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As filed with the Securities and Exchange Commission on October 20, 2006
Registration No. 333 -______
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NUVIM, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 5149 13-4083851
(State or Other Jurisdiction (Primary Standard (I.R.S. Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number)
12 North State Route 17
Paramus, NJ 07652
201.556.1010
(Address and Telephone Number of Principal Executive Offices
and Principal Place of Business)
Richard P. Kundrat
12 North State Route 17
Paramus, NJ 07652
201. 556.1013
(Name, Address and Telephone Number of Agent for Service)
Copy to:
Mark Alan Siegel, Esq.
1900 Corporate Boulevard, Suite 400 E
Boca Raton, Florida 33431
561.998.6835
Approximate Date of Commencement of the Proposed Sale to the Public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED PER SECURITY(1) OFFERING PRICE FEE
- -------------------------------------------------- ------------ --------------- -------------- ------------
Shares of common stock 5,288,237 $ 0.25 $ 1,322,059.25 $ 141.46
(1) Estimated solely for purposes of calculating the amount of the registration
fee paid pursuant to Rule 457(g) under the Securities Act.
The Registrant hereby amends this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
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SUBJECT TO COMPLETION, DATED OCTOBER 20, 2006
PROSPECTUS
5,288,237 SHARES OF COMMON STOCK
[LOGO OF NUVIM]
This prospectus relates to the potential sale by certain selling
security holders (collectively the "Sellers") of an aggregate of 5,288,237
shares of common stock of NuVim, Inc. None of the proceeds from the sale of the
shares by the Sellers will be received by us. We will bear all expenses (other
than selling commissions and fees and expenses of counsel or other advisors to
the Sellers) in connection with the registration and sale of the shares being
offered by the Sellers.
The common stock is quoted on the OTC Bulletin Board (R) ("OTCBB")
under the symbol "NUVM". The shares will be offered by the Sellers in
transactions on the OTC Bulletin Board (R) ("OTCBB"), in negotiated transactions
or a combination of these methods of sale, at fixed prices which may be changed,
at market prices prevailing at the time of sale, at prices related to such
prevailing market prices, or at negotiated prices. The Sellers may effect these
transactions by selling the shares to or through broker-dealers, and the
broker-dealers may receive compensation in the form of discounts, concessions or
commissions from the Sellers and/or the purchasers of the shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both. The
Sellers may be deemed to be "underwriters" as defined in the Securities Act of
1933. If any broker-dealers are used by the Sellers, any commissions paid to
broker-dealers and, if broker-dealers purchase any units as principals, any
profits received by such broker-dealers on the resale of the units, may be
deemed to be underwriting discounts or commission under the Securities Act. In
addition, any profits realized by the Sellers may be deemed to be underwriting
commissions. Brokerage commissions, if any, attributable to the sale of the
units will be borne by the Sellers.
THE COMPANY IS CONSIDERED TO BE IN UNSOUND FINANCIAL CONDITION. PERSONS
SHOULD NOT INVEST UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.
INVESTING IN OUR SECURITIES INVOLVES SIGNIFICANT RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE 7.
NUVIM WILL RECEIVE NONE OF THE PROCEEDS OF THE SALE OF THE COMMON STOCK
OFFERED HEREUNDER. ALL OF THE PROCEEDS WILL GO TO THE SELLERS.
See "Risk Factors" beginning on page 7 for a discussion of certain
factors that should be considered in connection with an investment in the
shares.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS
HAVE NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU
OTHERWISE.
The date of this Prospectus is October 20, 2006.
TABLE OF CONTENTS
Page
----
Prospectus Summary 3
Risk Factors 7
Forward-Looking Statements 14
Use of Proceeds 13
Dividend Policy 13
Capitalization 13
Dilution 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations 16
Business 27
Management 35
Related Party Transactions 45
Principal Stockholders 51
Description of Securities 53
Shares Eligible for Future Sale 54
Underwriting 58
Legal Matters 56
Experts 57
Where You Can Find More Information 57
Index to Financial Statements F-1
Until February ___ , 2007 (90 days after the commencement of this
offering), all dealers that buy, sell or trade our units, whether or not
participating in this offering, may be required to deliver a prospectus. This
delivery requirement is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained in this prospectus.
We have not, and the sellers have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. Information contained on
our website does not constitute a part of this prospectus. The information in
this prospectus may only be accurate as of the date appearing on the cover page
of this prospectus, regardless of the time this prospectus is delivered or our
units are sold.
We are not, and the sellers are not, making an offer to sell the common
stock in any jurisdiction where the offer or sale is not permitted. No action is
being taken in any jurisdiction outside the United States to permit a public
offering of our securities or the possession or distribution of this prospectus
in any such jurisdiction. Persons who come into possession of this prospectus in
jurisdictions outside of the United States are required to inform themselves
about and to observe any restrictions as to this offering and the distribution
of this prospectus applicable in that jurisdiction.
The trademarks NuVim(R) MunePro(R), AccuFlex(R), Fruit Symphony(R) and
MuniFlexTM are owned by NuVim, Inc. All other brand names or trademarks
appearing in this prospectus are the property of their respective owners.
Notice to California investors: Each purchaser of units in California
must meet one of the following suitability standards:
(1) annual gross income of at least $200,000; (2) net worth of at least
$1,000,000 (inclusive of home, home
1
furnishings and automobiles); (3) liquid net worth of at least $500,000
(exclusive of home, home furnishings and automobiles); or (4) liquid net worth
(exclusive of home, home furnishings and automobiles of at least $250,000 plus
annual gross income of at least $65,000. This offering was approved in
California on the basis of a limited offering qualification where offers/sales
can only be made to investors who meet one or more of the foregoing suitability
standards. The company did not have to demonstrate compliance with some or all
of the merit regulations of the Department of Corporations as found in Title 10,
California Code of Regulations, Rule 260.140 et seq. Furthermore, the exemptions
for secondary trading available under California Corporations Code Section
25104(h) will be withheld, but there may be other exemptions available to cover
private sales.
Notice to New Jersey investors: Offers and sales in this offering in
New Jersey may only be made to accredited investors as defined in Rule 501(a) of
Regulation D under the Securities Act of 1933. Under Rule 501(a), to be an
accredited investor an individual must have: (1) net worth or joint net worth
with the individual's spouse of more than $1,000,000; or (2) income of more than
$200,000 in each of the two most recent years or joint income with the
individual's spouse of more than $300,000 in each of those years and a
reasonable expectation of reaching the same income level in the current year.
Other standards apply to investors who are not individuals. There will be no
secondary sales of the securities to persons who are not accredited investors
for 90 days after the date of this offering in New Jersey by the underwriter and
selected dealers.
2
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It does not contain all of the information you should consider
before purchasing any shares. Therefore, you should read the prospectus in its
entirety, including the risk factors and the financial statements and related
notes appearing elsewhere in this prospectus. References to "we," "us," "our,"
and "NuVim," or "the company" generally refer to NuVim, Inc
OUR COMPANY
We produce, market, and distribute NuVim(R) dietary supplements in
beverage form. NuVim(R) contains two proprietary micronutrients known as
MunePro(R)and AccuFlex(R). These two patented micronutrients have been shown in
independent clinical studies to help strengthen the immune system, support
muscle flexibility and enhance athletic performance when twelve ounces are
consumed for six weeks. Our exclusive worldwide license (except for Asia,
Australia and New Zealand) and supply agreement with Stolle Milk Biologics Inc,
("SMBI") allows us to use these proprietary micronutrients in carbonated and
non-carbonated beverages (and powders for reconstitution), excluding only
certain milk, yogurt and nutritional meal replacement products. This allows us
to be a sole source provider in the markets in which we operate.
Our goal is to become a leading provider of good-tasting, clinically
proven dietary supplement beverages and other clinically proven health products.
Our product line currently consists of three flavors of refrigerated
fruit-flavored nutritional beverages, including Orange Tangerine, Fruit Symphony
and Strawberry Vanilla. Our products are primarily sold in 64-ounce cartons,
typically in the refrigerated juice section of supermarkets. Sixteen-ounce
bottles of NuVim are typically sold in food service operations and a limited
number of small supermarkets, delicatessens, and chain supermarkets in the New
York metropolitan area. Our plans for the sixteen ounce contemplate expanding
our distribution base to include, for example, club stores, convenience stores,
nutrition centers, and health food outlets.
We developed a powder version of our product to be sold through direct
distribution such as the internet and infomercials, as well as retail outlets.
Sales of the product to date have not been material. The powder version is
available in three varieties, Chocolate, Vanilla, and Strawberry. There are 30
individually wrapped servings in a box. It can be added to water, milk, juice,
yogurt, or cereal. Some consumers are adding and shaking NuVim in powder form to
their bottled water to gain taste and the exclusive NuVim benefits. The powder
version contains the same micronutrients as the refrigerated version and has the
same anti-oxidant vitamins of "A", "C" and "E". There are only 10 calories per
serving.
We have distributed our refrigerated beverages since the year 2000 and
are in approximately 2,100 Supermarkets in the Eastern United States. In 2002
company revenues were $3.5 million. However, we eliminated most advertising and
marketing support for our product in the second half of 2002 due to a lack of
funding. We recapitalized our company in June 2005 through the conversion of
approximately $7.7 million of debt into common stock and an initial public
offering of our common stock. Since that time we have concentrated our limited
financial resources on developing and supporting distribution opportunities that
we believe will provide the greatest sales expansion potential. These
initiatives have included expansion at Wal-Mart to the entire Southeast Region
from 120 stores to approximately 300 stores. We are also working with Kroger,
the second largest supermarket retailer behind Wal-Mart, to begin testing a
proposal to co-pack the 64 ounce and 16 ounce size in the Kroger owned dairies
and to distribute to their supermarkets. We are developing sales to the military
commissaries. Part of the funds received in our Initial Public Offering in June
2005 was used to launch the powder version and support the current refrigerated
product line in the East Coast supermarkets and Wal-Mart. The last initiative is
to expand the number of distribution points for the 16 ounce size. We are
concentrating on making the 16 ounce shelf stable to increase the number of
independent distributors that will carry our line. If we can make the 16 ounce
shelf stable meaning that it does not need refrigeration enroute to the retail
outlet then the number of retail outlets that stock NuVim will increase
dramatically. There are over 700,000 potential distribution points where this
NuVim size could be sold.
3
We have a sole source supply agreement with SMBI for our requirements
of the whey protein concentrate ("WPC") that contains the patented
micronutrients required to produce the health benefits of our products. The whey
protein concentrate is produced through a proprietary immunization process on
dairy cows in New Zealand and is imported in dry powder form into the United
States by SMBI. Our products are currently manufactured at a dairy co-packer in
Reading, Pennsylvania. Finished products are warehoused in Orefield,
Pennsylvania and shipped to our customers by a third party transportation
company. As we expand our business into new geographic areas and introduce new
products, we also expect to expand our co-packing, warehousing and
transportation relationships, which we anticipate will reduce certain expenses
we currently must incur, particularly transportation costs. We believe there are
sufficient qualified dairies and warehouses available for our purposes. The 83
day shelf life of out products from date of manufacture allows us to operate the
business without investing in our own manufacturing facility, warehouse, and
trucks.
Our operations to date have generated significant operating losses that
have been funded through the issuance of common stock and external borrowings.
We will require additional sources of outside capital to continue our
operations. Senior secured promissory notes with a principal amount of $500,000
has been extended to a due date of January 15, 2009. We also have outstanding
notes payable with a principal balance of approximately $320,000, which have
also been extended to January 15, 2009. We are currently seeking additional
financing through the sale of equity securities.
We were incorporated in Delaware in September 1999. Our principal place
of business is 12 Route 17 North, Suite 210, Paramus, New Jersey 07652. Our
telephone number is (201) 556-1010. Our web address is www.nuvim.com.
Information contained in or accessible through our website is not part of this
prospectus.
THE OFFERING
SELLING STOCKHOLDERS
This offering includes the registration of a total of 5,288,237 shares
of common stock for resale by the Sellers. A total of 2,470,000 of these shares
were sold for cash to a group of 23 investors. Paulsen, one of the Sellers,
acted as our placement agent with respect to most of these investors. Paulsen
purchased its 537,500 shares at that time as well. In addition, shares
aggregating 815,584 were issued to 13 creditors and noteholders, including, a
former officer, each of whom has agreed to accept shares of common stock to
extinguish certain amounts owed to them rather than being paid cash. 483,563
shares were issued to companies and individuals and one research association for
services. Dick Clark, our former spokesman, will be offering 628,636 of his
shares and Stanley Moger, one of our directors will be offering 352,955 of his
shares.
The six following table sets forth certain information with respect to
the beneficial ownership of our common stock by each Seller as of the closing of
our initial public offering and after the sale of all the shares available for
sale by the selling stockholders pursuant to this prospectus.
4
Shares Beneficially Owned May be Sold Shares Beneficially Owned
Prior to this Offering Purusant to After this Offering
-------------------------- this ---------------------------
Name of Selling Stockholder Number Percentage (2) Prospectus Number Percentage (2)
- ------------------------------------------------------- --------- -------------- ------------ ---------- --------------
NFS LLC / FMTC FBO Steven Michael Wright 75,000 * 75,000 0 *
NFS LLC / FMTC FBO Richard Wright 100,000 * 100,000 0 *
NFS LLC / FMTC FBO W Douglas Dodds 100,000 * 100,000 0 *
NFS LLC / FMTC FBO Dianne M. Wright 100,000 * 100,000 0 *
Woodburn Nursery, Inc. 80,000 * 80,000 0 *
Hummingbird Value Fund, LP 180,000 1.70% 180,000 0 *
SCG Capital, LLC 250,000 2.36% 250,000 0 *
Richard Melnick 500,000 4.72% 500,000 0 *
Russell & Beverley Davidson 25,000 * 25,000 0 *
Mark A. McKay 25,000 * 25,000 0 *
Richard P. Kansky & Amy Kansky 25,000 * 25,000 0 *
Dean A. McKay 25,000 * 25,000 0 *
King Seeds Inc. 80,000 * 80,000 0 *
Gene F Anderson & Jane M. Anderson 150,000 1.41% 150,000 0 *
Doug Gibson & Janice Gibson 50,000 * 50,000 0 *
Ronald DeConinck & Joan DeConinek 200,000 1.89% 200,000 0 *
Delbert LaFace 180,000 1.70% 180,000 0 *
David Morgan 50,000 * 50,000 0 *
Peter Jones 50,000 * 50,000 0 *
Trent Davis 50,000 * 50,000 0 *
Richard R. Wright 100,000 * 100,000 0 *
Steven Michael Wright 75,000 * 75,000 0 *
Paulson Investment Company, Inc. 537,500 5.07% 537,500 0 *
Richard Clark (3) 1,298,636 12.25% 628,636 670,000 6.32%
Stanley Moger (4) 1,111,637 10.49% 352,955 758,682 7.16%
Ashleigh Lynne Howard and Gregory Scott Howard, JTWROS 15,000 * 15,000 0 *
Jamal Kibria 100,000 * 100,000 0 *
Stewart Smith 25,200 * 25,200 0 *
Equity Relations, Inc. 24,000 * 24,000 0 *
On Ideas 34,286 * 34,286 0 *
Platinium Television 248,571 2.34% 248,571 0 *
American Heart Association 56,000 * 56,000 0 *
Wickersham & Murphy, P.C. 81,929 * 81,929 0 *
Stratmar Systems, Inc. 122,990 1.16% 122,990 0 *
Sonic Packaging Industries, Inc. 41,291 * 41,291 0 *
R. J. Palmer, Inc. 76,449 * 76,449 0 *
Paul J. Young 9,000 * 9,000 0 *
Peter Barton Hutt 107,631 1.02% 107,631 0 *
Midtown Partners & Co., LLC 21,799 * 21,799 0 *
William G and Margaret D. Flynn 60,000 * 60,000 0 *
Robert M. Wessel 125,000 1.18% 125,000 0 *
The Mayflower Group, Ltd. 50,000 * 50,000 0 *
Joseph Flannery 50,000 * 50,000 0 *
Douglas P. Arnold 50,000 * 50,000 0 *
Total 6,716,919 63.35% 5,288,237 1,428,682 13.48%
* Less than 1%.
(1) This prospectus also shall cover any additional shares of common stock
that become issuable in connection with the shares registered for sale
hereby by reason of any stock dividend, stock split, recapitalization or
other similar transaction effected without the receipt of consideration
that results in an increase in the number of our outstanding shares of
common stock.
(2) Based on 10,602,088 shares of Common Stock outstanding on June 30, 2006
but does not include 5,606,337 shares issuable upon the exercise of
warrants and 3,306,147 shares issuable upon the exercise of employee
stock options.
(3) Consists of 628,636 shares now issued and 670,000 shares to be issued
upon exercise of warrants.
(4) Consists of 352,955 shares now issued and 758,682 shares to be issued
upon exercise of options and warrants.
5
SUMMARY FINANCIAL INFORMATION
In the table below, we provide you with historical summary financial
information for each of the two years ended December 31, 2004 and 2005, derived
from our audited financial statements included elsewhere in this prospectus. We
also provide below financial information for the six months ended June 30, 2005
and 2006, derived from our unaudited financial statements included elsewhere in
this prospectus. These unaudited results include, in the opinion of management,
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair statement of such information. When you read this historical summary
financial information, you should also consider the historical financial
statements and related notes and the section entitled Management's Discussion
and Analysis of Financial Condition and Results of Operations. Historical
results are not necessarily indicative of the results that may be expected for
any future period.
YEARS ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------ ------------------------------
SELECTED STATEMENT OF OPERATIONS DATA: 2004 2005 2005 2006
- ------------------------------------------- ------------- ------------- ------------- -------------
Gross Sales $ 1,411,355 $ 1,208,279 $ 649,508 $ 598,152
Net Sales 958,785 721,381 357,830 481,593
Gross Profit 221,143 34,214 (19,680) 172,393
Loss From Operations (1,871,755) (2,358,782) (1,073,735) (831,679)
Net Loss (2,131,581) (2,396,902) (1,315,061) (896,569)
Basic and Diluted Loss Per Share $ (10.26) $ (0.82) $ (1.18) $ (0.13)
Weighted Average Number of Common Shares 207,740 2,940,987 1,116,777 7,131,769
Outstanding - Basic and Diluted
SELECTED BALANCE SHEET DATA: JUNE 30, 2006
------------------------------------------- -------------
Working Capital (Deficit) $ (1,611,955)
Cash and Cash Equivalents 30,100
Total Assets 832,006
Total Liabilities 2,344,364
Total Stockholders' Deficit (1,512,358)
6
RISK FACTORS
An investment in our securities involves a high degree of risk and many
uncertainties. You should carefully consider the specific factors listed below,
together with the cautionary statement that follows this section and the other
information included in this prospectus, before purchasing our units in this
offering. If one or more of the possibilities described as risks below actually
occur, our operating results and financial condition would likely suffer, and
the trading price of our securities could fall, causing you to lose some or all
of your investment in the securities we are offering. The following is a
description of what we consider our key challenges and material risks.
RISKS RELATED TO OUR BUSINESS
Investing in our shares involves a high degree of risk. You should carefully
consider the following risks, as well as the other information in this report,
before deciding whether to invest in our shares. If any of the following risks
actually occur, our business, financial condition, results of operations and
liquidity could suffer. In that event, the trading price of our shares could
decline and you might lose all or part of your investment.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL.
We are currently operating at a loss and expect our expenses to
continue to increase as we expand our product line as well as our geographic
presence throughout the United States. To date, we have relied primarily on
financing transactions to fund operations. We could face unforeseen costs such
as an increase in transportation costs resulting from the recent significant
increases in the cost of fuel; or our revenues could fall short of our
projections because retail outlets discontinue ordering our products or for
reasons unrelated to our products, such as a revenue decline due to changes in
consumer habits and preferences or we may achieve lower margins than planned on
our products due to cost increases or competitive pricing pressure. We will need
another infusion of capital to continue to fund our operations in 2006. During
2006 Paulsen Investment Company, Inc. privately placed 2,970,000 restricted
shares of our common stock at a price of twenty cents per share. A total of
$594,000 was received less offering costs paid of 60,125 for a net amount of
$533,875.
In addition, 8 creditors agreed to accept common stock at a price of
$0.35 per share to settle an aggregate of approximately $143,000 of current or
past due trade debt and convertible notes and seven people and organizations
have agreed to accept approximately 483,563 shares of common stock for services
valued at approximately $173,000.
During the second quarter, the holders of $67,600 of secured debentures
agreed to accept 335,000 shares of common stock in exchange for their notes and
warrants.
During the third quarter, on August 23, 2006, the holders of all
$500,000 of NuVim(R)'s Senior Secured Notes, Richard Clark, the entertainer, and
Stanly Moger, one of NuVim(R)'s directors, agreed to extend their maturity from
November 2006 to January 2009. Interest will accrue at an annual rate of eight
(8%) percent. Neither principal nor interest will be due until that date. As
compensation, each received a warrant to purchase 100,000 shares of NuVim's
common stock for $0.35 per share. The warrant may be exercised from February
2007 through August 15, 2015. As a result of this extension, the maturity of an
additional $200,000 of debt which is subordinated to the Senior Secured Notes is
automatically extended to January 2009. The loan agreement with Clark and Moger
provides that, if NuVim raises additional capital, they have the right to demand
prepayment of their Notes.
On August 25, 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the
holder of an $120,000 unsecured note agreed to extend its maturity from November
2006 to January 2009. Interest will accrue at an annual rate of eight (8%)
percent. Neither principal nor interest will be due until that date.
7
We will still continue to need additional funds to continue our
operations. New sources of capital may not be available to us when we need it or
may be available only on terms we would find unacceptable. If such capital is
not available on satisfactory terms, or is not available at all, we will be
unable to continue to fully develop our business and our operations and our
financial condition will be materially and adversely affected. Such a lack of
additional funding could force us to cease operations altogether. Debt
financing, if obtained, could increase our expenses and would be required to be
repaid regardless of operating results. In addition, if we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, these securities may have rights, preferences or privileges senior
to those of the rights of our ordinary shares and our shareholders may
experience additional dilution. Any such developments can adversely affect your
investment in our company, harm our financial and operating results, and cause
our share price to decline.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
In their report in connection with our 2005 and 2004 financial
statements, our auditors included an explanatory paragraph stating that, because
we have incurred net losses and have a net capital deficiency for the years
ended December 31, 2004 and 2005, and, as of June 30, 2006, we were in default
on approximately $1 million of notes payable due upon our next financing, there
is substantial doubt about our ability to continue as a going concern. The
extension of all debt to a payable date of January 15, 2009 does alleviate the
immediate debt concerns. Our continued existence will depend in large part upon
our ability to successfully secure additional financing to fund future
operations. Our initial public offering was not sufficient to completely
alleviate these concerns; the proceeds have been adequate to fund operations to
date, but we will need to raise additional funding to continue operations. If we
are not able to achieve positive cash flow from operations or to secure
additional financing as needed, we will continue to experience the risk that we
will not be able to continue as a going concern.
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS DIFFICULT.
We have a limited operating history and have encountered, and expect to
continue to encounter, many of the difficulties and uncertainties often faced by
early stage companies. We commenced our business operations in 1999 and began
marketing our initial products in 2000 on a limited basis. Accordingly, we have
only a limited operating history with which you can evaluate our business and
prospects. An investor in our units must consider our business and prospects in
light of the risks, uncertainties and difficulties frequently encountered by
early stage companies, including limited capital, delays in product development,
possible marketing and sales obstacles and delays, inability to gain customer
acceptance or to achieve significant distribution of our products to customers
and significant competition. We cannot be certain that we will successfully
address these risks. If we are unable to address these risks, our business may
not grow, our stock price may suffer and/or we may be unable to stay in
business.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO CONTINUE TO OPERATE AT A LOSS FOR
THE FORESEEABLE FUTURE.
Since our inception in 1999, we have incurred net losses in every year,
including net losses of $2,239,440 for the year ended December 31, 2003,
$2,131,581 for the year ended December 31, 2004, $2,396,902 for the year ended
December 31, 2005 and 896,569 for the six months ended June 30, 2006. We had a
working capital deficit of $1,611,955 at June 30, 2006 and have negative cash
flows from operations. As a result of ongoing operating losses, we also had an
accumulated deficit of $21,141,630 and a stockholders'
8
deficit of $1,512,358 at the same date. We expect to incur losses until at least
through 2006 and may never become profitable. We also expect that our expenses
will increase substantially for the foreseeable future as we seek to expand our
product line and sales and distribution network, implement internal systems and
infrastructure and comply with the legal, accounting and corporate governance
requirements imposed upon public companies. These ongoing financial losses may
adversely affect our stock price.
OUR SUCCESS SUBSTANTIALLY DEPENDS ON MAINTAINING OUR RELATIONSHIPS WITH SMBI.
