4% of total sales for the 2005 second quarter compared to 76.2% of total sales for the 2004 second quarter. Cost of goods sold includes distributor commissions that are paid to several levels of distributors on each product sold. The amount and recipient of the commission varies depending on the purchaser's position within the Unigen Plan. Distributor commissions are paid to distributors on a monthly basis based upon their personal and group sales volume. Additional bonuses are paid weekly to distributors. The overall payout average for sales commissions has historically been approximately 36% to 38% of product sales. Total operating expenses decreased 17.5% for the 2005 six month period compared to the 2004 six month period and these expenses decreased 28.9% for the 2005 second quarter compared to the 2004 second quarter. Selling expenses, which include marketing expenses, the support of sales meetings and events, and certain customer service expenses, increased 11.6% for the 2005 six month period compared to the 2004 six month period. Selling expenses increased 68.9% for the 2005 second quarter compared to the 2004 second quarter. This increase was primarily due to the marketing efforts associated with our product seminars. General and administrative expenses, which include general office expense, management and employees' salaries, and the support systems for the distributor network, decreased 22.4% for the 2005 six month period compared to the 2004 six month period and these expenses decreased 43.5% for the 2005 second quarter compared to the 2004 second quarter. Total other expense for the 2004 and 2005 periods was primarily related to interest expense from debt financing. As a result of the above, we recorded net losses for the 2005 and 2004 periods. However, our net loss decreased 13.2% for the 2005 six month period compared to the 2004 period and decreased 9.6% for the 2005 second quarter compared to the 2004 second quarter. The following chart summarizes our balance sheet at June 30, 2005, and December 31, 2004. 10 Summary of Balance Sheet ------------------------- As of June 30, 2005 As of December 31, 2004 -------------------- ----------------------- Cash $ - $ - Total current assets 457,477 549,081 Total assets 1,188,761 1,395,763 Total current liabilities 2,169,772 1,547,245 Total liabilities 2,169,772 1,547,245 Retained deficit (14,727,670) (13,837,486) Total stockholders equity $ (981,118) $ (151,482) At June 30, 2005 our total current liabilities increased primarily due to notes payable of $1,560,734. FACTORS AFFECTING FUTURE PERFORMANCE Internal cash flows alone have not been sufficient to maintain our operations. We have had a history of losses and have been unable to attain profitability. Actual costs and revenues could vary from the amounts we expect or budget, possibly materially, and those variations are likely to affect how much additional financing we will need for our operations. Our future internal cash flows will be dependent on a number of factors, including: .. Our ability to encourage our distributors to sponsor new distributors and increase their own personal sales; .. Our ability to promote our product lines with our distributors; .. Our ability to develop successful new product lines; .. Effects of future regulatory changes in the area of direct marketing, if any; and .. Our ability to remain competitive in our markets. In addition, we have entered into agreements with independent distributors and suppliers located in Australia, Canada, New Zealand, and the United Kingdom. We may establish similar arrangements in other countries in the future. As a result, our future revenues may be affected by the economies of these countries. Our international operations are subject to a number of risks, such as, longer payment cycles, unexpected changes in regulatory environments, import and export restrictions and tariffs, difficulties in staffing and managing international operations, greater difficulty or delay in accounts receivable collection, potentially adverse recessionary environments and economies outside the United States, and possible political and economic instability. ITEM 3. CONTROLS AND PROCEDURES Our Chief Executive Officer, who acts in the capacity of principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, he concluded that our disclosure controls and procedures were effective. Also, our Chief Executive Officer determined that there were no significant changes made in our internal controls over financial reporting during the second quarter of 2005 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting. 11 PART II: OTHER INFORMATION ITEM 6. EXHIBITS Part I Exhibits 31.1 Chief Executive Officer Certification 31.2 Principal Financial Officer Certification 32.1 Section 1350 Certification Part II Exhibits 3.1 Articles of Incorporation of Whole Living (Incorporated by reference to Form exhibit 2.1 10-SB, as amended, filed August 9, 1999) 3.2 Certificate of Amendment to Articles of Incorporation for Whole Living, Inc. (Incorporated by reference to exhibit 3.2 for Form 10-QSB, filed November 15, 2004) 3.3 Bylaws of Whole Living (Incorporated by reference to exhibit 2.4 to the Form 10-SB, as amended, filed August 9, 1999) 10.1 Lease Agreement between Whole Living and Dare Associates, LLC, dated September 6, 2002 (Incorporated by reference to exhibit 10.1 for Form 10-KSB, filed April 8, 2003) 21.1 Subsidiaries of Whole Living, Inc. (Incorporated by reference to exhibit 21.1 for Form 10-QSB, filed November 14, 2003) SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WHOLE LIVING, INC. Date: August 11, 2005 By: /s/ Douglas J. Burdick --------------------------------- Douglas J. Burdick President, Chief Executive Officer and Director