SMBI is the holder of certain patents that cover the micronutrients
that we use in our products and is our only supplier of those micronutrients. We
have a license agreement and a supply agreement with SMBI, both of which are
critical to our business and expire in 2014. Under the SMBI license agreement,
we have the right to use SMBI's intellectual property for the production and
distribution of carbonated and noncarbonated beverages incorporating the
micronutrients that provide the health benefits of our products. SMBI also
supplies the key ingredient in our products under the terms of the supply
agreement. These agreements contain cross-termination provisions, and therefore,
we risk losing both our rights to the licensed use of the micronutrients and
other SMBI intellectual property needed for our business, as well as our sole
source of supply, if either agreement is terminated in accordance with its
terms. Furthermore, any exclusive rights we enjoy under the license and supply
agreements may be jeopardized if we fail to satisfy certain minimum purchase
requirements. In addition, SMBI and its affiliate, Spencer Trask Specialty
Group, LLC ("Spencer Trask"), are founders stockholders of our company. If we
are unable to obtain the whey protein concentrate from SMBI for any reason, our
manufacturing and distribution processes could be severely disrupted, and our
operations could be adversely affected. We are aware of only one other source
that might be able to provide an immune enhancement whey protein but we are not
certain of its effectiveness. Moreover, it is our understanding that this
ingredient would not provide the muscle flexibility health benefit that we
achieve by using the SMBI whey protein concentrate. In addition, even if we are
able to find acceptable alternative sources of supply, the new terms would
likely be less favorable than those that we receive from SMBI. Accordingly, it
is critical that we continue to meet all of our material obligations under both
the license agreement and the supply agreement. In the past, we have not always
been able to do so because of a lack of financial resources. We are currently on
net 30 day payment terms for the SBMI whey protein.
OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OUR PRODUCTS IN BOTH EXISTING AND NEW
MARKETING AREAS.
We intend to expand into new geographic areas and broaden our product
offerings to generate additional sales. Our refrigerated beverage products are
currently available from southern Connecticut to Miami and as far West as
Pittsburgh including such supermarket chains as ShopRite, Pathmark, A&P,
Gristedes, Food Emporium, Walbaums, Stop N Shop, Acme Giant, Giant Eagle, Publix
and Wal-Mart. Although marketing funds have been limited, but we have been able
to maintain distribution due to our loyal consumer base who have felt the NuVim
difference and continue to buy NuVim on a regular basis. The supermarket chain
accounts see NuVim as a one of a kind product that offers the consumer a
healthily choice to high sugar and high caffeine carbonated and non- carbonated
beverages.. We do not know whether the level of market acceptance we have
received in our current markets for our products will be matched or exceeded in
the geographic locations we are newly serving or in other areas of the country
as we expand our distribution in the future. We also will need to raise
additional financing to support this expansion.
We have tested a shelf stable sports drink that tastes like the two
market leaders sports drink products and has our trademarked points of
differentiation of immune enhancement and helping muscle flexibility, sturdy
joints, and athletic performance through the two exclusive micrnutrients
MunePro(R) and AccuFlex(R). We possibly will further test the sports drinks in
2007.
We can give no assurance that we will expand into new geographic areas.
It is unlikely that we will achieve profitability in 2007, but possibly could
achieve profitability on a monthly basis toward the end of next year.
9
CONSUMERS WHO TRY OUR PRODUCTS MAY NOT EXPERIENCE THE HEALTH BENEFITS WE CLAIM,
WHICH MAY CAUSE THEM TO DISCONTINUE USING OUR PRODUCTS.
There have been 19 independent clinical studies that have demonstrated
the health benefits of the micronutrient components of our products. However,
there has been only one, small-scale study of the effects of NuVim beverages
directly. That study required the subjects to consume 12 ounces of NuVim daily
for six weeks. While the study did validate the positive health claims we
believe our products provide, it did not consider whether a smaller quantity of
the beverage or a shorter period of continued usage might provide similar
benefits. Therefore, we currently cannot confirm that the health benefits of our
products will be evident to casual consumers of our products. Consumers may
determine that drinking 12 ounces of NuVim per day for a minimum of six weeks
requires more discipline and expense than they are willing to devote. If
consumers do not use our product in the quantity or for the duration we
recommend, they may not achieve the health benefits we claim, which may cause
them to make alternative nutritional beverage and/or dietary supplement
purchasing decisions.
OUR BUSINESS MAY SUFFER FROM LACK OF DIVERSIFICATION.
Our business is centered on nutritional beverages. The risks associated
with focusing on a limited product line are substantial. If consumers do not
accept our products or if there is a general decline in market demand for, or
any significant decrease in, the consumption of nutritional beverages, we are
not financially or operationally capable of introducing alternative products
within a short time frame. As a result, such lack of acceptance or market demand
decline could cause us to cease operations.
EXPANSION OF OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO EXPAND PRODUCTION.
We currently manufacture our refrigerated product line at Clover Farms
Dairy in Reading, Pennsylvania. Our ability to expand beyond our current
marketing areas depends on, among other things, the ability to produce our
product in commercial quantities sufficient to satisfy the increased demand.
Although our present production capacity is sufficient to meet our current and
short-term future production needs, production capacity may not be adequate to
supply future needs. If additional production capacity becomes needed, it will
be necessary to engage additional co-packers or to expand production capacity at
our present co-packer facility. If we expand production at Clover Farms Dairy,
we risk having to pay significantly greater transportation costs to transport
our products to warehouses in other regions of the United States. Any new
co-packing arrangement raises the additional risk of higher marginal costs than
we currently enjoy since we would be required to negotiate new terms with any
new co-packer. We may not be able to pass along these higher costs to our
customers. If we are unable to pass along the higher production costs imposed by
new co-packers to our customers, we either will suffer lower gross margins and
lower profitability, once achieved, or we may be unable to expand our business
as we have planned, which could disappoint our stockholders.
OUR BUSINESS CONTAINS RISKS DUE TO THE PERISHABLE NATURE OF OUR PRODUCT.
Our current refrigerated product is a perishable beverage that has a
limited shelf-life of approximately 83 days. This restricted shelf life means
that we do not have any significant finished goods inventory and our operating
results are highly dependent on our ability to accurately forecast near term
sales in order to adjust our raw materials sourcing and production needs. When
we do not accurately forecast product demand, we are either unable to meet
higher than anticipated demand or we produce excess inventory that cannot be
profitably sold. Additionally, our customers have the right to return products
that are not sold by their expiration date. Therefore, inaccurate forecasts that
either mean that we are unable meet higher than anticipated demand or that
10
result in excess production, or significant amounts of product returns on any of
our products that are not sold by the expiration date could cause customer
dissatisfaction, unnecessary expense and a possible decline in profitability.
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
Our business is subject to government regulation, principally the
United States Food and Drug Administration (the "FDA"), which regulates the
processing, formulation, packaging, labeling and advertising of dietary
products, and to a lesser extent, state governments, where state attorneys
general have authority to enforce their state consumer protection acts.
Specifically, we are subject to the Dietary Supplement and Health Education Act
("DSHEA"). Under DSHEA, dietary supplements are permitted to make "statements of
nutritional support" with notice to the FDA, but without FDA pre-approval. The
FDA does not allow claims that a dietary product may mitigate, treat, cure or
prevent disease. There can be no assurance that at some future time the FDA will
not determine that the statement of nutritional support we make on our packaging
is a prohibited claim rather than an acceptable nutritional support statement.
Such a determination by the FDA would require deletion of the treatment, cure or
prevention of disease claim, or, if it is to be used at all, submission by our
company 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 require demonstration of substantiated scientific evidence to
support such claim and would also consume considerable management time and
financial resources.
Our advertising of dietary supplement products is also subject to
regulation by the Federal Trade Commission (the "FTC") under the Federal Trade
Commission Act, which prohibits unfair or deceptive trade practices, including
false or misleading advertising. The FTC in recent years has brought a number of
actions challenging claims made by companies that suggest that their products
are dietary supplements. No assurance can be given that actions will not be
brought against us by the FTC or any other party challenging the validity of our
product advertising claims.
OUR BUSINESS MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS RELATING TO CONSUMER USE
OF OUR PRODUCTS.
As a marketer of beverages that are ingested by consumers, we face an
inherent risk of exposure to product liability claims if the use of our products
results in injury or our labeling contains inadequate warnings concerning
potential side effects. With respect to product liability claims, we have
obtained a $2.0 million liability insurance policy ($2.0 million per
occurrence), which we believe is adequate for our kind of business activity. The
policy contains certain exclusions that would pertain to food products such as
the additional products exclusion for bodily injury or property damage arising
out of the manufacture, handling, distribution, sale, application or use of
certain specified products (e.g., silicone, latex, and dexfenfluramine, among
others), the intended injury and the willful and intentional acts exclusions.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or, if available, that it will be adequate to cover potential
liabilities. If we are found liable for product liability claims that exceed our
coverage or are subject to a policy exclusion, such liability could require us
to pay financial losses for which we have not budgeted and may not have adequate
resources to cover. If the uninsured losses were significantly large enough to
impact our ability to continue our then-existing level of operations, we might
experience a decline in net income and earnings per share, and our stock price
might suffer. In an effort to limit any liability, we generally obtain
contractual indemnification from parties supplying raw materials or marketing
our products. Such indemnification is limited, however, by the terms of each
related contract and, as a practical matter, by the creditworthiness of the
indemnifying party.
Despite the insurance coverage that we plan on maintaining, it is
possible that we may be sued if one or more consumers believe our products have
caused them harm. While no such claims have been made to date, the results of
any such suit could result in significant financial damages to us, as well as
serious damage to the
11
reputation and public perception of our company, even if we are ultimately found
not to be at fault.
RISKS RELATED TO INVESTMENT IN OUR SECURITIES
The present public trading market for our securities is not an active market and
one may not develop or, if developed, be sustained. If a stronger public trading
market does not develop, our security holders may not be able to sell any of
their securities.
The present public trading market for common stock on the OTCBB, which
is generally considered to be a less efficient market than an exchange or NASDAQ
is typified by thinly-traded market activity. During the months of June, July,
and August, the average daily volume was 7,634. The highest daily volume during
2006 was 128,700 on January 26 2006. During the first eight months of the year,
there were 169 trading days; on 65 of them, no shares were traded. The number of
shares offered for sale under this prospectus is 5,288,237.
We can provide no assurance that a sufficiently active market will
develop or be sustained for the common stock. If a public trading market for our
securities which is active enough to adsorb the shares offered under this
prospectus does not develop or is not sustained, it may be difficult or
impossible for purchasers to resell their securities at any price. Even if an
active public market does develop, the market price could decline below the
amount investors paid for their shares.
WE WILL RECEIVE NONE OF THE PROCEEDS FROM THIS OFFERING.
All of the proceeds from this offering, will go to the Sellers. No
proceeds will be received by us. As a result, our financial condition will be
unimproved.
A DIRECTOR, A MAJOR SHAREHOLDER, CREDITORS, AND AN EXECUTIVE OFFICER WILL
PERSONALLY BENEFIT FROM THIS OFFERING THROUGH THE REGISTRATION OF THEIR SHARES
OF COMMON STOCK.
We issued a total of 654,911 shares of common stock to Richard Clark, a
major stockholder, Stanley Moger, a director, our bridge lenders, Paulson
Investment Company, Inc., the underwriter of our initial public offering and the
placement agent for the recent private placement of 2,970,000 shares of common
stock, a former officer, and other creditors who have loaned us money or
provided services in the past, all of whom have agreed to accept our stock to
repay past due obligations. These shares are registered for resale on the
registration statement of which this prospectus is a part. It is highly unlikely
that these individuals and entities would have received cash to satisfy the
indebtedness owed to them at any time in the foreseeable future, which would
have left them with claims against us, but with no realistic possibility of
receiving payment. As such, these stockholders will personally benefit from
receiving shares that will be registered for resale, thereby giving them the
opportunity to obtain cash from the sale of shares in the future.
THE ABILITY OF OUR STOCKHOLDERS TO SELL OUR COMMON STOCK AND WARRANTS IN THE
SECONDARY MARKET COULD BE RESTRICTED BECAUSE OUR STOCK IS CONSIDERED TO BE
"PENNY STOCK."
The Securities and Exchange Commission has adopted regulations which
generally define "penny stock" to be an equity security that has a market price,
as defined, of less than $5.00 per share or an exercise price of less than $5.00
per share, subject to certain exceptions that do not apply to us. So long as our
common stock trades below $5.00, and our securities trade on the OTCBB, our
securities are deemed to be "penny stock." As such, our securities will be
subject to rules that impose additional sales practice requirements on
broker-dealers who sell them. For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchaser of
such securities and have received the purchaser's written consent to the
transactions prior to the purchase. Additionally, for any transaction involving
a penny stock, unless exempt, the rules require the delivery, prior to the
transaction, of a disclosure schedule prepared by the Securities and
12
Exchange Commission relating to the penny stock market. The broker-dealer also
must disclose the commissions payable to the broker-dealer and the registered
underwriter, current quotations for the securities and, if the broker-dealer is
the sole market maker, the broker-dealer must disclose this fact and the
broker-dealer's presumed control over the market. Finally, among other
requirements, monthly statements must be sent disclosing recent price
information for the penny stock held in the account and information on the
limited market in penny stocks. Many brokerage firms have policies prohibiting
their brokers from trading in penny stocks. As such, the "penny stock" rules may
restrict the ability of stockholders to sell our common stock and warrants in
the secondary market.
FUTURE SALES OR THE POTENTIAL FOR FUTURE SALES OF SHARES OF OUR COMMON STOCK MAY
CAUSE THE TRADING PRICE OF OUR COMMON STOCK TO DECLINE AND COULD IMPAIR OUR
ABILITY TO RAISE CAPITAL THROUGH SUBSEQUENT EQUITY OFFERINGS.
As of the date of this offering, we will have 10,852,088 shares of
common stock outstanding. Following this offering, approximately 7,727,557
shares of common stock will be registered for sale, 5,288,237 included in this
prospectus, 654,911 registered for resale at the time of our initial public
offering and now free from any contractual restriction on resale, and 2,700,000
sold in the initial public offering. If these stockholders sell substantial
amounts of our common stock in the public market, the market price of our common
stock could fall. In addition, approximately 1,275,386 shares of common stock
are now eligible and another approximately XXX,XXX will become eligible, for
sale in the public market subject to the provisions and restrictions of Rule 144
promulgated under the Securities Act of 1933, as amended. For more information
see "Shares Eligible for Future Sale."
In addition, we intend to file a registration statement under the
Securities Act of 1933, as amended, to register our existing option plans. We
expect this registration statement to become effective immediately upon filing.
If all holders of outstanding options exercisable as of the date hereof were to
exercise and sell the shares issuable upon exercise of these options,
approximately 3,306,147 additional shares of common stock will become eligible
for sale and freely tradeable in the public markets at the end of the one-year
period.
USE OF PROCEEDS
We will receive no proceeds from the sale of the common stock covered
by this prospectus. All of the sales proceeds will go to the Sellers.
DIVIDEND POLICY
We have never declared or paid any dividends on our capital stock and
do not anticipate paying any cash dividends on our capital stock in the
foreseeable future. We currently expect to retain our future earnings, if any,
for use in the operation and expansion or our business. Any future decision to
pay cash dividends will be at the discretion of our board of directors and will
be dependent upon our financial condition, results of operations, capital
requirements and other factors our Board of Directors may deem relevant.
Following this offering, there will be no restrictions that limit our ability to
pay dividends on our capital stock.
CAPITALIZATION
The following table sets forth our actual debt and capitalization as of
June 30, 2006. You should read this table in conjunction with the section of
this prospectus captioned "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as the financial statements and
related notes included elsewhere in this prospectus.
13
ACTUAL
--------------
DEBT
Senior note payable-related party $ 500,000
Accrued interest-senior notes payable related parties (spokesperson) 149,160
Stockholder loans-subordinated convertible promissory notes 200,000
Accrued interest stockholder loans 25,020
Rescinded series B offering payable 18,920
Related party advances
Other note payable 148,117
--------------
Total Debt $ 1,041,217
--------------
STOCKHOLDERS' DEFICIT
Common stock, $0.00001 par value; 120,000,000 shares authorized;
10,602,088 shares issued and outstanding 107
Additional paid-in capital 19,629,165
Accumulated deficit (21,141,630)
--------------
Total stockholders' deficit $ (1,512,358)
--------------
Total debt and stockholders deficit $ (471,141)
DILUTION
As all of the shares offered hereby are previously sold shares, there
is no investment in NuVim and therefore no dilution of the purchaser's
investment.
FORWARD-LOOKING STATEMENTS
Forward-looking statements include, but are not limited to, statements
regarding:
o possible or assumed future results of operations, including statements
regarding revenue mix, cost of revenues, promotion of our products through
advertising, sampling and other programs, changes to our internal financial
controls, trends in our operating expenses and provision for income taxes,
increased costs as a result of becoming a public company and expenses
related to stock-based compensation;
o financing plans, including the adequacy of financial resources to meet
future needs;
o business strategies, including any expansion into new products;
o our industry environment, including our relationships with our significant
customers and suppliers;
o potential growth opportunities; and
o the effects of competition.
Some of our forward-looking statements can be identified by use of words such as
"may," "will," "should," "potential," "continue," "expects," "anticipates,"
"intends," "plans," "believes" and "estimates."
Forward-looking statements involve many risks, uncertainties and assumptions.
Actual results may differ materially from those expressed in the forward-looking
statements for a number of reasons, including those
14
appearing under the caption "Factors Affecting Operating Results" and elsewhere
in this prospectus. The cautionary statements contained or referred to in this
report should be considered in connection with any subsequent written or oral
forward-looking statements that may be issued by us or persons acting on our
behalf. We undertake no obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
The forward-looking statements are based on our beliefs, assumptions
and expectations of our future performance, taking into account information
currently available to us. These beliefs, assumptions and expectations can
change as a result of many possible events or factors, including those events
and factors described by us in "Risk Factors," not all of which are known to us.
Neither we nor any other person assumes responsibility for the accuracy or
completeness of these statements. We will update this prospectus only to the
extent required under applicable securities laws. If a change occurs, our
business, financial condition, liquidity and results of operations may vary
materially from those expressed in our forward-looking statements.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with the financial statements and
related notes to the financial statements included elsewhere in this prospectus.
This discussion contains forward-looking statements that relate to future events
or our future financial performance. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results, levels
of activity, performance or achievements to be materially different from any
future results, levels of activity, performance or achievements expressed or
implied by these forward-looking statements. These risks and other factors
include, among others, those listed under "Forward-Looking Statements" and "Risk
Factors" and those included elsewhere in this prospectus.
OVERVIEW
We produce, market and distribute NuVim(R) dietary supplements in ready
to drink beverage form and in powder for mixing with water or adding to other
beverages. Both forms of our beverages have two exclusive and patented
micronutrients, MunePro(R) and Accuflex(R). MunePro(R) enhances the immune
system and AccuFlex(R) helps build muscle flexibility, sturdy joints and muscle
recovery. These micronutrients have been clinically proven to enhance the immune
system, muscle flexibility and athletic performance after 19 studies, 8,000 case
histories and an expenditure of $50 million.
We focus on developing the NuVim(R) brand through a mix of advertising
and promotional programs that build consumer awareness, trial and repeat
purchases. The marketing consists of newspaper advertising/advertorials, product
sampling, coupon distribution, and promotional price discounts. These marketing
expenditures are essential to build the NuVim(R) brand. We continue to test
various ways to find the most cost efficient means to use these marketing funds
to increase consumer awareness, trial and repeat purchases. We believe that
these advertising and promotional activities are critical to the growth of our
business and expect to continue these programs in the future.
We have distributed our refrigerated beverages since the year 2000 and
are in approximately 2,100 Supermarkets in the Eastern United States. In 2002
company revenues were $3.5 million. However, we eliminated most advertising and
marketing support for our product in the second half of 2002 due to a lack of
funding. We recapitalized our company in June 2005 through the conversion of
approximately $7.7 million of debt into common stock and an initial public
offering of our common stock. Since that time we have concentrated our limited
financial resources on developing and supporting distribution opportunities that
we believe will provide the greatest sales expansion potential. We also
developed a powder version of our product to be sold through direct distribution
such as the internet and infomercials, as well as retail outlets. Sales of the
product to date have not been material.
We have launched an equity funded print news media campaign to educate
consumers about the benefits of NuVim(R) and create market awareness for our
product. In November, 2005 we issued 250,000 shares of common stock, a warrant
to purchase 250,000 shares of common stock at $1.50 and a warrant to purchase
250,000 shares of common stock at $2.00 as payment for a contract to provide
$3,000,000 worth of nationally syndicated print features at standard rates, at a
discounted amount. The media program which began in January 2006 and will
continue for approximately eighteen months or until the contracted amount of the
newspaper features has been completed.
We are planning to produce a 30 second television commercial for the
refrigerated products, a 60 second television commercial for the powder product
and a 5 minute infomercial for the product and air these commercials 2,000 times
through Platinum Television Group headquartered in Deerfield Beach Florida. The
compensation for the commercials production and the television airing of the
2,000 commercials was pre paid with 248,571 shares of common stock.
16
Case shipments of our refrigerated product declined by 3,127 or 8.8%
during the first half of 2006 as compared to the same period in the prior year.
The reasons for the decline included a reduction in the number of the Publix
warehouses stocking NuVim, and declines in the markets that have not been
supported with advertising or consumer promotion. During 2006 we continued to
have had limited funding to support product sampling and advertising programs,
which we believe are critical to maintain and increase sales of our products.
Therefore, we have focused our spending on promotions in accounts that we
believe will offer the greatest potential for sales growth and expansion
opportunities until we are able to raise funding for additional marketing
programs.
In late 2003 we began a test program with a single Wal-Mart
supercenter. In late 2004 the test was expanded to 43 supercenters (one Wal-Mart
distribution center) and then further expansion to 120 supercenters (two
additional distribution centers) in late 2005 that covered most of the Wal-Mart
supercenters in the State of Florida. During the 2005 expansion the number of
NuVim(R) varieties carried by the supercenters was increased from two to three.
First quarter 2005 Wal-Mart sales were 8% of the total 2005 first quarter sales.
In April 2006, we increased our distribution to the entire southeast region,
encompassing approximately 300 supercenters (six total distribution centers)
servicing all or part of 7 states.
The table set forth below discloses selected data regarding sales for
the six months ended June 30, 2006 and 2005 and for the years ended December 31,
2005 and 2004. The data is not necessarily indicative of continuing trends.
However we believe that the revenues in the second quarter of 2006 will
exceed those of the second quarter 2005 by twenty percent.
Sales of beverages are expressed in unit case volume. A "unit case"
means a unit of measurement equal to 512 U.S. fluid ounces of finished beverage
(eight 64-ounce containers). Unit case volume means the number of unit cases (or
unit case equivalents) of beverages directly or indirectly sold by us. Gross
cases sold to the customer represent the number of cases shipped to the customer
prior to any returned cases containing product that has not been sold by its
expiration date.
UNIT CASE VOLUME/CASE SALES
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
--------------------------- ---------------------------
2006 2005 2005 2004
------------ ------------ ------------ ------------
Gross Cases Sold 32,532 35,659 65,982 77,395
Gross Sales $ 598,152 $ 649,508 $ 1,208,279 $ 1,411,355
Net Sales $ 481,593 $ 357,830 $ 721,381 $ 958,785
Gross sales are the amount invoiced to customers, while net sales
deduct from gross sales any payment or discount terms, promotional allowances,
slotting fees, warehouse damage and returned goods in accordance with the
Financial Accounting Standards Board Emerging Issues Task Force Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. In some accounts
we pay slotting fees when our products are initially introduced to a new account
and run price feature promotions to encourage trials of our product. As brand
loyalty grows in a market, we anticipate that we will be able to run fewer price
promotions and will not incur the one time additional slotting fees to gain new
distribution. Cases sold decreased 3,127, or 8.8%, for the six months ended June
30, 2006, when compared to the same period in 2005. As discussed above, we
believe that the number of cases sold is directly impacted by the effectiveness
of advertising, sampling and marketing activities we are able to fund in support
of our refrigerated product. Second quarter sales 2006 versus second quarter
2005 posted a 20% case sales increase. We have not had funding available to fund
advertising and marketing programs on a sustained basis across the majority of
the stores our
17
products are distributed in since mid 2002. This has caused sales to decline in
those markets. Since we recapitalized our Company in June of 2005 we have
concentrated our marketing programs on selected growth opportunities for our
refrigerated product and the introduction of our NuVim Powder product line. We
believe these initiatives will provide better opportunity for long term growth
and increase sales in our existing markets by creating market awareness for our
product.
RESULTS OF OPERATIONS
Results of operations for the six months ended June 30, 2006 compared to the six
months ended June 30, 2005
Gross Sales. For the six months ended June 30, 2006, gross sales were
$598,152, a decrease of $51,356, or 9% lower than gross sales of $649,508 for
the six months ended June 30, 2005. The decrease in gross sales for six months
is primarily attributable to a poor first quarter where there were decreases in
case volume in stores in New York, New Jersey, Pennsylvania, Virginia and
Maryland, and decreased sales to the Publix supermarket chain. This was
partially offset by increased sales at Wal-Mart Supercenters especially in the
second quarter and some increases in other accounts in the second quarter. We
have not had funds to support advertising and sampling of our products in our
existing stores since mid 2002 and limited funds for accounts like the Publix
Supermarket chain which we added in August of 2004, resulting in declining
sales. In June of 2005, we restructured our balance sheet through the issuance
of common stock, but were only able to raise a limited amount of funds for
advertising and sampling programs. By focusing our initiatives with these
limited resources on selected opportunities with future expansion potential, we
have managed to have the best six months performance in over three years
Discounts, Allowances and Promotional Payments. For the six months
ended June 30, 2006, promotional allowances and discounts were $116,559, a
decrease of $175,119 or 60%, from the promotional allowances and discounts of
$291,678 for the six months ended June 30, 2005. This decrease is primarily
attributable to lower coupon expense resulting from a sampling and coupon
program at the Publix chain in the first half of 2005 that was not repeated in
2006 and lower costs related to consumer price reductions.. We record the price
reductions, which are reimbursed by us to the retailers, in accordance with
Financial Accounting Standards Board Emerging Issues Task Force, No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. We expect to
continue to use price promotions and coupon distribution selectively as a means
to promote consumer sampling and trial of our product into the foreseeable
future. As the product matures and a higher percentage of users of our product
are repeat purchasers, we expect coupon expense, relative to gross sales, to
decline. Product returned after its expiration date increased primarily due to
the lower sales volume discussed above. Total Discounts, Allowances and
Promotional payments as a percentage of gross sales decreased from 45% for the
six months ended June 30, 2005 to 19% for the six months ended June 30, 2006.
SIX MONTHS ENDED
JUNE 30,
------------------------- INCREASE
2006 2005 (DECREASE) PERCENTAGE
----------- ----------- ----------- -----------
Discounts for timely payment $ 9,523 $ 8,988 $ (535) (29.9)%
Product returned after its expiration date 65,110 85,092 19,982 23%
Promotional price allowances, coupons and other
incentives 41,073 173,735 132,662) (76)%
Slotting fees 853 23,863 (23,010) (96)%
----------- ----------- ----------- -----------
Total Discounts, Allowances and Promotional Payments $ 116,559 $ 291,678 $ (175,119) (60)%
=========== =========== =========== ===========
18
Net Sales. Net sales for the six months ended June 30, 2006 were
$481,593, an increase of $123,763, or 345% higher than net sales of $357,830 for
the six months ended June 30, 2005. The increase in net sales is primarily
attributable to the increase in case sales and lower consumer price discount
promotion spending as discussed above.
Cost of Sales. For the six months ended June 30, 2006, cost of sales
was $309,200, a decrease of $68,310, or 18% lower than cost of sales of $377,510
for the six months ended June 30, 2005. Cost of sales as a percentage of gross
sales decreased to 52% for the six months ended June 30, 2006, compared to 58%
for the six months ended June 30, 2005. The decrease in cost of sales as a
percentage of gross sales was primarily the result of lower price discount
allowances and to a lesser degree manufacturing improvements.
Gross Profit. Gross profit was $172,393 for the six months ended June
30, 2006, an increase of $192,073 from the negative ($19,680) gross profit for
the six months ended June 30, 2005. Gross profit as a percentage of gross sales
was 29% for the six months ended June 30, 2006 compared to the negative gross
profit of approximately 3% for the six months ended June 30, 2005. The increase
in gross profit as a percentage of gross sales was primarily due to the lower
price discounts and the lower cost of goods.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $1,004,072 for the six months ended June 30, 2006,
a decrease of $49,983, or 5% from selling, general and administrative expenses
of $1,054,055 for the six months ended June 30, 2005. Selling, general and
administrative expenses exceeded net sales in both periods as we are still 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 is due to
decreases in product sampling expenses and the decrease in salaries due to the
administrative changes of eliminating a full time CFO and Vice President of
Operations.. During the six months ended June 30, 2005 we promoted our product
through in store sampling, including a program at the Publix Supermarket chain.
We had no extensive sampling activities in the first half of 2006.. We feel that
out sourcing the financial and operations accountabilities at this time can
decrease cost without decreasing effectiveness.
Loss from Operations. Loss from operations was $831,679 for the six
months ended June 30, 2006 compared to $1,073,735 for the six months ended June
30, 2005. The $242,056 decrease in loss from operations was primarily
attributable to the increased gross profit and decreased operating expenses
described above.
Interest Expense. Interest expense was $73,538 for the six months ended
June 30, 2006; a decrease of $315,341, or 81%, from interest expense of $388,879
for the six months ended June 30, 2005. The decrease in interest expense is
primarily attributable to the retirement of indebtedness. On June 24, 2005, in
connection with the closing of our initial public offering, we extinguished
approximately $7.7 million of indebtedness through the issuance of common stock.
Net Loss. Net loss was $896,569 for the six months ended June 30, 2006
compared to $1,315,061 for the six months ended June 30, 2005. The $418,429
decrease in net loss was primarily attributable to the improved operating
results and the lower interest expense discussed above.
Results of operations for the year ended December 31, 2005 compared to the year
ended December 31, 2004
Case shipments of our refrigerated product declined by 11,413 or 15% in
2005 when compared to the prior year. Increased case shipments to Wal-Mart
Supercenters of approximately 10,808 cases were offset by decreased shipments in
the New York/New Jersey markets. During 2005 we have had limited funding to
support product sampling and advertising programs, which we believe are critical
to maintain and increase
19
sales of our products. Therefore, we have focused our spending on product
sampling in accounts that we believe will offer the greatest potential for sales
growth and expansion opportunities until we are able to raise funding for
additional marketing programs.
In August of 2004 we began a test program with Wal-Mart supercenters in
northern Florida. We distributed two flavors of our refrigerated product to one
distribution center servicing approximately 44 supercenters. In August 2005
Wal-Mart increased our distribution to three flavors and a total of three
distribution centers servicing approximately 127 supercenters. This resulted in
sales of approximately 6,100 cases in the fourth quarter of 2005. We believe
Wal-Mart operates approximately 2000 supercenters across the United States.
The table set forth below discloses selected data regarding sales for
the years ended December 31, 2005 and 2004. The data is not necessarily
indicative of continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case"
means a unit of measurement equal to 512 U.S. fluid ounces of finished beverage
(eight 64-ounce containers). Unit case volume means the number of unit cases (or
unit case equivalents) of beverages directly or indirectly sold by us. Gross
cases sold to the customer represents the number of cases shipped to the
customer prior to any returned cases containing product that has not been sold
by its expiration date.
Unit Case Volume/Case Sales
Year Ended December 31,
-------------------------------------------------------
Increase
2004 2005 (Decrease) Percentage
------------ ------------ ------------ ----------
Gross Cases Sold 77,395 65,982 (11,413) (15)%
Gross Sales $ 1,411,355 $ 1,202,279 $ 209,076 (15)%
Net Sales $ 958,955 $ 721,381 $ 237,574 (25)%
Gross sales are the amount invoiced to customers, while net sales
deduct from gross sales any payment or discount terms, promotional allowances,
slotting fees, warehouse damage and returned goods. In some accounts we pay
slotting fees when our products are initially introduced to a new account and
run price feature promotions to encourage trials of our product. As brand
loyalty grows in a market, we anticipate that we will be able to run fewer price
promotions for our refrigerated product. We believe these initiatives will
provide better opportunity for long term growth and increase sales in our
existing markets by creating market awareness for our product.
Gross Sales . For the year ended December 31, 2005, gross sales were
$1,208,279, a decrease of $203,075, or 17% lower than gross sales of $1,411,355
for the year ended December 31, 2004. The decrease in gross sales is primarily
attributable to a decrease in case volume in stores New York, New Jersey,
Pennsylvania, Virginia and the Publix Supermarket chain, partially offset by
increased sales at Wal-Mart Supercenters. We have not had funds to maintain
advertising and sampling of our products on a consistent basis in our existing
stores since mid 2002 resulting in declining sales. In June of 2005, we
restructured our balance sheet through the issuance of common stock, but were
only able to raise a limited amount of funds for advertising and sampling
programs. We have focused these limited resources on selected growth
opportunities for our refrigerated product and introduction of a powder product,
until such time as we are able to fund programs across all of our markets.
Discounts, Allowances and Promotional Payments. For the year ended
December 31, 2005, promotional allowances and discounts were $486,898, an
increase of $34,328 or 8% higher than the promotional allowances and discounts
of $452,570 for the year ended December 31, 2004. This increase is primarily
attributable to increased Promotional price allowances, coupons and other
incentives of $38,133, and slotting
20
fees of $24,343. Promotional price allowances, coupons and other incentives
increased due to sampling programs at Publix stores in the first quarter of 2005
where $1.00 coupons were distributed in store locations, and promotional price
discounts in the New York and New Jersey markets. We record the estimated
redemptions based on our historical experience at the time the coupon is
distributed. We also record reimbursements given to retailer for consumer price
promotions. We expect to continue to use coupon distribution and price
promotions as a means to promote consumer sampling and trial of our product into
the foreseeable future. Slotting fees increased due to fees paid to gain
distribution in approximately 400 stores supplied by distributor serving the
Mid-Atlantic region of the United States. Discounts, allowances and promotional
payments as a percentage of gross sales increased from 32% for the year ended
December 31, 2004 to 40% for the year ended December 31, 2005, primarily due to
the increased coupons and price discounts discussed above. Discounts, allowances
and promotional payments are comprised of the following:
YEAR ENDED
DECEMBER 31,
--------------------------- INCREASE
2004 2005 (DECREASE) PERCENTAGE
------------ ------------ ------------ ------------
Discounts for timely payment $ 25,595 $ 15,908 $ (9,687) (38)%
Product returned after its
expiration date 161,313 142,852 (18,461) 11%
Promotional price allowances,
coupons and other incentives 257,532 295,665 38,133 15%
Slotting fees 8,130 32,473 24,343 300%
------------ ------------ ------------ ------------
Total Discounts, Allowances and
Promotional Payments $ 452,570 $ 486,898 $ 34,328 8%
============ ============ ============ ============
Net Sales. Net sales for the year ended December 31, 2005 were
$721,381, a decrease of $237,404, or 25% lower than net sales of $958,785 for
the year ended December 31, 2004. The decrease in net sales is primarily
attributable to the decrease in cases sold and the increased discounts,
allowances and promotional payments discussed above.
Cost of Sales. For the year ended December 31, 2005, cost of sales were
$687,167, a decrease of $50,475 or 7% lower than cost of sales of $737,642 for
the year ended December 31, 2004. The decrease in cost of sales was primarily
attributable to a 14% decrease in cases sold discussed above, offset by higher
ingredient costs due to increased pricing for certain ingredients. Cost of sales
as a percentage of gross sales was approximately 57% for the year ended December
31, 2005 and 52% for the year ended December 31, 2004.
Gross Profit (loss). Gross profit (loss) was $34,214 for the year ended
December 31, 2005, a decrease of $186,929, from the $221,143 gross profit for
the year ended December 31, 2004. Gross profit (loss) as a percentage of gross
sales was 3% for the year ended December 31, 2005, compared to a gross profit as
a percentage of gross sales of 16% for the year ended December 31, 2004. The
decrease in gross profit as a percentage of gross sales was primarily due to the
increased coupons and price incentives and cost of sales as a percent of gross
revenue discussed above.
21
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $2,392,996 for the year ended December 31, 2005, an
increase of $300,098 or 14%, from selling, general and administrative expenses
of $2,092,898 for the year ended December 31, 2004. Selling, general and
administrative expenses exceeded net sales in both periods 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 increase in selling, general and administrative expenses was
primarily attributable to a non cash charge for stock grants to executive
officers. In February 2006, the board granted an aggregate of 858,000 shares of
unregistered stock to four executive officers, in lieu of 2005 bonuses. The
Company has recorded the stock grant at its fair market value of $171,600, as
determined by the board of directors, based on an evaluation of arms length
unregistered stock sales proposed to the company in 2005.
Loss from Operations. Loss from operations was $2,358,782 for the year
ended December 31, 2005 compared to $1,871,755 for the year ended December 31,
2004. The $487,027 increase in loss from operations was primarily attributable
to the increased operating expenses and lower gross profit described above.
Interest Expense. Interest expense was $430,216 for the year ended
December 31, 2005, a decrease of $148,344, or 26%, from interest expense of
$578,560 for the year ended December 31, 2004. The decrease in interest expense
is primarily attributable to a reduction in indebtedness resulting from the
conversion of debt to common stock. On June 24, 2005, in connection with the
closing of our initial public offering, we extinguished approximately $7.7
million of indebtedness through the issuance of common stock. Therefore we
expect interest expense to decline in future periods due to lower outstanding
borrowings.
Gain on Forgiveness of Accounts Payable. In 2004, Gain on forgiveness
of accounts payable represents the difference between the invoiced amount and
the amount in the form of a note payable for fees to a law firm incurred and
expensed in 2002. In 2005, Gain on forgiveness of accounts payable represents
the difference between the principal and accrued interest due on notes payable
and the fair value of common stock issued to retire those obligations.
Net Loss. Net loss was $2,396,902 for the year ended December 31, 2005
compared to $2,131,581 for the year ended December 31, 2004. The $265,321
increase in net loss was primarily attributable to the increased operating
expenses and lower gross profits, offset by lower interest expense and the gain
on retirement of accounts payable 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 and external borrowings.
We will require additional sources of outside capital to continue our
operations. During 2006, all of NuVim(R)'s debt instruments were either
converted into stock or extended in their maturity.
Secured convertible promissory notes with a face amount of $67,600 were
due June 23, 2006 and senior secured promissory notes with a principal amount of
$500,000 are due on November 30, 2006. All the notes due June 23, 2006 were
converted into 335,000 shares of common stock and the warrants issued at the
time of the sale of the notes were cancelled.
On August 23, 2006, the holders of all $500,000 of NuVim(R)'s Senior
Secured Notes, Richard Clark, the entertainer, and Stanly Moger, one of
NuVim(R)'s directors, agreed to extend their maturity from November 2006 to
January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be due until that date. As compensation,
each received a warrant to purchase 100,000 shares of NuVim's common stock for
$0.35 per share. The warrant may be exercised from February 2007 through August
15, 2015. As a result of this extension, the maturity of an additional $200,000
of debt which is subordinated to the Senior Secured Notes is automatically
extended to January 2009. The loan agreement with Clark and Moger provides that,
if NuVim raises additional capital, they have the right to demand prepayment of
their Notes.
22
On August 25, 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the
holder of an $120,000 unsecured note agreed to extend its maturity from November
2006 to January 2009. Interest will accrue at an annual rate of eight (8%)
percent. Neither principal nor interest will be due until that date.
We also have outstanding approximately $290,000 of accounts payable for
which the holders have agreed to defer payment until a subsequent financing. We
are currently seeking additional financing through the sale of equity
securities, and negotiating modified payment terms with our creditors, but there
can be no assurance we will be successful in this endeavor.
In March 2006 the board and compensation committee authorized a total
of 661,500 shares of common stock in lieu of the executive cash bonuses for 2005
and agreed with these executives to defer the payment of their 2005 accrued
salaries until 2007 and established the parameters for settling these accruals
in common stock. Also in March 2006, 50,000 shares of common stock was issued to
the new corporate secretary for a portion of his 2006 fees. Finally, in March
2006, NuVim issued 8,750 shares of common stock to SmallCapVoice.com, for
investor relations services.
In April 2006 Paulsen Investment Company, Inc. privately placed
2,970,000 restricted shares of our common stock at a price of twenty cents per
share. A total of $594,000 was received less offering costs paid of $60,125 for
a net amount of $533,875.
Also in April 2006, our former CFO agreed to accept a total of 183,955
shares of common stock for a portion of the salary remaining due to him on the
date of his resignation and in lieu of this 2005 bonus.
In May and June 2006, several creditors agreed to accept 331,463 shares
of restricted common stock at a price of $0.35 per share to settle an aggregate
of approximately $111,000 of current or past due accounts payable obligations
and several organizations agreed to accept 460,704 shares of common stock for
future services valued at approximately $168,000.
In June 2006 a note holder agreed to accept 107,631 shares of
restricted common stock for approximately $38,000 in principal and interest.
On August 23, 2006, the holders of all $500,000 of NuVim(R)'s Senior
Secured Notes, Richard Clark, the entertainer, and Stanly Moger, one of
NuVim(R)'s directors, agreed to extend their maturity from November 2006 to
January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be due until that date. As compensation,
each received a warrant to purchase 100,000 shares of NuVim's common stock for
$0.35 per share. The warrant may be exercised from February 2007 through August
15, 2015. As a result of this extension, the maturity of an additional $200,000
of debt which is subordinated to the Senior Secured Notes is automatically
extended to January 2009. The loan agreement with Clark and Moger provides that,
if NuVim raises additional capital, they have the right to demand prepayment of
their Notes.
On August 25, 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the
holder of an $120,000 unsecured note agreed to extend its maturity from November
2006 to January 2009. Interest will accrue at an annual rate of eight (8%)
percent. Neither principal nor interest will be due until that date.
We will still need to raise additional financing to pay our past due
obligations, fund operating losses and to support sales and marketing programs
to increase sales of our products. If we are not able to identify additional
sources of financing, we may not be able to continue operations beyond December
2006. We have participated in the New Jersey Economic development Authority Tax
Transfer program for the past 4 years and will again this year. The funds from
this program are received in December and therefore expect that approximately
$250,000 to $270,000 will be received from this program in December of 2006.
23
Net cash used in operating activities for the six months ended June 30,
2006 was $768,243 compared to cash used in operating activities of $1,058,875
during the same period in 2005. The decrease in cash used by operating
activities during the first six months of $290,632 was primarily due to the
improvement of gross profit and the reduction of selling and administrative
costs.
Additionally, $527,875 was provided by financing activities during the
six months ended June 30, 2006, compared to $2,000,709 provided during the six
months June 30, 2005. The private placement conducted by Paulson Investment
Company in 2006 provided the bulk of the financing this year; the initial public
offering conducted by Paulson provided the funds during the first half of last
year.
FINANCIAL INFORMATION
The financial information set forth in Summary Financial Information as
of June 30, 2006 is as follows:
JUNE 30, 2006 COMMON
TOTAL TOTAL STOCKHOLDERS SHARES
LIABILITIES EQUITY (DEFICIT) OUTSTANDING
--------------- ------------------ ------------
Actual, (Unaudited) $ 2,344,364 $ (1,512,358) 10,602,088
24
APPLICATION OF RECENT AND CRITICAL ACCOUNTING POLICIES AND PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") has published
FASB Interpretation No. 48 ("FIN No. 48"), Accounting for Uncertainty in Income
Taxes, to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in FASB Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, on the
uncertainty in income taxes recognized in an enterprise's financial statements.
FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with
earlier adoption permitted. The adoption of FIN 48 is not expected to have a
material effect on the Company's financial condition, results of operations or
cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction ("SFAS 154"), which replaces Accounting Principles Board Opinions No.
20 "Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and are required to be adopted by the Company in the first quarter of
fiscal 2006. The adoption of SFAS 154 did not have an impact on the Company's
consolidated results of operations and financial condition or cash flows.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asst Retirement Obligations" in March 2005. FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement obligation if
the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. This guidance did not have a
material affect on the Company's financial statements.
CRITICAL ACCOUNTING ESTIMATES
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.
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. For a
detailed discussion on the application of these and other accounting policies,
see Note 2 to our annual audited financial statements for the year ended
December 31, 2005.
PLACEMENT AND PROMOTIONAL ALLOWANCES AND CREDITS FOR PRODUCT RETURNS
As an inducement to our customers to promote our products in preferred
locations of their stores, we provide placement and promotional allowances to
certain customers. We also provide credits for customer coupon redemptions,
consumer price reductions, and product which has not been sold by its expiration
date. These allowances and credits are reflected as a reduction of revenue in
accordance with Emerging Issues Task Force ("EITF") No. 01-9, which requires
certain sales promotions and customer allowances previously
25
classified as selling, general and administrative expenses to be classified as a
reduction of sales or as cost of goods sold. Provisions for promotional
allowances are recorded upon shipment and are typically based on shipments to
the retailer during an agreed upon promotional period. We expect to offer
promotional allowances at historical levels in the near future as an incentive
to our customers. One time per account slotting or placement fees are deducted
from revenue in the period paid. Provisions for coupon redemptions and product
returned that has reached its expiration date are based on historical trends.
Information such as the historical number of cases returned per unit shipped,
product shelf life, current sales volume, and coupons distributed during the
period are used to derive estimates of the required allowance. As we expand
production and introduce new products, we may incur increased levels of returned
goods. Also, our estimates assume we will continue as a going concern and
maintain distribution with wholesalers and supermarkets that currently carry our
product. If a supermarket or wholesaler discontinues our product, we may
experience return rates in excess of our historical trend. This could result in
material charges to future earnings for reimbursements to our customers for
returned, unsold product.
ACCOUNTS RECEIVABLE
We evaluate the collectablity 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 provide an incentive to customers for paying in less than 30 days
which results in our overall receivables to be approximately 17 days.
We estimate an allowance for doubtful accounts and revenue adjustments
based on historical trends and other criteria. We have had only one account that
could not be collected since the inception of the company in 2000. The amount
was less than $10,000.. 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.
INFLATION
We do not believe that inflation had a significant impact on our
results of operations for the periods presented.
OFF-BALANCE SHEET TRANSACTIONS
At June 30, 2006, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
26
BUSINESS
INTRODUCTION
We produce, market, and distribute NuVim(R) dietary supplements in
beverage form. NuVim(R) contains two proprietary micronutrients known as
MunePro(R) and AccuFlex(R). These two patented micronutrients have been shown in
independent clinical studies to help strengthen the immune system, support
muscle flexibility and enhance athletic performance when twelve ounces are
consumed for six weeks. Our exclusive worldwide license (except for Asia,
Australia and New Zealand) and supply agreement with Stolle Milk Biologics Inc,
("SMBI") allows us to use these proprietary micronutrients in carbonated and
non-carbonated beverages (and powders for reconstitution), excluding only
certain milk, yogurt and nutritional meal replacement products. This allows us
to be a sole source provider in the markets in which we operate.
NuVim(R) dietary supplement beverages are formulated to meet many of the
preferences of health conscious consumers. They are low in sugar, with
approximately 10 grams per 8 ounce serving, compared to 40-50 grams for some
soft drinks. NuVim(R) is non-dairy, virtually lactose-free, fortified with the
anti-oxidant vitamins and A, C, and E, contains 100% of the daily recommended
requirement of zinc, and has all 9 essential amino acids and calcium
Our first ready to drink product line was introduced in May 2000. This
product line currently consists of three flavors of refrigerated dietary
supplement beverages: Orange Tangerine, Fruit Symphony and Strawberry Vanilla.
All are available in 64-ounce juice type cartons. Orange Tangerine and
Strawberry Vanilla are also available in 16-ounce bottles. We have introduced
NuVim(R) ready to use powder in January 2006. The powder is available in three
varieties; Chocolate, Vanilla, and Strawberry. NuVim(R) powder supplement can be
mixed with the consumer's favorite beverage such as juice or milk or added to
yogurt or cereal. The powder is sold in 30 individual servings in a box and is
currently available through the NuVim(R) web store at www.NuVim(R).com.
NuVim(R) beverages are currently available in 13 states and the
District of Columbia. Our 64-ounce cartons are currently sold in over 2,100
supermarkets, as of December 31, 2005. Chains carrying NuVim(R) include ShopRite
Supermarkets, Publix Super Markets, Pathmark Supermarkets, Giant Supermarkets,
A&P Supermarkets, Stop & Shop, Food Emporium, Waldbaums, Mars Super Markets,
SuperValue Supermarkets, Acme Markets, and Wal-Mart supercenters in Florida,
South Georgia and South Carolina. Our 16-ounce bottles accounted for less than
5% of our sales and are sold in selected retail locations, including small
grocery stores, delicatessens and a limited number of chain supermarkets in the
New York metropolitan area.
In the future we plan to introduce one new flavor of the 64-ounce size
beverage. Possible new flavors include chocolate, vanilla, and peach. We expect
to test market the new item within the next 12 months.
INDUSTRY BACKGROUND
NuVim(R), 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 according to Business Communications Company, Inc. ("BCC")
Functional beverages include a 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
27
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:
o physical fitness and mental well-being are the core needs driving
the functional beverage industry;
o the variety of functional beverages has grown to appeal to almost
all demographics of consumers;
o the growing ethnic population in the United States influences
beverage consumption patterns with their use of novel ingredients;
and
o 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.
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.
According to "New Nutrition Business," a journal for healthy eating,
functional foods, and nutraceuticals, 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:
o increasing medical acceptance and recommendation of supplements,
vitamins and health foods;
o increasing consumer desire to avoid prescription drugs and seek
non-medical treatment options;
o growing number of consumers seeking health benefits in food and
beverages;
o growing number of consumers seeking to avoid certain unhealthy
attributes in foods and beverages; and
o growing scientific interest in the problems of inflammation and a
compromised immune system.
o Better nutritional educational practices being taught at all levels
in the school 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 MUNEPRO(R) AND ACCUFLEX(R)
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. Cow's milk
naturally contains many vital micronutrients, but generally in minute
quantities. The body receives these nutrients only in minute quantities, which
is why they are referred to as "micronutrients."
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 of that cow and could benefit humans who consumed
that milk. In addition, that milk could be concentrated, and the biological
factors present in liquid milk could be maintained in concentrated form and
could benefit humans who consumed the milk or the concentrated milk.
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Dairy cows are routinely immunized for the purpose of protecting the
cow from diseases known to affect cows, some of which may also affect humans.
SMBI developed and patented proprietary cow immune stimulants that target a
broad spectrum of bacterial antigens that are specific to humans. The immune
stimulants are the Stolle Milk Biologics Inc. Series 100 Immune Stimulant. The
stimulant consists of 26 different strains of killed bacteria. The stimulant is
manufactured by independent licensed serum manufacturing companies. The
immunization induces the treated cows to produce antibodies, Immunogloublin G
("IGG") and Anti-Inflammatory Factor ("AIF"). The presence and level of the
micronutrients is measured through the full production process, beginning with
the levels present at the first milking after inoculation, through collection of
the fluid milk and the concentration process. NuVim(R) trademarked these
micronutrients under the name MunePro(R) for the immune stimulant and
AccuFlex(R)(R) for the anti-inflammatory stimulant.
The unique immune stimulant in NuVim(R) beverages, as well as the
micronutrients resulting from the immunizations, is the subject of patent
protection. The immunized cow's milk is then dehydrated 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 MunePro(R) and AccuFlex(R). In 2002, C.M.
Colker, M. Swain, L. Lynch and D.A. Gingerich published in "Nutrition" Magazine
a study of our NuVim(R) beverage entitled, "The Effects of a Milk-Based
Bioactive Micronutrient Beverage on Pain Symptoms and Activity of Adults with
Osteoarthritis: A Double Blind, Placebo-Controlled Clinical Evaluation." This
clinical study involved 31 human subjects and yielded similar results to the
other micronutrient studies, when subjects consumed 12 ounces of NuVim(R) daily
for six weeks. There has been no follow up study, and therefore, we do not have
clinical evidence that a shorter period of daily consumption might provide
similar beneficial results.
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 or other technologies that become available. The elements of our
business strategy include the following:
o Increasing current market consumer awareness, trial and repeat
purchases through sampling and other marketing activities.
o Expanding sales for our existing product line into additional
geographic markets.
o 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 and infomercials
for selling of NuVim(R) powder mix.
o Use e-commerce and direct selling through infomercials for selling
of NuVim(R) powder mix.
o Building the brand, growing revenues and achieving profitability in
order to position NuVim(R) as a possible joint venture or merger
partner, because NuVim(R)'s brand as well as its marketing
strengths could contribute to the combined venture. NuVim(R) is
also a possible acquisition candidate for one of the 13
multi-national food and beverage companies that might seek to add
healthy product choices to their product offerings.
o Exploit the NuVim(R) brand, management team and distribution base
to position NuVim as a possible acquisition candidate for one of
the 13 multi-national food and beverage companies that might seek
to add healthy product choices to their product offerings.
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OUR PRODUCTS
We have developed NuVim(R) beverages to provide consumers with
good-tasting beverages that help strengthen the immune system, support muscle
flexibility and promote athletic performance. All of our products contain the
proprietary, patented and exclusive micronutrients, MunePro(R) and AccuFlex(R).
Current Products
Ready to Drink Beverages
This product line consists of natural, fruit-flavored, refrigerated
dietary supplement beverages available in three flavors: Strawberry Vanilla,
Orange Tangerine and Fruit Symphony. The 64-ounce cartons are currently is sold
primarily in refrigerated juice section of major supermarkets. We also sell
single-serving, 16-ounce bottles, which are available in Strawberry Vanilla and
Orange Tangerine flavors. This smaller size in plastic bottles is currently
marketed primarily to small grocery stores and delicatessens.
In addition to containing the proprietary micronutrients MunePro(R) and
AccuFlex(R), NuVim(R) refrigerated beverages are also fortified with vitamins
and minerals. An eight-ounce serving offers 100% of the minimum daily
requirement of Vitamins E, C, B-12, and zinc, smaller portions of Vitamin A,
calcium, and all nine essential amino acids. The beverage is readily 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(R) is typically priced from $2.78 to $3.99,
depending on the supermarket. This 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.
NuVim(R) Powder
In January 2006 we introduced NuVim(R) powdered supplements to be added to
beverages, cereals or yogurt. It is, available in three flavors, Vanilla,
Chocolate, Strawberry. NuVim(R) provides the same micronutrients, vitamins and
minerals as our ready to drink beverages. It is sold in 30 serving boxes and is
currently available on our online store for $49.95 per box, with discounts for
larger quantities. The powder form allows us to market our product on a
nationwide basis without the distribution costs associated with the refrigerated
ready to drink line. Sales to date have not been material.
New Product Development
We intend to develop the following additional products that deliver the
same clinically-demonstrated health benefits as our current products:
o New Flavors. We plan to introduce one new flavor of our 64-ounce
size beverage - chocolate, vanilla or peach - at least one of which
should be available for test marketing within the next 12 months.
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 immune capacity and
people with restrictive diets, such as diabetics or lactose-intolerant
consumers.
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Approximately 95% of our current sales are to refrigerated supermarket
warehouses that then deliver our product and other brands of refrigerated
products to individual supermarkets. Some of these supermarket warehouses are
owned by the supermarket chains that stock our product, while other warehouses
that we sell to have contracts with a supermarket chain to warehouse and then
deliver refrigerated products to their stores. For the year ended December 31,
2005, Wal-Mart, a retailer of our product in Florida and Georgia accounted for
21% of our sales, Publix, a retailer of our product primarily in Florida and
Georgia accounted for 14% of our sales, C&S New Jersey warehouse that supplies
the Pathmark supermarket chain accounted for 11%, and Wake fern Foods, which
supplies Shop Rite Supermarkets in the New York/New Jersey area, accounted for
approximately 10% of our total gross sales.
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. We plan to expand
the number of distributors we sell and the categories of customers to include
club stores, nutrition centers and health food outlets.
During 2005 our primary marketing program was in-store sampling. We
used sampling to build consumer brand awareness and trial and repeat purchases,
particularly to support our product introduction in Wal-Mart stores in the state
of Florida. In August of 2004 we began a test program with Wal-Mart supercenters
in northern Florida. We distributed two flavors of our refrigerated product to
one distribution center servicing approximately 44 supercenter stores. In August
2005 Wal-Mart increased our distribution to three flavors and a total of three
distribution centers servicing approximately 120 stores. In April 2006, we
increased our distribution to the entire southeast region, encompassing
approximately 300 supercenters and six Wal-Mart distribution centers service
Wal-Mart supercenters in 6 states. We believe Wal-Mart operates approximately
2000 supercenters across the United States.
We also made use of supermarket advertising and consumer promotions,
and internet advertising. During the year we also used direct mail programs
through the supermarket data base to identify and deliver advertising and coupon
incentives to our targeted audience.
Dick Clark was our public spokesperson in 2005 and has appeared in past
NuVim(R) television and radio commercials, point of sale materials and on our
website. Because Dick Clark suffered a stroke and has not completely recovered
we used him in a limited way in 2005 and do not anticipate that we will be using
him in advertising, or promotion in 2006. We have signed actress/model Ashleigh
Howard as our new spokesperson.
In December 2005 we began a print media campaign through News USA. The
program creates and distributes a series of news articles addressing a wide
range of consumer health concerns for which NuVim(R) is beneficial. Topics
include staying heart healthy, ways to combat fatigue, why the immune system is
key to good health, and the right way to maintain sound nutrition when dieting.
This campaign is designed to build brand awareness and educate the consumer
about NuVim(R)'s benefits in an informational and credible format.
In the third quarter of 2006 we have used a television 5 minute infomercial to
communicate the benefits of NuVim(R) in powder forms. In the fourth quarter of
2006 we plan to use a 30 second television commercial, a 60 second commercial
emphasizing the powder version and a 5 minute commercial also focusing just on
the powder version to build awareness, trial and repeat purchaes of the
refrigerated products.
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DISTRIBUTION
We first introduced NuVim(R) 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, located in Florida.. As of December
31, 2005, our refrigerated beverages are available in approximately 2,100
supermarkets in all or part of 13 states (New York, New Jersey, Connecticut,
Maryland, Pennsylvania, Delaware, Virginia, Ohio, Florida, Alabama, Georgia, and
South Carolina) and the District of Columbia. These accounts are serviced by a
network of eight food brokers. The brokers present the promotional programs to
the supermarket chain account headquarter buyers and the brokers also have a
retail force that call on each individual supermarket to maintain product
rotation, correct pricing and maintain or improve shelf location and the amount
of space allocated to the NuVim products.
SUPPLY, MANUFACTURING AND ORDER PROCESSING
SMBI whey protein concentrate ("WPC") containing MunePro(R) and
AccuFlex(R), 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"). Our license agreement with SMBI (the "License Agreement"), gives us
the worldwide (except for Asia, Australia and New Zealand) 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. See "Related
Party Transactions" for information concerning these agreements.
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 bulk purchases result 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(R) beverages 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 are planning to introduce a new
formula in the third quarter of 2006 that, among other things, eliminates the
high fructose corn syrup from our product, resulting in lower calories per
serving. We expect to be able to produce the new product at a slightly lower
cost than the current product.
NuVim(R) beverages are produced under a strict quality assurance
program. The product formulation and process steps for the production of
NuVim(R) products are documented in the NuVim(R), Inc. Quality Manual. This
manual contains production formula and process instructions, as well as quality
assurance testing required on a daily, batch basis, including, without
limitation, daily microbiological testing. The HACCP (Hazard Analysis Critical
Control Point), which is in place at Clover Farms Dairy and is a requirement for
all dairy operations in the United States, will be implemented at any new
production site.
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We expect to contract with other co-packer dairies 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. This strategy allows us to operate without investing in plant
and production equipment thereby keeping our fixed capital cost for
manufacturing as well as warehousing and freight at virtually zero..
Our beverages are currently warehoused exclusively at Orefield Cold
Storage in Orefield, Pennsylvania and transported to our customers by common
carrier.
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.
Each broker organization is paid on a commission basis for cases sold in their
territory.
Upon receiving an order, our products are shipped directly from the
Orefield warehouse to customer warehouses, enabling "just in time" inventory
levels for our finished products. Customers typically receive the product with a
minimum of 60 days of shelf life. We control inventory management, production
and invoicing.
PATENTS AND TRADEMARKS
SMBI has over 100 U.S. and foreign patents and patent applications that
apply directly to NuVim(R) products, which expire at various times between
February 2005 and April 2017. In addition, in November 2003, NuVim(R) was
awarded a manufacturing process patent for milk protein concentrate beverages,
which expires in March 2021.
We own the NuVim(R), MunePro(R), AccuFlex(R), MuneFlex(R), and Fruit
Symphony(R) trademarks.
NuVim also owns the manufacturing process patent.
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 all other
beverages including our dietary supplement beverages. When consumers buy
NuVim(R), 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, always
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 satisfaction 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. In many
supermarkets and in Wal-Mart supercenters NuVim is placed on the refrigerated
juice shelf between Minute Maid and Tropicana products
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 our major points of differentiation: NuVim(R) helps build the immune system
(our first line of disease defense), muscle flexibility and athletic
performance.. However, our competition has significantly greater name
recognition, financial, managerial and technical resources than we do, which may
put us at a competitive disadvantage. Our intent is to try to capture a small
share of this very large and growing segment of the beverage industry.
NuVim(R) dietary supplement beverages are the only beverages sold in
the United States containing the proprietary micronutrients MunePro(R) and
AccuFlex(R). Other companies sell milk and whey protein concentrate or products
containing milk or whey protein concentrate, but they do not include the
antibodies in the NuVim(R) products. Therefore, we believe our products provide
health benefits to consumers that are not available in other products that
contain milk-derived antibodies. We believe that NuVim(R) is the only beverage
product on the market derived from milk that has the anti-inflammatory as well
as the enhanced immunity factor.
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.
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. This 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.
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In October 1994, the Dietary Supplement Health and Education Act
("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. These 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. This 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. An expert panel determined that the
Stolle milk whey concentrate is consider Generally Recognized As Safe and
therefore the whey received a Certificate of Generally Recognized As Safe
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.
EMPLOYEES
As of December 31, 2005, we had eight employees. There are three
full-time employees and are our executive officers, and five are part-time
employees, one is in credit collection management, one is in consumer affairs
and one is in administration and quality assurance, one in accounts payable, and
one is our Vice President of Operations. Our corporate secretary and general
counsel is a part-time consultant. We also employ a part time consultant to
assist in operations.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, including their ages as of May
31, 2006, and certain information about them are as follows:
NAME AGE POSITION
- -------------------- ---- --------------------------------------------------
Richard P. Kundrat 62 Chairman of the Board and Chief Executive Officer
John L. Sullivan 62 Vice President of Sales
Stanley H. Moger 70 Director
Calvin L. Hodock 71 Director
Peter V. DeCrescenzo 56 Director
Doug Scott 39 Director
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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
which he retired in June 1996. Upon his retirement form Unilever/Lipton, he
founded the business management firm, Kundrat Associates, Mahwah, New Jersey,
which he operated full-time until he joined NuVim in September 1999. 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.
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. Upon his
retirement from Unilever/Lipton in September 1998 until he joined NuVim in March
2000, Mr. Sullivan worked as an independent consultant through his firm, John L.
Sullivan and Partners, Haworth, New Jersey. He received his B.S. degree in
Marketing from Fairleigh Dickenson 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.
Peter V. DeCrescenzo was elected to our Board of Directors in January
2005. He has been the President and Chief Executive Officer of Dialog Group,
Inc. since March 2003. Dialog Group is a provider of relationship marketing
communications services, business and consumer targeting databases for the
healthcare, financial and other direct-to-consumer, direct-to-professional
business markets. From November 2000 to March 2003, he served as President and
Chief Executive Officer of HealthCare Dialog, a direct marketing company
specializing in healthcare. In March 2000, HealthCare Dialog was acquired by
Dialog Group, Inc. From October 1993 until November 2000, Mr. DeCrescenzo was
the founding partner of PVD and Partners, a full-service healthcare marketing
and communications agency. He has been the Chairman of the Board of Dialog
Group, Inc. since April 2003. He received a BBA degree from Pace University.
Calvin L. Hodock was elected to our Board of Directors in April 2005.
For more than five years, Mr. Hodock has been the President and Managing Partner
of The Hodock Group, a marketing consulting and research company, located in
Skillman, New Jersey. Since June 2002, he also has served as Professor of
Marketing, Berkeley College and from June 2002 to December 2003, he served as
Adjunct Professor, Stern School of Business, New York University. He received
his B.B.A degree from the University of Cincinnati and his M.S. degree in
Marketing from the University of Illinois.
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Doug Scott was elected to our Board of Directors in May 2006. For more
than five years, since 1997, he has been the President, CEO, and Founder of the
Platinum Television Group and New Line Media Solutions. Mr. Scott, who is 39
years old, has served in this capacity since 1997. Before that he was a Vice
President and Senior Vice President with responsibility for marketing and media
development for Intermedia Marketing Solutions, Inc.
Directors are elected annually at the annual meeting of stockholders to
hold office for one year, and until their successors are duly elected and
qualified. NuVim's next annual meeting will be in June, 2007. 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 officers are appointed by the Board and serve at their discretion.
There are no family relationships among the directors or executive officers of
NuVim.
CORPORATE GOVERNANCE
Board of Directors - Our Board has positions for six Directors that are elected
annually at the annual meeting of stockholders to hold office for one year 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 officers
are appointed by the Board and serve at their discretion. There are no family
relationships among the directors or executive officers of NuVim.
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:
o Selecting, hiring and terminating our independent auditors.
o Evaluating the qualifications, independence and performance of
our independent auditors.
o Approving the audit and non-audit services to be performed by
the independent auditors.
o Reviewing the design, implementation, adequacy and
effectiveness of our internal controls and critical accounting
policies.
o 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.
o Together with management and our independent auditors,
reviewing any earnings announcements and other public
announcements regarding our results of operations.
o preparing the report that the Securities and Exchange
Commission requires in our annual proxy statement.
Our Audit Committee is comprised of Messrs. Scott, DeCrescenzo, and Moger. Mr.
Scott serves as Chairman. The Board has determined Messrs. DeCrescenzo and Moger
are independent under the rules of the National Association of Securities
Dealers. The Board has determined that Mr. Scott 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:
37
o Approving the compensation and benefits of our executive
officers.
o Reviewing the performance objectives and actual performance of
our officers.
o Administering our stock option and other equity compensation
plans.
Our Compensation Committee is comprised of Messrs. Hodock, Moger, and Scott. Mr.
Hodock serves as Chairman. The Board has determined that Messrs. Hodock and
Moger are independent under the rules of the NASD.
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:
o 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.
o Establishing a policy for considering stockholder nominees for
election to our Board of Directors.
o Evaluating and recommending candidates for election to our
Board of Directors; reviewing our corporate governance
principles and providing recommendations to the Board
regarding possible changes.
o Reviewing and monitoring compliance with our Code of Ethics
and our insider trading policy.
Our Corporate Governance and Nominating Committee is comprised of
Messrs. DeCrescenzo, Hodock, and Scott. Mr. DeCrescenzo serves as Chairman. The
Board has determined that Messrs. DeCrescenzo and Hodock are independent.
Corporate Documents
You can obtain corporate governance information from our home page,
www.NuVim.com. Copies of the following information can be found on the home page
or is available in print to any stockholder who requests it.
o Our Committee Charters: Audit Committee, Corporate
Governance and Nominating Committee, and Compensation
Committee.
o Our Code of Conduct and Business Ethics.
DIRECTOR COMPENSATION
Prior to our initial public offering in June of 2005 we have never paid
cash compensation to our directors, but directors have, from time to time,
received shares of common stock and option grants. Under the 2005 Directors
Stock Option Plan, which became effective upon the closing of the initial public
offering, each director received an option to purchase 10,000 shares of common
stock, which vests and becomes exercisable over three years in equal
installments. Each director also received 7,500 for their first year of service,
and is eligible to receive an option to purchase an additional 7,500 shares in
each year of service thereafter. 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 as compensation for their services as chairman
of the committees. The annual options become immediately vested and exercisable.
38
Non-employee directors are reimbursed for their reasonable
out-of-pocket expenses incurred in attending meetings of the Board of Directors.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning total
compensation received by our Chief Executive Officer and our other executive
officers during the last year for services rendered to NuVim in all capacities
for the last three fiscal years.
39
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation -------------------------------------------
- ----------------------------------------------------------------------------------- Restricted Stock All Other
Name & Position Year Salary Bonus Other Awards and Options Compensation
- ---------------------------- -------- ------------ ------------ ----------- ---------------------------- ------------
Richard P. Kundrat
Chairman of the Board 2005 $ 202,084 $ 0 346,500 shares of common
and CEO stock in lieu of bonus,
options to purchase 637,500
shares of common stock,
2004 $ 175,000 $ 0
2003 $ 175,000 $ 110,000 1,450 (1)
Paul J. Young
Vice President of 105,000 shares of common
Operations stock in lieu of bonus,
options to purchase 327,500
2005 $ 77,917 $ 0 shares of common stock.
2004 $ 150,000 $ 0
2003 $ 150,000 $ 0 1,250 (1)
John L. Sullivan
Vice President of Sales 210,000 shares of common
stock in lieu of bonus,
options to purchase 327,500
2005 $ 162,500 $ 0 shares of common stock.
2004 $ 175,000 $ 0
2003 $ 175,000 $ 110,000 1,450 (1)
Michael Vesey
Chief Financial Officer 85,000 shares of
common stock in lieu
of bonus, options to
$ 4,956 (2) purchase 225,000
2005 $ 150,000 $ 0 shares of common stock.
2004 $ 12,500 $ 0
(1) Securities issued were warrants, exercisable at $11.00 per share for seven
years. These warrants were voluntarily cancelled in 2004.
(2) Represents reimbursement of medical and dental insurance expenses for Mr.
Vesey in accordance with his contract.
40
The salaries and bonus reflected in the above table include accrued salaries
that were paid in stock for the period January 2003 through May 2005. In 2003,
the Named Officers accepted shares of common stock at $11 per share in payment
of one-half of the salary owed to them for the months of February through July
2003 as follows: Mr. Kundrat was issued 3,955 shares for $43,750 of salary, Mr.
Young was issued 3,410 shares for $37,500 of salary and Mr. Sullivan was issued
3,410 shares for $37,500 of salary. In November 2004, we issued shares of our
common stock to each of the Named Officers in payment of the remaining deferred
salaries and bonus through December 31, 2003. Mr. Kundrat was issued 77,271
shares for $298,500 of accrued salaries and bonus, Mr. Young was issued 30,949
shares for $162,500 of accrued salary and Mr. Sullivan was issued 39,646 shares
for $162,500 of accrued salary. In April 2005, the Named Officers agreed to take
additional shares of common stock in payment of additional accrued salary owed
to them through February 2005. These shares, which are part of a restructuring
plan in which our executive officers, the bridge lenders and certain creditors
participated, will be issued concurrently with the closing of the offering, at a
price of $3.00 per share. The shares to be issued to the Named Officers are as
follows: 63,195 shares for $189,584 of accrued salary to Mr. Kundrat and 54,167
shares for $162,500 of accrued salary owed to each of Messrs. Sullivan and
Young. In addition, in June 2005, the Named Officers agreed to take additional
shares of common stock in payment of additional accrued salary owed to them
through May of 2005. These shares, were issued concurrently with the closing of
the offering, at a price of $1.00 per share, and were included in a registration
statement declared effective June 21, 2005. The shares to be issued to the Named
Officers are as follows: 29,167 shares for $29,167 of accrued salary to Mr.
Kundrat and 25,000 shares for $25,000 of accrued salary owed to each of Messrs.
Sullivan and Young. Because no public market existed for our common stock during
at the time of the issuances of these shares, all of the shares issued to the
Named Officers in lieu of cash salaries or bonuses were valued based upon the
good faith determination of the Board of Directors of the then fair market value
of our common stock, taking into account such factors as the price at which
unrelated third parties had purchased our securities, our revenues and net
losses and the relative strength of our balance sheet.
During 2004 The Company incurred $30,650 in consulting fees to Mr. Vesey prior
to his employment.
During 2005, three executives agreed to allow the Company to defer payment of a
portion of their salaries, as follows; Mr. Kundrat $43,750, Mr. Sullivan $29,166
and Mr. Vesey $14,583. In March of 2006, the executives agreed to extend payment
of the salaries until January, 2007, and the Board agreed that if the executives
are requested to convert their salary into restricted common stock in the future
by the company, it will not be at a value higher than the fair value of similar
equity instruments at December 31, 2005, which is estimated to be, $.20.
The Company did not adopt a cash bonus plan in 2005. In March of 2006, the Board
of Directors granted an aggregate of 546,500 shares of unregistered stock to
four executives as an incentive and in lieu of a 2005 bonus plan as follows; Mr.
Kundrat 346,500 shares, Mr. Sullivan 210,000 shares, Mr. Young 105,000 shares
and Mr. Vesey 85,000 shares.
41
OPTION GRANTS IN LAST YEAR
Options Granted and Potential Realizable Value
% of
Total Potential Realizable Value
Securities Options at Assumed rates of
Underlying Granted Appreciation in Stock Price
Options in Fiscal Exercise ---------------------------
Name & Position Granted Year Price Expiration date 5% 10%
- ----------------------------- ------------ ---------- -------- --------------- ------------ ------------
Richard P. Kundrat 420,000.00 26% $ 1.00 June 21, 2005 $ 684,136 $ 1,089,372
Chairman of the Board and CEO 230,000.00 14% $ 0.77 August 4, 2015 $ 288,477 $ 459,352
Paul J. Young 227,500.00 14% $ 1.00 June 21, 2005 $ 370,574 $ 590,076
Vice President of Operations 100,000.00 6% $ 0.77 August 4, 2015 $ 125,425 $ 199,718
John L. Sullivan 227,500.00 14% $ 1.00 June 21, 2005 $ 370,574 $ 590,076
Vice President of Sales 100,000.00 6% $ 0.77 August 4, 2015 $ 125,425 $ 199,718
Michael Vesey 125,000.00 8% $ 1.00 June 21, 2005 $ 203,612 $ 324,218
Chief Financial Officer 100,000.00 6% $ 0.77 August 4, 2015 $ 125,425 $ 199,718
OPTION EXERCISES AND HOLDINGS
Aggregated Options exercised in Last Fiscal Year and Fiscal Year end Option Values
Shares
Acquired on Value Exercisable/
Name & Position Exercise Realized Exercisable/Unexercisable Unexercisable
- ----------------------------- ------------ ---------- ------------------------- -------------
Richard P. Kundrat 0 $ 0 537,500/600,000 $ 0/$0
Chairman of the Board and CEO
John L. Sullivan 0 $ 0 225,000/327,500 $ 0/$0
Vice President of Sales
42
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 Chairman of the Board and Chief Executive Officer, John L.
Sullivan, our Vice President of Sales and Paul Young, our Vice President of
Operations. These have a three year term and became effective upon our initial
public offering on June 21, 2005. 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. Paul Young has moved to the position
of Special Advisor to the Chairman and his contract as a full time employee has
been terminated. Michael Vesey has moved on to another company and his duties
replaced by accounting firm Hendel and Hendel.
Securities authorized for issuance under equity compensation plans
The equity compensation reported in this section has been and will be
issued pursuant to individual compensation contracts and arrangements with
employees, directors, consultants, advisors, vendors, suppliers, lenders and
service providers. The equity is reported on an aggregate basis as of December
31, 2005. Our security holders have not approved the compensation contracts and
arrangements underlying the equity reported.
2005 INCENTIVE STOCK OPTION PLAN
In 2005, our Board of Directors recently adopted, and stockholders
approved, the 2005 NuVim Incentive Stock Option Plan, which will became
effective upon the closing of this offering and expire ten years later. The plan
authorizes us to issue options to purchase, in the aggregate, up to 1,500,000
shares of our common stock to employees, officers and consultants.
2006 EMPLOYEE STOCK OPTION PLAN
At its March 2006 meeting, the Directors proposed to adopt the 2006
Plan to make common stock options available to executives, employees, advisors,
and consultants and continue provide automatic grants to each outside director
and each chair and member of a Board committee. The plan combines aspects of
both plans approved in 2005 in that it covers both automatic grants to directors
who are not employees and discretionary grants to be made by the Compensation
Committee to selected employees.
The number of shares subject to the plan shall be 2,000,000 shares. In
addition to authorizing grants to employees and consultants, the 2006 Plan
provides automatic annual grants to our Outside Directors of options to purchase
50,000 shares, to each Independent Director who is a chair of Board Committee an
annual grant of options to purchase 10,000 shares for each committee they chair,
and. to each Outside Director who is a member of Board Committee an annual grant
of options to purchase 10,000 shares for each committee on which they serve
43
The plan is administered by the Compensation Committee of the Board of
Directors with respect to grants to employees. 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.
In addition to 270,000 shares automatically granted to outside and
Independent Directors, the compensation committee has granted options to
purchase a total of 1,625,000 shares. Included in this grant are options for a
total of 1,350,000 shares granted to the executive officers, consisting of
options for 1,000,000 shares granted to our CEO, Richard Kundrat, 300,000 to our
Vice President for Sales, John Sullivan, and 50,000 granted to our new Vice
President for Operations, Jamal Kiberia.
All of the options, both the automatic for outside directors and those
granted by the compensation committee to employees, including the executive
officers, are exercisable immediately and have, except for some of Mr. Kundrat's
options, a strike price of $0.35. Most of Mr. Kundrat's options have a strike
price of $0.385, equal to 110% of the fair market value on the date of grant.
HISTORICAL INCENTIVE STOCK PLANS
Stock Option Plans
We established stock option plans in 2000, 2001, 2002, 2005, and 2006
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. In each instance, the fair market value was determined by the board
of directors, taking into consideration the factors they deemed important in
setting the value, including, among other factors, the price at which securities
had been sold to unaffiliated third parties as well as results of operations and
the relative strength of the balance sheet. We currently have an aggregate of
3,306,147 outstanding options under these past 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 December 31, 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.
44
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, 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 our initial public offering Spencer Trask and its controlled
subsidiary, SMBI, collectively own 579,426 shares of our common stock, which
represented approximately 32% of our then outstanding capital stock. After the
offering, Spencer Trask and SMBI owned approximately 13% of our common stock. As
of today, they own about 5.5% of the outstanding common shares. Donald F.
Farley, the Chief Executive Officer of Spencer Trask and the Chairman of the
Board of SMBI, was also a member of our Board of Directors until the spring of
2005. 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 fiscal year where the amount involved was at least
$60,000. There were other transactions with affiliates of Spencer Trask prior to
the last fiscal year. SMBI is the provider of the whey protein concentrate for
which we have exclusive distribution rights under a License and Supply
Agreement. SMBI is controlled by Spencer Trask, a beneficial owner of more than
5% of our common stock.
Transactions with SMBI
In March of 2005 we entered into a Modification and Extension Agreement
with SMBI Providing for the payment of past due accounts payable, royalties and
interest payable in two installments aggregating $452, 278.
45
We made a payment of $250,000 in July 2005, and $202, 277 in January 2006 under
the agreement. Upon payment of the final installment in January 2006, SMBI
assigned us the NuVim trademark.
SMBI whey protein concentrate ("WPC"), which contains SMBI's patented
micronutrients, LactoMune and LactoActin, is the key ingredient in our products.
In January 2000, we had entered into the Supply Agreement with SMBI, which also
was amended and restated in May 2004. 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 periods. In 2000, we entered into a License
Agreement with SMBI. In May 2004, we amended and restated the License Agreement.
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.
In the event either SMBI alone or SMBI, in collaboration with us,
develops any improvements, including all improvements, developments, formulae,
ingredients, trademarks, trade names, copyrights, variations and innovations
relating in any way to the License Agreement or SMBI's intellectual property as
that term would apply to products supplied by SMBI, the License Agreement
provides that such improvements will be the sole property of SMBI. However, the
License Agreement does grant us the exclusive right to use and/or sell any
improvement resulting from the License Agreement that is consistent with the
uses that are the subject of, and permitted by, the License Agreement.
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 2003 and 2004, we accrued royalties of $36,000 and $21,000,
respectively, to SMBI under the License Agreement.
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
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.
In connection with the bridge loan we received in 2004, SMBI consented
to an amendment to the 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 paid all amounts that were due and now
own the NuVim trademark.
SMBI whey protein concentrate ("WPC"), which contains SMBI's patented
micronutrients, LactoMune and LactoActin, is the key ingredient in our products.
In January 2000, we had entered into the Supply Agreement with SMBI, which also
was amended and restated in May 2004. 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
46
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. We began using WPC as a replacement for milk protein concentrate from SMBI
in the fourth quarter of 2003. During 2003, we purchased 2.4 metric tons of WPC
and used approximately 1.4 metric tons, leaving a 1 metric ton surplus at the
end of 2003. However, during the fourth quarter of 2003, the SMBI ingredient
used by us was reformulated, and we shifted from purchasing milk protein
concentrate, which requires a significantly greater amount for NuVim's purposes,
to WPC, and this had an impact on the amount of WPC we used in that year. In
2004, we purchased 1.4 metric tons and used approximately 2.4 metric tons. For
2005 the minimum purchase quantity under the Supply Agreement will be three
metric tons. If the parties are unable to agree upon a minimum quantity for
2006, the agreement provides that the minimum will be 115% of the 2005 quantity,
or 3.45 metric tons. Thereafter, in any year in which the parties cannot agree
on the amount, it shall be 115% of the prior year's minimum. 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.
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 equally between SMBI and us
following both parties' agreement to the costs.
In 2004 and 2005, we purchased $810,000 and $88,000, respectively, of
product under the Supply Agreement.
Under the supply agreement we are required to make minimum purchases to
maintain exclusive distribution rights. For 2006 the minimum purchase quantity
under the Supply Agreement will be 3.45 metric tons.
Transactions with Spencer Trask
Spencer Trask had guaranteed our obligations under a $2,500,000 line of
credit from Bank of Wachovia pursuant to which we have borrowed the full amount.
Additionally we issued Spencer Trask Secured Convertible Promissory notes in
the principal amount of $2,480,000. In May of 2005 Spencer Trask was assigned
our notes payable with the Bank of Wachovia.
47
In June, 2005, upon effectiveness of our initial public offering,
Spencer Trask accepted a total of 461,700 shares of our common stock as payment
in full for the notes assigned from the Bank of Wachovia, the Secured
Convertible notes, and all accrued interest theron. The number of shares was
negotiated between the parties did not necessarily bear any relationship to any
recognized criterion of value. This agreement was conditioned upon the closing
of the initial public 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 December 31, 2002 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 note holder
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. The loans we have received from our current officers and
directors since June 2001 are as follows:
BALANCE AS OF SHARES OF
THE DATE OF COMMON
NAME PRINCIPAL ISSUANCE STOCK ISSUED
- ------------------ -------------- -------------- --------------
Richard P. Kundrat $ 100,000 $ 138,017 34,229
John L. Sullivan $ 50,000 $ 69,009 16,104
Paul Young $ 100,000 $ 138,017 24,801
Donald F. Farley $ 100,000 $ 143,851 47,951*
* Mr. Farley has agreed to accept these shares in lieu of a cash repayment in
connection with the restructuring events that will be consummated
concurrently with the closing of this offering.
ACCRUED EXECUTIVE SALARIES
In November 2004, we agreed to issue a total of 147,866 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 totaling $623,500. We continued to accrue their unpaid salaries for 2004
through November 2004. The following table sets forth the cash compensation for
each executive officer that was extinguished through the issuance of common
stock in November 2004:
SHARES OF
COMMON STOCK
ISSUED TO
EXTINGUISH
CASH
2002 AND 2003 2002 AND 2003 COMPENSATION
NAME ACCRUED SALARY BONUSES OBLIGATION
- ------------------ -------------- -------------- --------------
Richard P. Kundrat $ 188,500 $ 110,000 77,271
John L. Sullivan $ 162,500 -- 39,646
Paul Young $ 162,500 -- 30,949
48
In connection with this offering and the restructuring events agreed to
by our executive officers, bridge lenders and certain other creditors, three of
our executive officers agreed to convert additional deferred salaries through
February 2005 to shares of common stock at $3.00 per share, rather than being
paid the amounts due to them out of the net proceeds of the offering. The
issuances of shares, which will occur concurrently with the closing of this
offering, are as follows:
SHARES OF COMMON STOCK
TO BE ISSUED TO
ACCRUED SALARY TO BE EXTINGUISH CASH
NAME CONVERTED TO STOCK COMPENSATION OBLIGATION
- ------------------ -------------------- -----------------------
Richard P. Kundrat $ 189,584 63,195
John L. Sullivan $ 162,500 54,167
Paul Young $ 162,500 54,167
These executive officers further agreed to convert additional deferred
salaries for April and May 2005 into common stock at $1.00 per share, which will
also occur concurrently with the closing of this offering, as follows:
SHARES OF COMMON STOCK
ISSUED TO
ACCRUED SALARY EXTINGUISH CASH
NAME CONVERTED TO STOCK COMPENSATION OBLIGATION
- ------------------ -------------------- -----------------------
Richard P. Kundrat $ 29,167 29,167
John L. Sullivan 25,000 25,000
Paul J. Young 25,000 25,000
Mr. Kundrat also agreed to convert an aggregate of $69,000 of funds
owed to him for advances he has made to cover manufacturing costs. He has agreed
to accept 23,000 shares of common stock at $3.00 per share, which will also
occur concurrently with the closing of this offering.
During 2005, three executives agreed to allow the Company to defer
payment of a portion of their salaries, as follows; Mr. Kundrat $43,750, Mr.
Sullivan $29,166 and Mr. Vesey $14,583. In March of 2006, the executives agreed
to extend payment of the salaries until January, 2007, and the Board agreed that
if the executives are requested to convert their salary into restricted common
stock in the future by the company, it will not be at a value higher than the
fair value of similar equity instruments at December 31, 2005, which is
estimated to be, $.20.
On April 20, 2006 NuVim and two current and one retired executives
reached agreement on the number of shares to be granted in lieu of a cash bonus
for 2005 and the additional restrictions to be imposed on their ability to sell
the shares. A total of 661,500 shares were granted, 341,500 to Mr. Kundrat, the
CEO, 200,000 to John L. Sullivan, the Vice-President of Sales, and 120,000 to
Paul J. Young, until April 1, 2006 the Vice President of Operations and now a
member of the Advisory Board.
On April 21, 2006 Michael Vesey agreed, in connection with his
resignation reported below in Item 5.02(b), to accept 98,955 shares of NuVim
common stock in payment of accrued salary of $19,791. In addition, he accepted
85,000 shares of common stock in lieu of his executive cash bonus for 2005. Mr.
Vesey also agreed that he will not sell his shares before May 1, 2007.
In the third quarter of 2006, the Company and the executives covered by
the Executive Bonus Program agreed that the reference price for converting their
2006 cash bonus to stock will be $0.35.
49
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 December 31, 2004, we have received the full $1,000,000. 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 were due and payable on the
earlier of the consummation of this offering or January 1, 2005. Because the
loan was not repaid by January 1, 2005, the interest rate increased to 15% as of
that date. 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, partial payment of legal fees and for general
corporate purposes. In June 2005, the bridge lenders converted $500,000 of the
principal in to 250,000 shares of common stock at $2.00 per share. The remaining
principal and accrued interest were to be due in November 2006. In August 2006,
the bridge lenders agreed to extend the maturity until January 2009. Interest
will continue accrue at 8% per annum. They each received a warrant to purchase
100,000 shares at a price of $0.35 per share. The warrant expires in 2015.
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 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 principal amount of $175,000. In
consideration for Mr. Clark's forbearance until the earlier of January 1, 2005
or the consummation of an initial public offering (the "Maturity Date"), the
note is convertible as though it carried a face amount of $245,000. The
convertible note is automatically convertible into unregistered units, each
consisting of one share of common stock, one $1.50 warrant and one $2.00
warrant, at $1.00 per unit provided the offering is consummated on or before
June 30, 2005. Assuming a $1.00 IPO unit price, the note will convert into
245,000 units. In addition, the initial interest rate of 10% increased to 15% on
January 1, 2005 because the note had not been repaid by the Maturity Date.
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, which Mr. Clark has accepted as payment in full for this
obligation. The exercise price of this warrant is determined by the timing and
the nature of a "maturity event," which alternatively could be an initial public
offering, a merger, acquisition or other business combination, or a sale of
assets. Assuming the maturity event is this offering and it closes on or before
June 1, 2005, the exercise price will equal the initial public offering price,
and the number of shares issuable upon exercise will be calculated by dividing
$650,000 by that 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. The foregoing notwithstanding, if the maturity event is
after June 30, 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. However, based on our post-offering, fully-diluted
capitalization and Mr. Clark's ownership interest, this warrant will not entitle
him to purchase any additional shares.
50
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.
Finally, the Bridge Loan required the formation of NuVim Powder LLC, of
which Mr. Clark was given a 25% ownership interest. On April 7, 2006 the Company
agreed with Messrs. Clark and Moger to acquire their respective 12.5% interests
in NuVim Powder, LLC, the powder subsidiary, for 225,000 shares of Company
common stock each. The Company executed the agreement on April 18. 2006. The
Company shares were exchanged for the interests in the powder subsidiary on
April 20, 2006.
In August 23, 2006, the holders agreed to extend their maturity from
November 2006 to January 2009. Interest will accrue at an annual rate of eight
(8%) percent. Neither principal nor interest will be due until that date. The
holders each received a warrant to purchase 100,000 shares of NuVim's common
stock for $0.35 per share. The warrant may be exercised from February 2007
through August 15, 2015.
APPROVAL BY INDEPENDENT DIRECTORS
Each of the aforementioned transactions with related parties was
approved or ratified by a majority of our independent directors, and at the time
each transaction was approved or ratified, there were at least two independent
directors on our Board.
FUTURE TRANSACTIONS
Future transactions with our officers, directors or greater than five
percent stockholders will be on terms no less favorable to NuVim than could be
obtained from independent third parties.
PRINCIPAL STOCKHOLDERS
COMMON STOCK OWNERSHIP BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information, as of August 31, 2006, with
respect to the beneficial ownership of the Company's Common Stock by (a) the
present executive officers and directors and nominees for Director of the
Company and (b) the present directors and officers of the Company as a group.
Unless otherwise noted, the shares are owned directly or indirectly with sole
voting and investment power.
MANAGEMENT OWNERS
PERCENTAGE OF
THE CLASS
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED (1) (2)
- -------------------------------------- ------------------ --------------
Richard P. Kundrat 2,240,498(3) 11.48%
John L. Sullivan 969,338(4) 4.97%
Stanley Moger 1,111,637(5) 5.70%
Peter V. DeCrescenzo 88,500(6) 0.45%
Calvin L. Hodock 90,000(7) 0.45%
Doug Scott 80,000(8) 0.41%
All directors and executive officers
as a group (6 persons) 3,294,682 26.44%
- ----------
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of August 31, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentage based on 19,514,572 shares of common stock including 10,602,088
shares now issued and 8,912,484 shares to be issued upon exercise of options and
warrants.
51
(3) Consists of 590,498 shares now issued and 1,6650,000 shares to be issued
upon exercise of options.
(4) Consists of 341,838 shares now issued and 627,500 shares to be issued upon
exercise of options.
(5) Consists of 352,955 shares now issued and 758,682 shares to be issued upon
exercise of options and warrants.
(6) Consists of 88,500 shares to be issued upon exercise of options.
(7) Consists of 90,000 shares to be issued upon exercise of options.
(8) Consists of 80,000 shares to be issued upon exercise of options
There currently are no arrangements that may result in a change of ownership or
control.
PRINCIPAL HOLDERS OF COMMON STOCK.
The following table sets forth information, as of August 31, 2006, with respect
to the beneficial ownership of the Company's Common Stock by each person known
by the Company to be the beneficial owner of more than five percent (5%) of the
Company's outstanding Common Stock
PERCENTAGE OF
THE CLASS
NUMBER OF SHARES BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED OWNED (1) (2)
- ------------------------------------ ------------------ -------------
Entities affiliated with Spencer
Trask Specialty Group, LLC 579,429 2.97%
535 Madison Avenue
New York, NY 10022
Kevin Kimberlin 579,429(3)(4) 2.97%
535 Madison Avenue
New York, NY 10022
Dick Clark 1,298,636(5) 6.65%
c/o Dick Clark Productions
9200 Sunset Blvd., 10th Floor
Los Angeles, CA 90069
Stanley H. Moger 1,111,637(6) 5.70%
1180 6th Avenue, Suite 2010
New York, NY 10036
- ----------
(1) Beneficial Ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock subject to options or
warrants currently exercisable or convertible, or exercisable or convertible
within 60 days of August 31, 2006 are deemed outstanding for computing the
percentage of the person holding such option or warrant but are not deemed
outstanding for computing the percentage of any other person.
(2) Percentage based on 19,514,572 shares of common stock including 10,602,088
shares now issued and 8,912,484 shares to be issued upon exercise of options and
warrants
(3) Because of Mr. Kimberlin's voting and investment control over the securities
owned by STSG, Fund I, Fund II, KK Partners and SMBI, he may be deemed to be the
beneficial owner of the shares owned by each such entity. He personally owns no
NuVim securities and disclaims beneficial ownership of all the securities owned
by STSG, Fund I, Fund II, KK Partners and SMBI, except to the extent of his
pecuniary interest in each such entity, if any.
52
(4) Does not include any securities owned by Spencer Trask. See Note (3). 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. Con Sterling the chief operating officer of SMBI,
has voting and dispositive authority over these securities, but he acts at the
direction of his board of directors. Mr. O'Brien disclaims beneficial ownership
of these shares. Spencer Trask is the controlling stockholder of SMBI.
(5) Consists of 628,636 shares now issued and 670,000 shares to be issued upon
exercise of warrants
(6) Consists of 352,955 shares now issued and 758,682 shares to be issued upon
exercise of options and warrants
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. We have 10,602,088 shares of common stock and no shares of preferred
stock outstanding.
COMMON STOCK
As of June 30, 2006 we have 10,602,088 shares of common stock
outstanding held 135 stockholders of record.
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.
PREFERRED STOCK
Our Certificate of Incorporation provides for the issuance of up to
65,000,000 shares of preferred stock. As of date hereof, there will be no shares
of preferred stock outstanding..
The Board of Directors has the authority, without further action by the
stockholders, to issue up to an additional 56,501,150 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.
53
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:
o 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;
o 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 (i) by persons who are directors and
also officers and (ii) 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
o 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.
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 AND REGISTRAR
Our transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
There are now 10,852,088 shares of common stock issued and outstanding.
5,288,237 are being registered for sale under the registration statement of
which this prospectus is a part. Many other shares may also be sold.
54
THE INITIAL PUBLIC OFFERING
Upon completion the initial public offering in June 2005, 2,700,000
shares of common stock issued as part of the units sold in this offering became
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
2,700,000 shares of common stock underlying the Class A public warrants and the
2,700,000 shares of common stock underlying the Class B public warrants issued
as part of the units sold in this offering will also be freely tradeable after
exercise of the warrants, except for shares held by our affiliates.
At the same time 654,911 shares of common stock were registered for the
holders thereof and are now freely tradeable. These shares are included in this
Registration and are covered by this prospectus.
OUTSTANDING RESTRICTED STOCK
The remaining 2,055,529 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, of which 795,100 shares are owned by affiliates.
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.
Without taking into account the lockup agreements, the following is a
summary of the availability of Rule 144 and Rule 144(k) following the offering:
SHARES
------
Affiliate shares available for sale 90 days following the date hereof
Non-affiliate shares available for sale 90 days following the date
hereof (also 144(k) available)
Affiliate shares available for sale beginning January 1, 2007
Non-affiliate shares available for sale beginning January 1, 2007
OPTIONS AND WARRANTS
Stock Options
As of August 31, 2006, we had granted and have outstanding options to
purchase a total of 3,306,147 shares of common stock under our several options
plans, all of which are held by affiliates.
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
55
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
In addition to the 3,400,000 Public Warrants discussed above with the
Initial Public Offering, we have an aggregate of 2,206,337 warrants outstanding.
Of these warrants, 1,342,577 are owned by our affiliates. 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.
PLAN OF DISTRIBUTION
Each Seller is free to offer and sell his shares at such times, in such
manner and at such prices as he shall determine. Such shares may be offered by
the Sellers in one or more types of transactions, which may or may not involve
brokers, dealers or cash transactions. The Sellers may also use Rule 144 under
the Securities Act to sell such securities if they meet the criteria and conform
to the requirements of such rule. There is no underwriter or coordinating broker
acting in connection with the proposed sales of shares by the Sellers.
The Sellers have advised us that sales of shares may be effected from
time-to-time in transactions (which may include block transactions) in the
over-the-counter market, in negotiated transactions, through the writing of
options on the units, or a combination of such methods of sale, at a fixed price
which may be changed, at market prices prevailing at the time of sale, or at
negotiated prices. The Sellers may effect such transactions by selling shares
directly to purchasers or to or through broker-dealers which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the Sellers or the purchasers of
shares for whom such broker-dealers may act as agents or to whom they sell as
principal, or both (which compensation as to a particular broker-dealer may be
in excess of customary commissions). The Sellers and any broker-dealers that act
in connection with the sale of the shares might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, and any commissions
received by them and any profit on the resale of the shares as principal might
be deemed to be underwriting discounts and commissions under the Securities Act.
The Sellers may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the units against certain
liabilities, including liabilities arising under the Securities Act.
Because Sellers may be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act, the Sellers will be subject to
prospectus delivery requirements under the Securities Act. Furthermore, in the
event of a "distribution" of shares, any Sellers, any selling broker-dealer and
any "affiliated purchasers" may be subject to Rule 10b-7 under the Securities
Exchange Act of 1934 which prohibits any "stabilizing bid" or "stabilizing
purchase" for the purpose of pegging, fixing or stabilizing the price of units
in connection with this offering.
LEGAL MATTERS
The validity of the issuance of the securities offered by this
prospectus will be passed upon for the Company by Mark Alan Siegel, Boca Raton
Florida. Certain legal matters in connection with this offering will be passed
upon for the Sellers by _____________.
56
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.
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.
57
NUVIM, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm F-2
Balance Sheets - December 31, 2004 and 2005; F-3
Statements of Operations - Years ended December 31, 2004 and December 31, 2005; F-4
Statements of Cash Flows - Years ended December 31, 2004 and December 31, 2005; F-5
Statements of Stockholders' Deficit - Years ended December 31, 2004 and
December 31, 2005; F-6
Notes to Financial Statements F-9 - F-25
Balance Sheet - June 30, 2006 (Unaudited) F-26
Statement of Operations - For the three and Six months ended June 30, 2006 and
2005 (Unaudited) F-27
Statement of changes in Stockholders' Deficit for the Six months ended June 30,
2006 (Unaudited) F-28
Statement of Cash Flows for the Six months ended June 30, 2006 and 2005 (Unaudited) F-29
Notes to Financial Statements (Unaudited) F-30 - F-39
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. (the "Company")
as of December 31, 2004 and 2005, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. 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 audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits 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
audits 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,
2004 and 2005, and the results of its operations and its cash flows for the
years then ended, 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 working 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.
March 17, 2006
Somerville, New Jersey
F-2
NUVIM, INC.
BALANCE SHEETS
DECEMBER 31
------------------------------
2004 2005
------------- -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 277,649 $ 270,468
Accounts receivable, net 33,715 35,399
Inventory 84,484 172,714
Prepaid expenses and other current assets 61,766 328,915
------------- -------------
Total Current Assets 457,614 807,496
Equipment and furniture, net 21,020 1,502
Deferred offering costs 441,243 --
Deposits and other assets 8,547 8,547
------------- -------------
TOTAL ASSETS $ 928,424 $ 817,545
============= =============
LIABILITIES AND STOCKHOLDERS'DEFICIT
Current Liabilities:
Senior secured notes payable - related parties $ 1,000,000 $ 500,000
Accrued interest - senior notes payable - related party 21,646 119,160
Secured convertible promissory notes, net of unamortized discount of $14,629
at December 31, 2005 -- 52,971
Demand note payable - bank 2,500,000 --
Accrued interest - demand note payable - bank 129,940 --
Senior convertible promissory notes payable - related party 2,480,000 --
Accrued interest - senior convertible promissory notes - related party 813,251 --
Convertible promissory note - related party 175,000 --
Stockholder loans - subordinated convertible promissory notes 385,000 225,000
Accrued interest stockholder loans 147,793 28,691
Accounts payable 1,055,622 881,345
Accounts payable and accrued expenses to related parties 659,000 231,328
Accrued expenses 285,277 269,968
Accrued compensation 470,283 420,100
Rescinded series B offering payable 42,000 18,920
Related party advances 82,000 --
Other note payable, includes accrued interest of $2,542 and $14,467
at December 31, 2004 and 2005 152,542 147,467
------------- -------------
Total Current Liabilities 10,399,354 2,894,950
------------- -------------
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 and 0 shares designated, issued and
outstanding (liquidation preference of $4,875,850) as of 2004 and 2005 49 --
Preferred Stock Series C, convertible, non cumulative, participating,
par value $.00001 per share; designated 50,000,000 shares, 3,623,000 and 0
issued and outstanding (liquidation preference of $724,600) as of 2004 and 2005 36 --
Common Stock, 120,000,000 shares authorized, $.00001 par value, issued and
outstanding, 414,073 at December 31, 2004 and 5,034,995 at December 31, 2005 4 51
Additional paid-in capital 8,377,140 18,167,605
Accumulated deficit (17,848,159) (20,245,061)
------------- -------------
Total Stockholders' Deficit (9,470,930) (2,077,405)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'DEFICIT $ 928,424 $ 817,545
============= =============
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
2004 2005
------------- -------------
Gross Sales $ 1,411,355 $ 1,208,279
Less: Discounts, Allowances and Promotional Payments 452,570 486,898
------------- -------------
Net Sales 958,785 721,381
Cost of Sales 737,642 687,167
------------- -------------
Gross Profit 221,143 34,214
Selling, General and Administrative Expenses 2,092,898 2,392,996
------------- -------------
Loss from Operations (1,871,755) (2,358,782)
Other Income (Expense):
Interest Expense (578,560) (430,216)
Interest Income -- 7,000
Gain on Forgiveness of Accounts Payable 60,258 151,995
------------- -------------
Total Other Income (Expense) - Net (518,302) (271,221)
------------- -------------
Net Loss Before Income Tax Benefit (2,390,057) (2,630,003)
Income Tax Benefit 258,476 233,101
------------- -------------
Net Loss $ (2,131,581) $ (2,396,902)
============= =============
Basic and Diluted Loss Per Share $ (10.26) $ (.82)
============= =============
Weighted Average Number of Common Shares Outstanding - Basic and Diluted 207,740 2,940,987
============= =============
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 2004 and 2005
2004 2005
------------- -------------
Cash Flow From Operating Activities:
Net Loss $ (2,131,581) $ (2,396,902)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation 42,120 19,960
Amortization of debt discount on notes payable -- 70,000
Accrued incentive stock grant -- 332,600
Gain on forgiveness of accounts payable (60,258) (151,995)
Stock issued for services -- 24,500
Provision for sales returns and allowances 452,570 486,898
Bad debt expense -- 4,109
Changes in Operating Assets and Liabilities:
Accounts receivable (405,833) (492,682)
Inventory 76,180 (88,230)
Prepaid expenses and other current assets (21,574) (10,789)
Deposits and other assets (400) --
Accounts payable 504,186 151,487
Accrued compensation 484,362 210,997
Accrued expenses 104,317 (15,763)
Accrued interest 496,461 350,763
Accounts payable to related parties 71,000 (427,672)
------------- -------------
Net Cash Used in Operating Activities (388,450) (1,932,719)
Cash Flow From Investing Activities:
Purchase of equipment and furniture (2,267) (442)
------------- -------------
Net Cash Used in Investing Activities (2,267) (442)
Cash Flow From Financing Activities:
Net proceeds from issuance of common stock 1,604,237
Reimbursement of (payment) of deferred offering costs (441,243) 346,243
Proceeds from secured convertible notes 63,580
Proceeds from senior note payable - related party 1,000,000
Repayment of shareholder loan (35,000)
Repayment of notes payable (17,000)
Repayment of Series B advances (23,080)
Proceeds from underwriter advance - related party 200,000
Repayment of underwriter advance - related party (200,000)
Proceeds from (repayment of) related party advances 55,000 (13,000)
Net Cash Provided By Financing Activities 613,757 1,925,980
------------- -------------
Increase (Decrease) in Cash and Cash Equivalents 223,040 (7,181)
Cash and Cash Equivalents at Beginning of Year 54,609 277,649
------------- -------------
Cash and Cash Equivalents at End of Year $ 277,649 $ 270,468
============= =============
Interest paid $ -- $ 1,625
============= =============
The Notes to Financial Statements are an integral part of these statements.
F-5
NUVIM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2004
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES C COMMON STOCK
--------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2003 4,875,850 $ 49 3,623,000 $ 36 155,073 $ 2
Shares issued in connection
with related party debt
extinguishment -- -- -- -- -- --
Common stock issued in
connection with service
agreement -- -- -- -- 30,000 --
Common stock issued in
connection with payment of
accounts payable -- -- -- -- 6,000 --
Common stock issued in
connection with accrued
compensation -- -- -- -- 147,866 1
Common stock issued in
connection with stockholder
loans -- -- -- -- 75,134 1
Net loss for the year ended
December 31, 2004 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 4,875,850 $ 49 3,623,000 $ 36 414,073 $ 4
============ ============ ============ ============ ============ ============
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT DEFICIT
------------ -------------- --------------
Balance at December 31, 2003 7,300,687 $ (15,716,578) $ (8,415,804)
Shares issued in connection
with related party debt
extinguishment 71,912 -- 71,912
Common stock issued in
connection with service
agreement -- -- --
Common stock issued in
connection with payment of
accounts payable 36,000 -- 36,000
Common stock issued in
connection with accrued
compensation 623,499 -- 623,500
Common stock issued in
connection with stockholder
loans 345,042 -- 345,043
Net loss for the year ended
December 31, 2004 -- (2,131,581) (2,131,581)
------------ -------------- --------------
Balance at December 31, 2004 $ 8,377,140 $ (17,848,159) $ (9,470,930)
============ ============== ==============
The Notes to Financial Statements are an integral part of these statements.
F-6
NUVIM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2005
PREFERRED STOCK PREFERRED STOCK
SERIES A SERIES C COMMON STOCK
---------------------------- --------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31, 2004 4,875,850 $ 49 3,623,000 $ 36 414,073 $ 4
Common stock issued in payment of
convertible promissory notes - related
parties 461,700 5
Common stock issued in payment of
accrued salaries 250,696 3
Common stock issued in payment of
senior notes payable - related parties 250,000 2
Common Stock issued in payment of
stockholder loans, subordinated
convertible promissory notes payable
and accrued interest 88,882 1
Common stock issued in payment of
advances - related party 23,000
Common stock issued in payment of
accounts payable 197,031 2
Common stock issued upon conversion of
convertible promissory note - related
party 245,000 2
Common stock issued, conversion of
Series A preferred stock (4,875,850) (49) 88,732 1
Common stock issued, conversion of
Series C preferred stock (3,623,000) (36) 65,881 1
Common stock and Warrants issued in
payment for media campaign 250,000 3
Warrants issued in connection with
secured convertible notes
Issuance of common stock, initial
public offering 2,700,000 27
Net loss for the year ended
December 31, 2005 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance at December 31 , 2005 -- $ -- -- $ -- 5,034,995 $ 51
============ ============ ============ ============ ============ ============
F-7
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT DEFICIT
-------------- -------------- --------------
Balance at December 31, 2004 $ 8,377,140 $ (17,848,159) $ (9,470,930)
Common stock issued in payment of convertible promissory notes - related
parties 6,141,522 6,141,527
Common stock issued in payment of accrued salaries 593,747 593,750
Common stock issued in payment of senior notes payable - related parties 499,998 500,000
Common Stock issued in payment of stockholder loans, subordinated convertible
promissory notes payable and accrued interest 118,113 118,114
Common stock issued in payment of advances - related party 69,000 69,000
Common stock issued in payment of accounts payable 251,404 251,406
Common stock issued upon conversion of convertible promissory note - related
party 244,998 245,000
Common stock issued, conversion of Series A preferred stock 48 --
Common stock issued, conversion of Series C preferred stock 35 --
Common stock and Warrants issued in payment for media campaign 249,997 250,000
Warrants issued in connection with secured convertible notes 17,366 17,366
Issuance of common stock, initial public offering 1,604,237 1,604,264
Net loss for the year ended December 31, 2005 -- (2,396,902) (2,396,902)
-------------- -------------- --------------
Balance at December 31 , 2005 $ 18,167,605 $ (20,245,061) $ (2,077,405)
============== ============== ==============
The Notes to Financial Statements are an integral part of these statements.
F-8
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
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. Spencer Trask Specialty
Group, LLC ("ST") is the controlling stockholder of SMBI. SMBI and ST
collectivelty are significant stockholders 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 21 A).
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 $2,131,581 and $2,396,902 for the
years ended December 31, 2004 and 2005, respectively. The Company has negotiated
extended terms until a subsequent financing on approximately $1,020,000 of notes
payable, stockholder loans, and accrued interest. Management also expects
operating losses to continue in 2006 and 2007. 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 sales 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 financing, 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.
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.
Accounts receivable are recorded at their net realizable value. The Company
estimates an allowance for doubtful accounts, sales returns and allowances based
on historical trends and other criteria. At December 31, 2004 and 2005, these
allowances approximated $26,700 and $27,700, respectively. No amounts were
recorded as bad debt expense for the year ended December 31, 2004 as all
allowances represented sales returns or promotional allowances. Bad debt expense
was approximately $4,100 for the year ended December 31, 2005.
C. Inventories
Inventories, which are predominantly raw materials, are stated at the lower of
cost (first-in, first-out method) or market. A provision for excess or obsolete
inventory is recorded at the time the determination is made. For finished goods,
inventory that is within 30 days of its expiration date is charged to cost of
sales.
F-9
D. Deferred Offering Costs
The Company incurred deferred costs incurred in connection with an initial
public offering of its common stock. Amounts deferred were offset against the
gross proceeds (recorded as additional paid in capital) upon consummation of the
offering on June 24, 2005.
The Company also incurred deferred financing costs during 2005 and are being
amortized over the life of the debt, in this case six months. The unaudited
portion is recorded in other current assets.
E. Debt Extinguishments
The Company accounts for debt extinguishments in accordance with Financial
Accounting Standards Board Statement 15 "Accounting by
Debtors and Creditors for Troubled Debt Restructurings". Related party debt
extinguishments are recorded as increases to paid in capital in accordance with
Accounting Principles Board Opinion 26.
F. Revenue Recognition
The Company records revenue at the time the related products are received by the
customer from the public warehouse used by the Company and the risk of ownership
has passed to the customer. A provision for estimated product returns,
promotional allowances and cash discounts based on the Company's historical
experience is recorded during the period of sale.
G. Promotional 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 reimburses retailers for
coupon redemptions, and provides credits for product which has not been sold by
its expiration date. These allowances and credits are reflected as a reduction
of gross sales in accordance with Emerging Issues Task Force ("EITF") No. 01-09
"Accounting for Consideration Given by a Vendor to a Customer".
H. Freight Costs
In accordance with EITF No. 00-10, "Accounting for Shipping and Handling Fees
and Costs," reimbursement of freight charges are recorded in net sales and
unreimbursed freight costs are recorded as selling general and administrative
expenses. For the years ended December 31, 2004 and 2005, freight-out costs
approximated $172,000 and $251,000, respectively, and have been recorded in
selling, general and administrative expenses.
I. 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 (3-5 years).
J. Stock-Based Compensation (Also See Note 2 R - Recent Accounting
Pronouncements)
The Company accounts for employee stock-based compensation in accordance with
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" (SFAS No. 123) which allows stock options and similar instruments
issued to employees to be valued under the principles of ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and the pro forma effect on net loss
and loss per share as if the fair value based method had been applied to be
disclosed supplementally. Under APB Opinion No. 25 employee stock options are
accounted for using the intrinsic method, where compensation expense is recorded
on the grant date only if the current market price of the underlying stock
exceeds the exercise price of the option. Incentive stock grants are recorded at
the quoted market price on the measurement date.
Equity instruments issued to non-employees are accounted for in accordance with
SFAS No. 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. For equity instruments, including stock options,
issued to non-employees, the fair value of the equity instruments or the fair
value of the consideration received, whichever is more readily determinable, is
used to determine the value of services or goods received and the corresponding
charge to operations. (See notes 18 F for a discussion of time and valuation
assumptions used to value options and warrants.)
F-10
SFAS No. 123 established accounting and disclosure requirements using a fair
value-basis method of accounting for stock-based employee compensation plans.
Had the Company elected to recognize compensation cost based on fair value of
the stock options at the date of grant under SFAS No.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.
YEAR ENDED
DECEMBER 31,
----------------------------
2004 2005
------------ ------------
Net loss, as reported $ 2,131,581 $ 2,396,902
Net loss, pro forma $ 2,143,042 $ 3,191,178
Net loss per share, as reported $ (10.26) $ (.82)
Net loss per share, pro forma $ (10.32) $ (1.09)
The pro forma results above are not intended to be indicative of, or a
projection of, future results.
K. 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, 2004 and 2005,
advertising and promotion expense was approximately $687,000 and $477,000,
respectively.
L. 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."
M. 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 affect the amounts reported in the financial statements and
accompanying notes including the disclosure of contingent assets and
liabilities. These estimates include, but are not necessarily limited to,
accounts receivable allowances, depreciation and coupon liability estimates.
Actual results could differ from those estimates.
N. 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
potentially dilutive securities, including options, convertible notes,
convertible preferred stock and warrants have been excluded as common stock
equivalents and diluted loss per share has not been presented as such securities
are antidilutive due to the Company's net loss for all periods presented. At
December 31, 2005, the Company had warrants to purchase 7,423,937 shares of
common stock (see note 18 E) and employee stock options (see note 18 F) to
purchase 1,643,316 shares of common stock outstanding which are not included in
the calculation.
O. 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, 2004 and December 31, 2005 the Company has not
recognized any impairment charges for long lived assets.
F-11
P. 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 two customers during the year ended December 31, 2004 approximated 14%
and 13% of sales. Sales to four customers during the year ended December 31,
2005 approximated 21%, 14%, 11% and 10% of sales.
Accounts receivable from two customers at December 31, 2004 approximated 21% and
16% of accounts receivable, and four customers at December 31, 2005 approximated
35%, 13%, 12% and 10%, respectively
One outside vendor manufactures all of the Company's finished goods. During the
years ended December 31, 2004 and 2005, manufacturing costs of approximately
$146,000 and $217,500 were incurred at this vendor. There was no amount due to
this vendor at December 31, 2004 and 2005.
See note 21a for purchase concentrations
Q. Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and debt. 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.
R. Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Correction ("SFAS 154"), which replaces Accounting Principles Board
Opinions No. 20 "Accounting Changes" and SFAS No 3, "Reporting Accounting
Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28."
SFAS 154 provides guidance on accounting for and reporting of accounting changes
and error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005 and is required to be adopted by Nuvim Inc. in the first
quarter of fiscal 2006. The Company is currently evaluating the effect that the
adoption of SFAS 154 will have on its consolidated results of operations and
financial condition, but does not expect it to have a material impact.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asst Retirement Obligations" in March 2005. FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement obligation if
the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. The Company does not expect this
guidance to have a material affect on its financial statements.
In December 2004, the FASB revised FASB Statement No. 123, Accounting for
Stock-Based Compensation. This Statement supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity's equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment
transactions and requires such statement be recorded at fair value. This
Statement does not change the accounting guidance for share-based payment
transactions with parties other than employees provided in Statement 123 as
originally issued 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 or Services." It applies to the Company's first reporting period
in 2006. The impact of the adoption of Statement No. 123 (revised 2004) is
expected to have a material impact on results of operations (see note 2 J).
F-12
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.
S. Reclassifications
Certain reclassifications were made to the 2004 financial statements in order to
conform to the 2005 financial statements. Such reclassifications had no effect
on prior year's results of operations.
NOTE 3 - INITIAL PUBLIC OFFERING
In June 2005, the Company completed an initial public offering ("IPO") selling
2,700,000 units at a price of $1.00 per unit to the public. Each unit consisted
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 net proceeds from the sale of the
2,700,000 units were approximately $1,604,000 after deducting the underwriting
discount and offering expenses.
The common stock and Class A and Class B public warrants traded only as a unit
until July 21, 2005 when the unit separated, after which the common stock, the
Class A public warrants and the Class B public warrants began trading
separately.
Class A public warrants . The Class A public warrants included in the units
became exercisable on July 21, 2005. The exercise price of a Class A public
warrant is $1.50. The Class A public warrants expire on June 20, 2010, the fifth
anniversary of the effective date of the IPO.
The Company has the right to redeem the Class A public warrants at a redemption
price of $0.25 per warrant, subject to adjustment in the event of stock splits,
reverse stock splits and other similar events of recapitalization. The
redemption right arises if the last reported sale price of the Company's common
stock equals or exceeds $2.00 for five consecutive trading days ending prior to
the date of the notice of redemption. The Company is required to provide 30 days
prior written notice to the Class A public warrant holders of the Company's
intention to redeem the warrants.
Class B public warrants . The Class B public warrants included in the units
became exercisable on July 21, 2005. The exercise price of a Class B public
warrant is $2.00. The Class B public warrants expire on June 20, 2010, the fifth
anniversary of the closing of the IPO. The Company does not have the right to
redeem the Class B public warrants.
Underwriters warrants . The Company issued a warrant to purchase 270,000 shares
of common stock in connection with the offering. The exercise price of the
underwriters warrants is $1.20. The warrant expires on June 20, 2010, the fifth
anniversary of the closing of the IPO.
F-13
NOTE 4 - DEBT EXTINGUISHMENTS CONCURRENT WITH INITIAL PUBLIC OFFERING
On June 24, 2005, the Company issued 1,116,611 shares of common stock in payment
of notes payable, accrued interest, accounts payable, and accrued salaries due
to executive officers at a debt conversion value per share of $1.00 to $13.00.
The debt conversion transactions were contingent on the Company completing a
public offering of its common stock. The shares issued were subject to lock-up
agreements with the Company's underwriter of six months to one year. The fair
market value of the shares issued is assumed to be equal to the initial public
offering price of one "Unit" in the initial public offering completed on June
24, 2005. The amount of indebtedness extinguished in excess of the fair value of
shares issued was recorded as gain on extinguishment of debt in accordance with
the provisions of SFAS No. 15, Troubled Debt Restructurings. The amount of
related party indebtedness extinguished in excess of the fair value of shares
issued was recorded as additional paid in capital in accordance with APB 26,
paragraph 20. The table below summarizes debt extinguishments consummated
concurrently with the initial public offering of the Company's common stock.
EXCESS OF
EXTINGUISHED DEBT
OVER FAIR VALUE
---------------------------
ADDITONAL
SHARES FAIR DEBT PAID IN
ISSUED VALUE EXTINGUISHMENT CAPITAL GAIN
------------ ------------ -------------- ------------ ------------
Senior secured notes-related parties 461,700 $ 461,700 $ 6,141,527 $ 5,679,827 $ --
Accrued salaries 250,696 250,696 593,750 343,054 --
Senior secured notes payable-related parties 250,000 250,000 500,000 250,000 --
Subordinated notes payable and accrued interest 88,882 88,882 266,639 95,899 81,858
Related party advances 23,000 23,000 69,000 46,000
Accounts payable 42,333 42,333 109,000 66,667
------------ ------------ -------------- ------------ ------------
Total 1,116,611 $ 1,116,611 $ 7,679,916 $ 6,414,780 $ 148,525
============ ============ ============== ============ ============
NOTE 5 - INVENTORY
Inventory consists of the following:
DECEMBER 31,
-----------------------
2004 2005
---------- ----------
Raw materials $ 62,358 $ 93,665
Work In Progress -- 22,087
Finished goods 22,126 56,962
---------- ----------
Total $ 84,484 $ 172,714
========== ==========
NOTE 6 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consists of the following:
DECEMBER 31,
-----------------------
2004 2005
---------- ----------
Prepaid Advertising $ -- $ 250,000
Prepaid Insurance 53,000 51,730
Debt Financing Costs -- 13,259
Other Prepaids and Advance Payments 8,766 13,926
---------- ----------
Total $ 61,766 $ 328,915
========== ==========
The Advertising program began in January 2006, the amount will be expensed as it
is used over the next twelve months.
F-14
NOTE 7 - EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following:
DECEMBER 31,
-----------------------
2004 2005
---------- ----------
Equipment $ 155,431 $ 155,431
Furniture and fixtures 54,522 54,964
209,953 210,395
Less: accumulated depreciation (188,933) (208,893)
---------- ----------
Equipment and furniture, net $ 21,020 $ 1,502
========== ==========
Depreciation expense for years ended December 31, 2004 and 2005 was $42,120 and
$19,960, respectively.
NOTE 8 - SENIOR NOTES PAYABLE - RELATED PARTIES
On July 26, 2004, the Company entered into a loan agreement with a stockholder
of the Company who is also a Company spokesperson, and one of the Company's
directors. The loan agreement provided for borrowings up to $1,000,000 in the
form of Senior Notes Payable issued in four tranches, each of which was
conditioned upon completion of specified actions or events. As of December 31,
2004, the Company had received the full amount of $1,000,000 under the
agreement. The loan accrues interest at 12% per annum, unless it is in default,
in which case the interest increases to 18%. 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 the lenders. The principal and accrued
interest were originally due and payable on the earlier of the consummation of
an initial public offering or January 1, 2005. The notes were not paid as of
January 1, 2005 which constituted an event of default under the agreement. Under
an event of default, the lenders had the right to, but did not make, a demand
for payment of the notes. In May 2005, the noteholders agreed to convert
outstanding principal of $500,000, into 250,000 shares of common stock, upon
completion of the initial public offering of the Company's common stock on June
24, 2005. The holders of the notes agreed not to sell shares of stock received
in the transaction for a period of six months after the initial public offering.
The noteholders also agreed to extend the maturity of the remaining notes
aggregating $500,000 and all accrued interest thereon to November 2006, bearing
interest at 12%.
The Company has recorded $21,646 and $97,514 as interest expense on the notes in
2004 and 2005, respectively. Accrued interest was $ 21,646 at December 31, 2004
and $119,160 at December 31, 2005.
As an additional condition of the loan agreement, the Company entered into a
second amended services agreement with the spokesperson. In connection with the
second amended services agreement, the Company issued 30,000 shares of common
stock, a warrant to purchase $650,000 of common stock, and a warrant to acquire
up to 9.9% of the Company's common stock under certain conditions. The common
stock issued, and stock underlying the warrants were to be forfeited by the
spokesperson if obligations under the service agreement were not met. Therefore,
no performance commitment had been met, as of December 31, 2004 and 2005, and no
value had been recorded for the shares and warrants in accordance with EITF
No.96-18, Accounting for Equity Instruments That Are Issued To Other Than
Employees For Acquiring, or In Conjunction With Selling Goods or Services. The
performance commitment under the contract had been met as of January 31, 2006,
and accordingly the Company expects to record a non cash charge of approximately
$250,000 for services performed under the agreement during the first quarter of
2006.
The warrant issued to the spokesperson to acquire up to 9.9% of the total
fully-diluted issued and outstanding common stock of the Company under certain
circumstances (see note 18 E.) was deemed to have no value. The warrant allowed
the holder, to acquire an additional number of shares of Common Stock, to bring
his total holdings to 9.9%, after the consummation of an initial public offering
of its common stock, at the initial public offering price, after deducting any
existing equity holdings at that date. After the completion of the Company's
initial public offering of its common stock on June 24, 2005, it was determined
that no shares were issueable under the warrant.
As an additional condition to the loan agreement the Company issued a
convertible note in payment of past due fees (see note 12). The loan agreement
also required the formation of NuVim Powder LLC, of which the Company
spokesperson was given a 25% ownership interest. During 2004 and 2005 Nuvim
Powder LLC was an inactive company.
The spokesperson and one of the Company's directors participated in the loans
under the agreement equally. In 2004, the spokesperson and Company Director
entered into an agreement providing for an equal share in the warrants and
ancillary agreements issued in connection with the loan agreement. Therefore,
the Company Director has been given a 12.5% interest in the NuVim Powder Company
and a 50% interest in both of the warrants issued in connection with the loan
agreement and second amended services agreement.
F-15
NOTE 9 - DEMAND NOTE PAYABLE - BANK
In 2001 the Company issued a note payable to a bank which was due on demand with
interest due monthly at the LIBOR Index plus 1.25% (3.53% at December 31, 2004).
The note was secured by all of the assets of the Company and guaranteed by a
stockholder. The Company had not paid monthly interest due on the note since
March 31, 2003 and was in default of the loan terms as of December 31, 2004. In
May of 2005, the loan and all unpaid interest thereon was assigned to the
guarantor by the lender. The guarantors agreed to exchange the $2,500,000
principal balance, accrued interest thereon, aggregating $179,498, and
$3,462,029 of outstanding principal and interest on Senior Convertible
Promissory
Notes due to them in exchange for 461,700 shares of common stock, see note 4 and
11. The $5,679,827 excess of the amount of related party indebtedness
extinguished in excess of the fair value of shares issued was recorded as
additional paid in capital in accordance with APB 26.
Interest expense on the demand note was $70,421 and $49,558 for the years ended
December 31, 2004 and 2005, respectively, and accrued interest payable on the
note was $129,940 at December 31, 2004.
NOTE 10 - SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
On December 23, 2005 the Company issued Secured Convertible Promissory Notes,
due June 24, 2006. The notes have a face amount aggregating $67,600, and were
discounted for the first six months of interest, resulting in net proceeds of
$63,580. The notes bear interest at a rate of 12% annually, and 18% annually
upon an event of default. Upon an event of default 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 common stock calculated by dividing the amount of
debt and accrued interest by $.40 per share. The notes are redeemable prior to
maturity at 110% of their face value and are collateralized by all the assets of
the Company. Since the notes are only convertible upon an event of default the
Company calculated the value of the beneficial conversion feature of the notes
of $11,200 on the issuance date, but will not record it as debt discount until
the event of default occurs in accordance with EITF 00-27 and 98-5.
The Company also issued warrants to purchase 67,600 shares of common stock to
the note holders and 24,950 shares of common stock to the placement agent. The
warrants have a three and five year term, respectively and are exercisable at
$.40. Upon an event of default, the Company has agreed to issue 33,800
additional warrants to the investors at an exercise price of $.375 and adjust
the exercise price on the existing 67,600 warrants to $.375. The $11,200 value
of the warrants for 67,600 shares was recorded as debt discount and is being
amorrtized over the six month term of the notes. Additionally, the Company
recorded the $6,165 fair value of the warrant issued to the placement agent and
$7,630 in fees paid to the placement agent as debt issuance costs which are
being amortized over the life of the note. The Company recognized $1,128 in
interest expense, including amortization of discounts and fees, in 2005 related
to the notes.
NOTE 11 - SENIOR CONVERTIBLE PROMISSORY NOTES PAYABLE - RELATED PARTY
Senior notes payable related party consisted of a series of notes aggregating
$2,480,000 issued to a group of related investors in the Company's common and
preferred stock, and guarantor of the Demand Note Payable - Bank. The notes bore
interest at a rate of 8% annually, and 14% annually upon an event of default.
Each note holder had 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. The notes were collateralized by all the assets of the company. The notes
had maturity dates from December 31, 2004 to September 3, 2005, and were in
default at December 31, 2004. In May of 2005, the noteholders agreed to accept
461,700 shares of common stock in full settlement of $2,480,000 in principal and
$982,029 in accrued interest due on the Senior Convertible Promissory Notes, and
$2,679,498 of Unpaid principal and accrued interest on the Demand Note Payable -
Bank (see note 4&9). The $5,679,827 excess of the amount of related party
indebtedness extinguished in excess of the fair value of shares issued was
recorded as additional paid in capital in accordance with APB 26.
Interest expense related to the notes, was $340,057 and $168,778 for the years
ended December 31, 2004 and 2005, respectively. Accrued interest on these notes
was $813,251 at December 31, 2004.
NOTE 12 - CONVERTIBLE PROMISSORY NOTE - RELATED PARTY
On July 26, 2004, The Company issued a convertible promissory note in the amount
of $175,000 in payment of accounts payable owed to the Company spokesperson and
in consideration for his forbearance until a "maturity date," as defined in the
note. The note accrued interest at the rate of 10% per annum until its original
maturity date of January 1, 2005, and 15% thereafter. The note was automatically
convertible into $245,000 of common stock or unregistered units identical to the
units sold at the initial public offering price, provided the offering was
consummated on or before June 30, 2005 (original date of December 31, 2004 was
previously extended by agreement to March 31, 2005 and subsequently to April 30,
2005 and June 30, 2005). If the offering did not occur by
F-16
June 30, 2005, the convertible note became convertible into $245,000 of common
stock, at the option of the holder, at the conversion price of $1.00 per share,
subject to certain contingencies defined in the Services Agreement. In
accordance with EITF 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features on Contingently Adjustable Conversion Ratios,"
the Company had not recorded the beneficial conversion feature of the note as of
December 31, 2004, because its terms change based on the occurrence of future
events outside the control of the holder of the convertible note. The note
automatically converted into 245,000 shares of common stock upon the closing of
the Company's initial public offering of common stock on June 24, 2005.
Accordingly, $49,753 related to the beneficial conversion was recorded as
interest expense at that date.
The Company recorded $7,486 as interest expense on the convertible note in 2004
and $62,514, including the beneficial conversion feature in 2005. The $7,486 of
accrued interest was included in accrued expenses at December 31, 2004
NOTE 13 - STOCKHOLDER LOANS - SUBORDINATED CONVERTIBLE PROMISSORY NOTES
Stockholder Loans - Subordinated Convertible Promissory Notes consists of a
series of identical notes issued on September 13, 2002 in replacement of
outstanding demand notes, issued in June 2001, of the same principal amount. The
notes had a maturity date of December 31, 2002, based on certain factors and
bear interest at a rate of 8% and default interest at 14%. The notes are
subordinated in right of payment to the senior notes payable-related parties.
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 the notes
shall be paid to the holder in cash on the conversion date. The notes were in
default as of December 31, 2002. However, in May of 2005, the holders of notes
aggregating $225,000 that remain outstanding as of December 31, 2005, agreed to
not demand payment until a public offering of the Company's common stock,
subsequent to the initial public offering, or the Company achieving $1,000,000
in profits.
In April 2005, two holders of the Company's subordinated convertible promissory
notes agreed to convert outstanding principal and accrued interest at April 30,
2005, aggregating $179,813, into 59,939 shares of common stock, if the Company
completed an initial public offering of its common stock. The holders of the
notes agreed not to sell shares of stock received in the transaction for a
period of six months after the initial public offering.
In May 2005, three holders of the Company's subordinated convertible promissory
notes agreed to convert outstanding accrued interest at April 30, 2005,
aggregating $86,826, into 28,943 shares of common stock, and to extend the
maturity date of notes with an aggregate principal balance of $200,000 to the
earlier of a public offering of the Company's common stock subsequent to the
initial public offering or the Company generating an annual profit of
$1,000,000. The holders of the notes agreed not to sell the shares of stock
received in the transaction for a period of six months after the initial public
offering.
In April 2005, one holder of the Company's subordinated convertible promissory
notes agreed to forgive $10,671 of interest accrued on his note, if the Company
pays the $25,000 outstanding principal balance of the note out of the proceeds
of a public offering of its common stock subsequent to this initial public
offering. The holder has agreed not to sell the shares received in the
transaction for a period of six months after the initial public offering.
In July 2005, the Company paid $35,000 in principal and $11,340 in accrued
interest due on one of the notes.
Interest expense on stockholder loans was $85,983 and $33,877 for the years
ended December 31, 2004 and 2005, respectively. Accrued interest payable was
$147,793 and $28,691 as of December 31, 2004 and 2005, respectively.
NOTE 14 - ACCRUED COMPENSATION
Accrued compensation consists of unpaid salary and incentive stock grants to be
issued to certain officers of the Company. Compensation expense related to
accrued and unpaid salary and bonus approximated $470,000 and $420,100 for the
years ended December 31, 2004 and 2005, respectively. In 2005, three executive
officers converted accrued salaries owed to them through May 31, 2005,
aggregating $593,750, into 250,696 shares of common stock, concurrently with the
public offering the Company's common stock. The executive officers agreed not to
sell the shares of stock received in the transaction for a period of six months
after the initial public offering.
The Company has recorded the $343,054 excess of the accrued salaries settled
over the fair value of the stock issued as additional paid in capital in
accordance with APB 26, paragraph 20.
F-17
During 2005, three executives agreed to allow the Company to defer payment of a
portion of their salaries, aggregating $87,500 until December 31, 2005. At
December 31, 2005 the executives agreed to extend payment of the salaries until
January, 2007, and the Board agreed that if the executives and the board
mutually agree to convert their salary into restricted common stock in the
future, it will not be at a value higher than the fair value of similar equity
instruments at December 31, 2005, which is estimated to be, $.20.
The Company did not adopt a cash bonus plan in 2005. In March of 2006, the Board
of Directors authorized the compensation committee to grant an aggregate of
831,500 shares of unregistered stock to four executives as an incentive and in
lieu of a 2005 bonus plan. The Company has recorded the stock grant as accrued
compensation in 2005 at a value of $332,600 based on the quoted market price of
a share of common stock at December 31, 2005 in accordance with APB Opinion 25.
When these shares are issued, the liability and stockholders deficit will be
reduced.
NOTE 15 - 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.
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 investors representing $78,500
elected a cash refund. The Company paid an additional $23,080 of the refunded
proceeds due during 2005 and has remaining liability of $18,920 at December 31,
2005.
NOTE 16 - RELATED PARTY ADVANCES
Related party advances consist of short term advances that are due to the lender
on demand. At December 31, 2004, the balance consisted of $20,000 due to the
Company's underwriter and $62,000 due to an executive officer of the Company.
The amount due to the underwriter accrued interest at 10% per annum. The amount
due to the executive officer did not accrue interest. During 2005, an additional
$31,000 was advanced to the Company by the officers of the Company. Also in 2005
one officer agreed to accept 23,000 shares of common stock in settlement of
$69,000 of advances, and remaining advances of $24,000 were repaid . The $46,000
excess of the debt retired over the fair market value of the common stock issued
was recorded as additional paid in capital in accordance with APB 26, paragraph
20 (see note 4).
Additionally, In May 2005, the Company borrowed $200,000 from the investment
bank that managed the initial public offering of its common stock. The note was
payable upon the closing of the stock offering if closed by May 31, 2005, or on
demand thereafter. The note did not bear any interest and was repaid upon
closing of the initial public offering on June 24, 2005.
NOTE 17 - OTHER NOTES PAYABLE
Other notes payable consists of notes payable issued to a law firm in payment of
past due legal fees and accrued interest theron. On August 20, 2004, the Company
agreed to pay $30,000 and issue two promissory notes for $120,000 and $30,000,
respectively, payable the earlier of the consummation of the proposed public
offering or February 5, 2005, in payment of past due accounts payable of
$240,000. The notes bore interest at 5% and default interest at 7%. The Company
recognized a gain on the extinguishment of this debt in the amount of
approximately $60,000 during the year ended December 31, 2004. The notes had not
been paid as of their respective maturity dates. Therefore, on February 3, 2005
the Company agreed to issue a replacement $150,000 demand note, payable upon the
earlier of a demand by the lender or an initial public offering of the Company's
common stock. In June 2005, the holder of the note agreed to defer payment to
the next financing completed by the Company after the initial public offering,
provided the Company make a $5,000 payment upon an initial public offering of
common stock and pays $2,000 each month thereafter. The Company paid $17,000
under the agreed payment schedule in 2005. The note bears interest at 10% per
annum. Interest expense related to the note was $2,542 and $11,925 for 2004 and
2005, respectively. Accrued interest was $2,542 and $14,467 at December 31, 2004
and 2005.
F-18
NOTE 18 - 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 years 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 of 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 into one
share of common stock, 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.
The Series A preferred stock holders voted to convert their shares to common
stock upon effectiveness of the Company's initial public offering of its common
stock on June 21, 2005. There are no shares of Series A preferred stock
outstanding as of December 31, 2005.
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 into one
share of common stock, at any time by the holder, or automatically in the event
of a merger or public offering 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.
The Series C preferred stock holders voted to convert their shares to common
stock upon effectiveness of the Company's initial public offering of its common
stock on June 21, 2005. There are no shares of Series C preferred stock
outstanding as of December 31, 2005.
F-19
E. Warrants
The following is a summary of warrants outstanding at December 31, 2005:
NUMBER OF
SHARES OF
COMMON
STOCK EXERCISE
PERTAINING TO PRICE
DATE ISSUED BASIS FOR WARRANT ISSUANCE WARRANT PER SHARE
- --------------- ------------------------------------------------------------ ------------- ---------
November 2000 Placement agent fees for series A preferred stock (a)(b) 8,714 $ 55.00
June 2001 Stockholder demand notes payable (e) 8,823 $ 55.00
November 2002 Placement agent fees for series C preferred stock (b)(f) 1,273 $ 11.00
March 2003 Accrued compensation 2,577 $ 11.00
September 2004 Second amended services agreement (g) (b) 650,000 $ 1.00
July 2004 Amended services agreement (h) -- --
June 2005 Conversion of note payable(d) 245,000 $ 1.50
June 2005 Conversion of note payable(d) 245,000 $ 2.00
June 2005 Class A warrants IPO (c) (d) 2,700,000 $ 1.50
June 2005 Class B warrants IPO(d) 2,700,000 $ 2.00
June 2005 Underwriters warrant(d) 270,000 $ 1.20
November 2005 Media Campaign (k) 250,000 $ 1.50
November 2005 Media Campaign (k) 250,000 $ 2.00
December 2005 Secured Convertible Notes (i) 67,600 $ .40
December 2005 Secured Convertible Notes (J) 24,950 $ 40
- ----------
(a) Expires November 2007
(b) Includes anti-dilution agreement and cashless exercise right.
(c) Callable at $.25 if common stock trades at $2.00 for five days.
(d) Expires June 24, 2010.
(e) Expires September 2006.
(f) Expires the June 20, 2008.
(g) Expires September 14, 2014.
(h) Warrant to purchase an amount of common stock to bring spokesperson's total
holdings to 9.9% of outstanding fully-diluted common shares of the Company
immediately after its initial public offering. The spokesperson's holdings
exceeded 9.9% immediately after the offering. Therefore, no additional
shares were issueable under the warrant.
(i) Expire December 22, 2008
(j) Expire December 22, 2010
(k) Expires June 24, 2010
F-20
F. Stock Options
The Company adopted three Stock Option Plans (the "Plans") in 2000, 2001 and
2002 and two stock option plans in 2005 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 1,735,273 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:
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
-------------- --------------
Outstanding December 31, 2003 33,428 $ 19.38
Cancelled (18,112) $ 24.25
Issued -- --
--------------
Outstanding December 31, 2004 15,316 $ 19.38
Cancelled (17,500) $ 24.25
Issued 1,645,500 .92
--------------
Outstanding December 31, 2005 1,643,316 $ 1.01
==============
Exercisable at December 31, 2004 13,116 $ 14.04
==============
Exercisable at December 31, 2005 1,150,816 $ 1.01
==============
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 6 and
10 years as of December 31, 2004 and December 31, 2005, respectively. The
weighted average grant date fair value of options issued in 2005 was $.70.
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 Company's issued options and
warrants were estimated at the date of grant using the fair value method with
the following assumptions:
Assumptions:
Risk-free rate 3.5%-4.85%
Dividend yield 0
Volatility factor of the expected market .10% to 90%
Price of the Company's common stock $ .77 to 11.00
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.
F-21
G. Stock Issued in Payment of Accounts Payable and for Payment of Goods and
Services
On November 3, 2005 the Company issued 50,000 shares of common stock in payment
of outstanding legal fees of $105,794 incurred in connection with the Company's
initial public offering of common stock. The fees were originally recorded as a
reduction of the net proceeds of the Company's initial public offering of common
stock. Therefore, the excess of the amount of accounts payable over the fair
market value of common stock issued of $83,294 was recorded as an increase in
paid in capital. The Company also issued 20,000 shares as payment for legal fees
for the third and fourth quarter of 2005 at a fair value of $6,000.
On November 3, 2005 the Company issued 250,000 shares of common stock and a
warrant to purchase 250,000 shares of common stock at $1.50 and 250,000 shares
of common stock at $2.00 with terms substantially the same as its Class A and
Class B warrants, in payment for a one year media advertising program. The fair
value of the advertising program was readily determinable as $250,000.
Therefore, the company recorded prepaid advertising and additional paid in
capital of $250,000 at December 31, 2005 in accordance with 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".
On November 3, 2005 the Company issued 34,697 shares of common stock at fair
value in payment of outstanding legal fees aggregating $15,614.
On November 3, 2005 the Company issued 50,000 shares of common stock at fair
value as compensation for the Company's corporate secretary for the six month
period ending December 31, 2005.
In November 2004, several vendors also agreed accept 6,000 shares of common
stock at its estimated fair value of $6.00 per share in payment of $36,000 of
accounts payable. The amount has been recorded as additional paid in capital as
of December 31, 2004. See Note 19B for revised terms.
H. Stock Reserved
At December 31, 2005, the Company had reserved shares of its common and
preferred stock as follows:
COMMON PREFERRED
-------------- --------------
Conversion Secured Convertible Notes 169,000
Conversion of Accrued Compensation 81,819
Exercise of common stock warrants 7,423,937
Exercise of stock options 1,735,273
Conversion of subordinated convertible promissory notes 20,455 1,125,000
-------------- --------------
Total 9,430,484 1,125,000
============== ==============
I. Nuvim Powder LLC
On August 23, 2004, NuVim Powder LLC was formed as a condition to a loan
agreement with a director and investor, who was also a spokesperson for the
Company. NuVim Powder LLC was owned 51% by the Company, 12.5% by the
spokesperson, 12.5% by the director and 24% by a related vendor providing
production services to the Company, and was to be the exclusive distributor of
food powder products developed by the Company. The LLC was not active in 2004
and 2005. In February 2006, the Company acquired a 24% interest in the LLC not
previously owned by it in exchange for a warrant to acquire 50,000 shares of
Nuvim Inc. common stock at a price of $1.00. The warrant has a term of ten
years.
NOTE 19 - INCOME TAXES
Based on the Company's operating losses, no provision for income taxes have been
provided for the years ended December 31, 2004 and 2005. As of December 31, 2004
the Company had net operating losses of approximately $16,000,000, which expire
though the year 2024. Due to the Company's initial public offering there is a
change in ownership in accordance with relevant provisions of the Internal
Revenue Code, which are expected to limit the realization of certain net
operating losses.
At December 31, 2003 and 2004, the Company had deferred tax assets of
approximately $4,800,000 and $5,440,000, 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.
F-22
In December 2004 and 2005, the Company received proceeds from the sale of the
rights to approximately $3,340,000 and $3,075,264 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
$300,564 and $276,774 in 2004 and 2005, 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
$258,476 and $238,026 in 2004 and 2005, respectively, related to the sale and
accordingly recorded them as a tax benefit in the year received.
NOTE 20 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
DECEMBER 31,
---------------------------
2004 2005
------------ ------------
Adjustment for related party debt extinguishments through equity $ 71,912 $ --
Issuance of common stock in payment of accounts payable $ 36,000 $ 29,644
Issuance of common stock in payment of accrued compensation $ 623,500 $ --
Issuance of common stock in payment of stockholder loans and accrued interest $ 345,043 $ --
Issuance of note payable for accounts payable-related party $ 175,000 $ --
Issuance of note payable for accounts payable $ 150,000 $ --
Assignment of senior secured notes payable and accrued interest to related party $ -- $ 2,679,498
Automatic conversion of notes payable $ -- $ 245,000
Debt extinguished through issuance of common stock - see note 6 $ -- $ 7,679,916
Issuance of common stock for paid advertising $ -- $ 250,000
Issuance of common stock for accounts payable $ -- $ 117,938
Warrants issued for convertible note debt discount $ -- $ 17,366
Settle deferred offering costs $ -- $ 95,000
NOTE 21 - 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 exclusive licensing agreement can be cancelled by SMBI if the
Company does not meet its annual purchasing commitment under the supply
agreement (see below), in which case, SMBI agrees to negotiate in good faith for
a non-exclusive supply agreement. Royalty expense of approximately $21,000 and
$10,000 was recorded in the years ended December 31, 2004 and 2005,
respectively, of which $21,000 and $10,000 are payable to SMBI at December 31,
2004 and 2005, respectively.
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, 2004 and 2005, the
Company purchased approximately $47,000, and $98,000, respectively, of the milk
and whey protein concentrates 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.
The license and supply agreements are subject to the Company maintaining minimum
purchases of SMBI's proprietary immune whey protein concentrate. The agreement
requires the Company to purchase minimum amounts of whey protein which are
determined annually by mutual agreement. The Company has met its minimum
purchase agreement in 2005 of three metric tons (approximately $98,000). The
2006 commitment is approximately four metric tons ($172,000) in 2006. In each
subsequent year the minimum purchase commitment is the greater of the prior
year's actual purchases or 115% of the prior year's minimum purchase commitment.
For each calendar year in which the Company fails to purchase its minimum
purchase requirements, the Company shall pay to SMBI a sum equal to the contract
price for the shortfall of product not purchased.
B. Lease
The Company leases office space under an agreement expiring in December 2006,
with annual payments approximating $58,000. During the years ended December 31,
2004 and 2005, rent expense was approximately $58,000.
F-23
C. Employment Agreements
In September 2004, the Company entered into employment agreements with three of
its executive officers that will become effective upon the closing of the
proposed public offering of its common stock, which occurred on June 24, 2005.
The employment agreements have a term of three years with an aggregate annual
salary of $575,000.
The Company has entered into an employment agreement with another executive
officer that has no specific termination date, with an initial $150,000 annual
base salary.
D. NuVim Powder Co-Packer
In August of 2005 the Company issued a purchase order for approximately $50,000
for the production of the Nuvim Powder product. As of December 31, 2005
approximately $25,000 of the order was filled and paid for and the remaining
$25,000 was completed in 2006. There were no sales of the powder product in
2005.
NOTE 22 - RELATED PARTY TRANSACTIONS
A. Consulting Fees
Included in selling, general and administrative expenses are consulting fees to
a stockholder and convertible note holder to act as general counsel and
secretary of the Company of approximately $18,000 and $15,000 for the year ended
December 31, 2004 and 2005, respectively.
Included in selling, general and administrative expenses are consulting fees to
an immediate family member of an executive officer of the Company of
approximately $27,000 and December 31, 2004.
B. Advertising and Legal Fees
The Company incurred approximately $92,000 of marketing and legal expenses for
the year ended December 31, 2004 to an advertising agency and law firm,
controlled by a board member, a member of his immediate family and an investor
in NuVim Powder LLC.
C. Accounts Payable and Accrued Expenses - Related Parties
Accounts payable and accrued expenses - related parties consists of the
following:
DECEMBER 31,
-----------------------
2004 2005
---------- ----------
Royalty license and supply agreement - (a) $ 487,000 $ 212,278
Consulting fees - (b) 98,600 19,050
Legal fees - (b) 1,400
Advertising and Legal fees - (c) 72,000
---------- ----------
Total $ 659,000 $ 231,328
========== ==========
- ----------
(a) Payable to SMBI, an approximate .09% stockholder of the Company.
(b) See description of caption A. above.
(c) See description of caption B. above
F. Amended Service Agreement - Spokesperson
On July 26, 2004, the Company entered into an amended services agreement with
its spokesperson. Under the agreement, the Company agreed to issue a convertible
promissory note (see Note 8) in payment of unpaid past services and enter into
an amended agreement for services for the three year period ending in January,
2006.
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 under the amended services agreement
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 the amended service
agreement and the warrant agreement,
F-24
or March 31, 2005, subsequently extended to May 31, 2005. In the event of a
public stock offering of the Company's common stock on or prior to May 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 May 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, depending on the
outcome of certain future events defined in the agreement.
The stock issued and underlying the warrants are subject to 100% forfeiture if
the spokesperson does not complete all services during the entire period under
the Services Agreement. Therefore, no value will be ascribed to the stock and
warrants until performance is complete in accordance with EITF 96-18.
NOTE 23 - SUBSEQUENT EVENTS
A. Stock Option Plan
In March 2006, the Board of Directors approved the 2006 Incentive Stock Option
Plan for the benefit of its officers, employees and consultants. The plan
Authorizes the grant of 1,500,000 shares of common stock. The plan will become
effective upon approval of shareholders at the Company's annual meeting in May
of 2006.
B. NuVim Powder LLC
In February, 2006 the Company issued a warrant to purchase 50,000 shares of
common stock at $1.00 per share in exchange for a 24.5% interest in NuVim Powder
LLC. The Warrants have a term of ten years.
C. Stock Issuances
In February 2006, the Company issued 50,000 shares of common stock to the
company's Corporate Secretary and general counsel for services to be provided in
2006.
In February 2006, the Company issued 7,850 shares of common stock for public
relations services to be provided in 2006.
F-25
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NUVIM, INC.
BALANCE SHEET
(Unaudited)
JUNE 30, 2006
-------------
ASSETS
Current Assets:
Cash and cash equivalents $ 30,100
Accounts receivable, net 69,482
Inventory 219,794
Prepaid expenses and other current assets 413,033
-------------
Total Current Assets 732,409
Equipment and furniture, net 1,050
Deposits and other assets 8,547
Distribution Rights 90,000
-------------
TOTAL ASSETS $ 832,006
=============
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities:
Accounts payable $ 865,009
Accounts payable and accrued expenses to related parties 54,050
Accrued expenses 130,874
Accrued compensation 253,214
Stockholder loans - subordinated convertible loans 200,000
Accrued interest stockholder loans 25,020
Senior notes payable - related parties 500,000
Accrued interest - senior notes payable - related parties 149,160
Other note payable 148,117
Rescinded Series B offering payable 18,920
-------------
TOTAL LIABILITIES 2,344,364
Comments 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, 0 issued and outstanding
Preferred Stock Series C, convertible, non cumulative, participating,
par value $.00001 per share:
50,000,0000 shares designated, 0 issued and outstanding
Common Stock, 120,000,000 shares authorized, $.00001 par value,
10,602,088 shares issued and outstanding 107
Additional paid-in capital 19,629,165
Accumulated deficit (21,141,630)
-------------
Total Stockholders' Deficit (1,512,358)
-------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 832,006
=============
The Notes to Financial Statements are an integral part of these statements.
F-26
NUVIM, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------------------- -------------------------------
2005 2006 2005 2006
------------- --------------- -------------- -------------
Gross Sales $ 273,789 $ 327,079 $ 649,508 $ 598,152
Less: Discounts, Allowances and Promotional Payments 124,835 21,707 291,678 116,559
------------- --------------- -------------- -------------
Net Sales 148,954 305,372 357,830 481,593
Cost of Sales 169,675 187,969 377,510 309,200
------------- --------------- -------------- -------------
Gross Profit (Loss) (20,721) 117,403 (19,680) 172,393
Selling, General and Administrative Expenses 517,364 491,399 1,054,055 1,004,072
------------- --------------- -------------- -------------
Loss from Operations (538,085) (373,996) (1,073,735) (831,679)
Other Income (Expense):
Interest Expense (210,077) (36,473) (388,879) (73,538)
Interest Income 153 - 153 45
Gain on Forgiveness of Accounts Payable 148,525 8,803 148,525 8,803
------------- --------------- -------------- -------------
Total Other Income (Expense) - Net (61,399) (27,670) (240,201) (64,690)
------------- --------------- -------------- -------------
Net Loss Before Income Tax Benefit (599,484) (401,666) (1,313,936) (896,369)
Income Tax Expense (1,125) (200) (1,125) (200)
------------- --------------- -------------- -------------
Net Loss $ (600,609) $ (401,866) $ (1,315,061) $ (896,569)
============= =============== ============== =============
Basic and Diluted Loss Per Share $ (0.33) $ (0.04) $ (1.18) $ (0.13)
============= =============== ============== =============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 1,819,491 9,209,259 1,116,777 7,131,769
============= =============== ============== =============
The Notes to Financial Statements are an integral part of these statements.
F-27
NUVIM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 2006 (UNAUDITED)
Preferred Stock Preferred Stock
Series A Series C Common Stock
----------------------- ----------------------- --------------------------
Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ---------- ------------- ----------
Balance at Dec 31 2005 - $ - - $ - 5,034,995 $ 51
Stock Issued for Services - - - - 50,000 1
Stock Issued for Services - - - - 7,850 -
Employee Stock Based Compensation - - - - -
Stock Issued for Accounts Payable - - - - 331,453 3
Stock Issued for Accrued Compensation - - - - 854,455 9
Stock Issued for Loan Payable & Accrued Interest - - - - 107,631 1
Stock Issued for Services - - - - 385,704 4
Stock Sold to Accredited Investors, Net - - - - 2,970,000 30
Stock Issued for Senior Notes - - - - 335,000 3
Stock Issued for Services - - - - 75,000 1
Stock Issued for Purchase of Nuvim Powder, LLC 450,000 4
Net Loss - - - - - -
---------- ---------- ---------- ---------- ------------- ----------
Balance at June 30, 2006 - $ - - $ - 10,602,088 $ 107
========== ========== ========== ========== ============= ==========
Additional Total
Paid-In Accumulated Shareholders'
Capital Deficit Deficit
------------- ------------- -------------
Balance at Dec 31 2005 $ 18,167,605 $ (20,245,061) $ (2,077,405)
Stock Issued for Services 28,999 - 29,000
Stock Issued for Services 4,558 - 4,558
Employee Stock Based Compensation 65,000 - 65,000
Stock Issued for Accounts Payable 110,581 - 110,584
Stock Issued for Accrued Compensation 355,532 - 355,541
Stock Issued for Loan Payable & Accrued Interest 37,630 - 37,631
Stock Issued for Services 139,173 - 139,177
Stock Sold to Accredited Investors, Net 533,845 - 533,875
Stock Issued for Senior Notes 66,997 - 67,000
Stock Issued for Services 29,249 - 29,250
Stock Issued for Purchase of Nuvim Powder, LLC 89,996 - 90,000
Net Loss - (896,569) (896,569)
------------- ------------- -------------
Balance at June 30, 2006 $ 19,629,165 $ (21,141,630) $ (1,512,358)
============= ============= =============
The Notes to Financial Statements are an integral part of this statement.
F-28
NUVIM, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2006
(Unaudited)
2005 2006
------------ ------------
Cash Flow From Operating Activities:
Net Loss $ (1,315,061) $ (896,569)
Adjustment to reconcile net loss to net cash used in
Depreciation 9,376 452
Beneficial conversions of notes payable 49,755 -
Amortization of debt discount on notes payable - 14,029
Stock issued for services - 201,985
Employee stock based compensation - 65,000
Provision for sales returns 291,678 116,559
Gain on forgiveness of accounts payable (148,525) (8,803)
Changes in Operating Assets and Liabilities:
Accounts receivable (284,994) (150,642)
Inventory (33,599) (47,080)
Prepaid expenses and other current assets 14,067 (84,118)
Accounts payable including related parties (124,288) (45,450)
Accrued compensation 177,166 188,655
Accrued expenses (28,082) (167,871)
Accrued interest 333,632 45,610
------------ ------------
Net Cash Used in Operating Activities (1,058,875) (768,243)
------------ ------------
Cash Flow From Investing Activities:
Purchase of equipment and furniture (442) -
------------ ------------
Net Cash Used in Investing Activities (442) -
------------ ------------
Cash Flow From Financing Activities:
Net proceeds from issuance of common stock 1,577,466 533,875
Reimbursement of, and reduction in deferred offering cost 441,243
Payment of note payable (5,000) (6,000)
Proceeds of related party advances (13,000) -
Proceeds from underwriter advance-related party 200,000 -
Repayment of underwriter advance-related party (200,000) -
------------ ------------
Net Cash Provided by Financing Activities 2,000,709 527,875
Net change in Cash and Cash Equivalents 941,392 (240,368)
Cash and Cash Equivalents at Beginning of Period 277,649 270,468
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,219,041 $ 30,100
============ ============
The Notes to Financial Statements are an integral part of these statements.
F-29
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(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, muscle flexibility and
muscle recovery. The Company distributes its products through supermarkets in
approximately 13 states, predominantly on the East Coast. The Company's beverage
products contain certain micronutrients which Stolle Milk Biologies, Inc.
("SMBI") has patented. Spencer Trask Specialty Group, LLC ("ST") is the
controlling stockholder of SMBI, SMBI and ST collectively are micronutrients,
which can be terminated by SMBI under certain conditions.
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 $401,866 and $600,609 for the
three months ended June 30, 2006 and 2005 and $896,569 and $1,315,061 for the
six months ended June 30, 2005 and 2005, respectively. Management also expects
operating losses to continue in 2006 and 2007. The Company has negative working
capital of $1,611,955 and a Total Stockholders Deficit of $1,512,358. 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 common stock, notes payable and cash advances from related parties and
stockholders. It is the Company's intention to raise additional capital through
additional borrowings and sales of its equity securities. No assurance can be
given that these funding strategies will be successful in providing the
necessary funding to finance operations of the Company. Additionally, there can
be no assurance, even if successful in obtaining financing, 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
adjustment relating to the recoverability and classification of recorded assets
or amounts and classification of liabilities that might be necessary related to
this uncertainty.
F-30
C. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The unaudited interim consolidated
financial statements as of June 30, 2006 and 2005 reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of management,
are considered necessary for a fair presentation of its financial position as of
June 30, 2006 and as of the result of its consolidated operations and its
consolidated cash flows for the periods ended June 30, 2006 and 2005.
The Unaudited Consolidated Statements of Operations for the six months ended
June 30, 2006 and 2005 are not necessarily indicative of results for the full
year.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, these financial statements should be read in
conjunction with the financial statements and accompanying notes included in the
Company's Current Report on Form 10KSB for the year ended December 31, 2005.
NOTE 2 - CRITICAL ACCOUNTING POLICIES
A. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment" which revised Statement of Financial Standards No. 123,
"Accounting for Stock-Based Compensation" This statement supercedes Opinion No.
25, "Accounting for Stock Issued to Employees." The revised statement addresses
the accounting for share-based payment transactions with employees, eliminates
the ability to account for share-based compensation transactions using the
intrinsic value method pursuant to APB 25 and requires that the compensation
costs relating to such transactions be recognized in the statement of
operations. The revised statement has been implemented by the Company effective
January 1, 2006. The Company continued to account for stock awards issued to
non-employees under the fair value method as described in EITF 96-18 "Accounting
for Equity Investments that are Issued to Other than Employees for Acquiring or
in Conjunction with Selling Goods or Services."
The implementation of FAS No. 123R has the following effect on the statement of
operations for the six month period ending June 30, 2006:
Net loss before stock option expense $ (831,569)
Less Stock Option Expense (65,000)
Net Loss as Reported $ (896,569)
============
F-31
For the 2005 fiscal year, the Company accounted for its employee incentive stock
option plans using the intrinsic value method in accordance with the recognition
and measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Had the Company determined
compensation expenses based on the fair value at the grant dates for those
awards consistent with the method of SFAS 123, the Company's net loss per share
would have increased to the following pro forma amounts:
SIX MONTHS ENDED
JUNE 30, 2005
----------------
Net income (loss) - as reported $ (1,315,000)
Add: total stock based employee compensation expense
determined under fair value based methods (477,494)
================
Net income (loss) - pro forma $ (1,792,555)
================
Net income (loss) attributable to common stockholders per share:
Basic and diluted net loss per share as reported $ (1.18)
================
Pro forma and diluted basic loss per share $ (1.61)
================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
JUNE 30, 2005
--------------
Risk free annual interest rate 4.30%
Expected volatility 90%
Expected life 7 years
Assumed dividends None
Effective January 1, 2006, the Company adopted FAS No. 123R utilizing the
modified prospective method. FAS No. 123R requires the recognition of stock
based compensation expense in the financial statements.
Under the modified prospective method, the provisions of FAS No. 123R apply to
all awards granted or modified after the date of adoption. In addition, the
unrecognized expense of awards not yet vested at the date of adoption,
determined under the original provisions of FAS 123, "Accounting for Stock Based
Compensation", shall be recognized in net earnings in the periods after the date
of adoption. Stock based compensation consists primarily of stock options. Stock
Options are granted to employees at exercise prices equal to the fair market
value on the dates of grant. Stock options generally vest over three years and
have a term of seven years. Compensation expense for stock options is recognized
over the period for each separate vesting portion of the stock option award.
The fair value for options issued prior to January 2006 was estimated at the
date of grant using a Black-Scholes option-pricing model. The risk free rate was
derived from the U.S. Treasury yield curve in effect at the time of the grant.
The volatility factor was determined based on a comparison to companies with
similar characteristics.
F-32
The Black-Scholes option-pricing model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option-pricing 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
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of employee stock options
A summary of the status of the Company's options for the six months ended June
30, 2006 is as follows:
WEIGHTED
AVERAGE AGGREGATE
EXERCISE REMAINING INTRINSIC
SHARES PRICE LIFE VALUE
------------ ------------ ------------ ------------
Balance at beginning of period 1,643,316 $ 1.01 9.9 years $ 0.00
Granted 200,000 --- -- --
Cancelled or Expired (277,169) --- -- --
Exercised --- --- -- --
Outstanding at the end of the period 1,566,147 $ 0.89 9.3 years $ 0.00
A summary of the status of the Company's nonvested shares as of June 30, 2006,
and changes during the three months ended June 30, 2006 is presented below:
WEIGHTED
AVERAGE
WEIGHTED REMAINING
AVERAGE FAIR CONTRACTUAL
NUMBER OF VALUE AT TERM
SHARES GRANT DATE (IN YEARS)
------------ ------------ ------------
Non-vested shares at December 31, 2005 492,456 $ 1.00 9.5
Options granted 200,000 --- ---
Options vested (367,506) --- ---
Options forfeited or expired (93,287) --- ---
Non-vested shares at June 30, 2006 231,663 $ 1.00 9.1
As of June 30, 2006, there was approximately $320,000 of unrecognized
compensation cost related to non-vested stock option awards, which is expected
to be recognized over a remaining weighted-average vesting period of 2.50 years.
B. RECLASSIFICATIONS
Certain reclassifications were made to the 2005 financial statements in order to
conform to the 2006 financial statements.
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C. LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No. 128,
Earnings Per Share and SEC Staff Accounting Bulletin No. 98. Basic EPS is
calculated by dividing the income or loss available to common stockholders by
the weighted number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
These common stock equivalents have been omitted from earnings per share because
they are anti-dilutive, accordingly, basic and diluted EPS were the same for the
six months ended June 30, 2006 and 2005. Common stock equivalents outstanding at
June 30, 2006 consisted of 1,566,147 incentive stock options and warrants to
purchase 7,456,337 shares of common stock.
D. RECENT ACCOUNTING PRONOUNCEMENTS
In July 2006, the Financial Accounting Standards Board ("FASB") has published
FASB Interpretation No. 48 ("FIN No. 48"), Accounting for Uncertainty in Income
Taxes, to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in FASB Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, on the
uncertainty in income taxes recognized in an enterprise's financial statements.
FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with
earlier adoption permitted. The adoption of FIN 48 is not expected to have a
material effect on the Company's financial condition or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction ("SFAS 154"), which replaces Accounting Principles Board Opinions No.
20 "Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first quarter of
fiscal 2006. The adoption of SFAS 154 did not have an impact on the Company's
financial statements.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations" in March 2005. FIN 47 clarifies that
an entity must record a liability for a conditional asset retirement obligation
if the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. This guidance did not have a
material affect on the Company's financial statements.
F-34
NOTE 3 - EMPLOYEE STOCK OPTIONS
In May 2006, the shareholders approved the 2006 Employee Stock Option Plan. for
the benefit of its outside directors, officers, employees and consultants. The
plan became effective upon shareholder approval. The Plan expires ten years from
the date of adoption. The Company is authorized to grant options for up to
2,000,000 common shares under the Plan. Under the 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 422 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. Nonqualified
stock options under both plans may be granted at exercise prices equal to or
greater than 100% of the fair market value on 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.
In January 2005, the Board of Directors approved the 2005 Incentive Stock Option
Plan for the benefit of its officers, employees and consultants. The Board also
approved the 2005 Directors' Stock Option Plan for the Company's board members.
These plans became effective concurrently with the closing of the Company's
initial public offering. The Plans expire ten years from the date of adoption.
The Company is authorized to grant options for up to 1,500,000 common shares
under the employee plan, and 200,000 under the directors plan. 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 422 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. Nonqualified stock options under both plans may be
granted at exercise prices equal to or greater than 85% of the fair market value
on 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. The
Company may also grant options to purchase up to 35,373 shares of common stock
under three plans adopted in 2000, 2001 and 2003, which have similar terms.
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 9.9
and 9.3 years as of December 31, 2005 and June 30, 2006.
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 not trading history
for the Company's stock,
F-35
the fair value of the Company's issued options and warrants were estimated at
the date of grant using the fair value method with the following assumptions:
Assumptions:
Risk-free rate 4.30%
Dividend yield 0
Volatility factor of the expected market 90%
Price of the Company's common stock 1.00
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
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Six Months Ended
-------------------------------
June 30, 2005 June 30, 2006
-------------- --------------
Non Cash Investing and Financing Activities
Stock issued for accounts payable -- $ 110,584
Stock issued for accrued compensation -- 335,541
Stock issued for senior notes payable -- 67,000
Stock issued for management loan and accrued interest -- 37,631
Stock issued for interest in NuVim Powder, LLC -- 90,000
Assignment of senior secured notes payable and
accrued interest to a related party $ 2,679,498 --
Automatic conversion of notes payable 245,000 --
Senior secured note - related party 6,141,527 --
Accrued salaries 593,750 --
Senior secured notes payable - related parties 500,000 --
Subordinated notes payable and accrued interest 266,639 --
Related party advance 69,000 --
Accounts payable 109,000 --
NOTE 5 - STOCKHOLDERS DEFICIT
Sales for Cash
On April 10, 2006, Paulsen Investment Company, Inc. the company that served
as underwriter of NuVim's recently completed initial public offering of
securities, and
F-36
NuVim entered into a Placement Agent Agreement pursuant to which Paulsen would
attempt to place up to 2,500,000 shares (subject to additional allocations with
the consent of Paulsen and NuVim) of NuVim's common stock with accredited
investors. Under the agreement a commission of seven percent would be paid to
the selling broker and Paulsen would receive an unaccountable expense allowance
of three percent of the total amount placed under the agreement. The agreement
also provides that NuVim will use its best efforts to register the shares to be
sold under the Securities Act of 1933, as amended within 120 business days of
the sale of 2,500,000 shares.
On April 18, 2006, Paulson Investment Company, Inc., the company that
served as underwriter of NuVim's recently completed initial public offering of
securities, purchased 500,000 shares of NuVim's common stock for $100,000.
Paulson represented itself to be an accredited investor who was purchasing the
common stock for its own investment and not for resale. It agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
On May 18, 2006, NuVim accepted twenty-two additional subscriptions
resulting from private placements arranged by Paulson Investment Company, Inc.
The investors purchased 2,470,000 shares of common stock for a total of
$494,000. In addition, Paulson purchased an additional 37,500 shares in exchange
for the cancellation of $7,500 of past due fees. The brokers placed each
investment received a 7% commission and Paulson received a 3% unaccountable
expense allowance. Each investor represented himself to be an accredited
investor who was purchasing the common stock for his own investment and not for
resale. They agreed in writing to restrictions on resale placed with the NuVim's
transfer agent and the printing of a legend on its certificate. Because of these
factors, this sale was exempt from registration under the Securities Act as not
involving a public distribution under section 4(2) and 4(6).
All of the cash was used for working capital.
Acquisition of the remainder of NuVim Powder LLC
NuVim originally planned to distribute the powder version of its product
through a subsidiary fifty-one percent of which was to be owned by NuVim and the
balance owned by Santa Fe Productions Inc., the venture's production company,
the entertainer Dick Clark, and NuVim director Stanley Moger.
During the first quarter of 2006, management negotiated to become the
excusive distributor of its powder operations.
Accordingly, during the first quarter of 2006, NuVim acquired all of Santa
Fe Productions' 24% interest in the powder subsidiary for a seven year warrant
to purchase 50,000 shares of common stock for a dollar a share. The value of
this warrant was not significant to the Company's financial statements.
On April 7, 2006 NuVim agreed with Messrs. Clark and Moger to acquire their
respective 12.5% interests in the powder subsidiary for 225,000 shares of NuVim
common stock each. NuVim executed the agreement on April 18. 2006. The NuVim
F-37
shares were exchanged for the interests in the powder subsidiary on April 20,
2006. Clark and Moger are accredited investors who accepted the shares for their
own investment and agreed to restrictions on resale placed with the Company's
transfer agent and the printing of a legend on their certificates. Because of
these factors, management has determined that this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2) and 4(6). The purchase price for this transaction was $90,000
representing the fair value of the Nuvim stock issued. Nuvim Powder, LLC. had no
assets and liabilities. Accordingly, the purchase price was allocated to an
intangible asset called distribution rights, since this transaction gave the
Company excusive distribution rights of Nuvim powder products. Management
intends to evaluate the fair value of this intangible asset within one year of
the date of acquisition. There can be no assurance that the Company will be
successful in its efforts to achieve profitability for its powder distribution
operations in the future.
Common Stock Issued for Services
On May 9, 2006 NuVim issued 75,000 additional shares of its Common Stock to
NuVim's Secretary as payment for additional services for the period ending
December 31, 2006. Mark Siegel's relationship to NuVim qualifies him as an
accredited investor. He accepted the shares for his own investment and agreed to
restrictions on resale placed with NuVim's transfer agent and the printing of a
legend on his certificate. Because of these factors, management has determined
that this issuance is exempt from registration under the Securities Act as not
involving a public distribution under section 4(2) and 4(6). The services for
which the shares were issued are valued, pursuant to agreement between NuVim and
Mr. Siegel at approximately $29,000.
During May and June, NuVim agreed with several organizations to provide
various services for 385,904 shares of common stock. The services have a value
of approximately $139,000. Each service provider represented itself to be an
accredited investor who was purchasing the common stock for his own investment
and not for resale. They agreed in writing to restrictions on resale placed with
the NuVim's transfer agent and the printing of a legend on its certificate.
Because of these factors, management has determined that this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Common Stock issued for Executive Compensation
On April 20, 2006 NuVim and two current and one retired executives reached
agreement on the number of shares to be granted in lieu of a cash bonus for 2005
and the additional restrictions to be imposed on their ability to sell the
shares. A total of 661,500 shares were granted, 341,500 to Mr. Kundrat, the CEO,
200,000 to John L. Sullivan, the Vice-President of Sales, and 120,000 to Paul J.
Young, until April 1, 2006 the Vice President of Operations and now a member of
the Advisory Board. All are accredited investors who have agreed in writing that
they are accepting the shares for investment purposes and will not sell the
shares until after May 1, 2007. Legends indicating that the shares are
unregistered have been placed on the certificates and stop transfer orders with
respect to these certificates have been placed with NuVim's transfer agent. As a
result, management has determined that this issuance is exempt from registration
under the Securities Act as not involving a public distribution under section
4(2) and 4(6).
On April 21, 2006 Michael Vesey agreed, in connection with his resignation
reported below in Item 5.02(b), to accept 98,955 shares of NuVim common stock in
payment of accrued salary of $19,791. In addition, he accepted 85,000 shares of
common
F-38
stock in lieu of his executive cash bonus for 2005. Mr. Vesey also agreed that
he will not sell his shares before May 1, 2007. Mr. Vesey is an accredited
investor who is accepting the shares for investment purposes. Legends indicating
that the shares are unregistered have been placed on the certificates and stop
transfer orders with respect to these certificates have been placed with NuVim's
transfer agent. As a result, management has determined that this issuance is
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Common Stock issued on Conversion of Secured Convertible Promissory Notes
In June 2006, the holders of the Secured Convertible Promissory Notes
agreed to the conversion of their Notes into an aggregate of 335,000 shares of
common stock. In addition, the holders surrendered the warrants that had been
issued in connection with the Notes for cancellation. Each of the Note holders
was an accredited investor. Legends indicating that the shares are unregistered
have been placed on the certificates and stop transfer orders with respect to
these certificates have been placed with NuVim's transfer agent. As the shares
of common stock were issued in exchange for NuVim securities without the payment
of any additional consideration, management has determined that the issue was
exempt under Section 3(a)9 of the Securities Act.
Also in June 2006, another note holder exchanged $37,631 of principal and
accrued interest for 107,631 shares of common stock. The note holder represented
himself to be an accredited investor who was purchasing the common stock for his
own investment and not for resale. He agreed in writing to restrictions on
resale placed with the NuVim's transfer agent and the printing of a legend on
his certificate. Because of these factors, management has determined that this
sale was exempt from registration under the Securities Act as not involving a
public distribution under section 4(2) and 4(6).
Common Stock issued for trade debt
Also in June 2006, several creditors agreed to accept 331,453 shares of
common stock at a price of $0.35 per share to settle an aggregate of
approximately $111,000 of current or past due trade debt. Each investor
represented himself to be an accredited investor who was purchasing the common
stock for his own investment and not for resale. They agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, management has
determined that this sale was exempt from registration under the Securities Act
as not involving a public distribution under section 4(2) and 4(6).
NOTE 6 - SUBSEQUENT EVENTS
On July 21, 2006, the compensation committee of the board of directors
granted 1,650,000 options to purchase shares of common stock at a price of $0.31
per share. This is in addition to automatic grants of a total of 290,000 options
granted to the outside directors in May and July of this year.
On August 23, 2006, the holders of all $500,000 of NuVim(R)'s Senior
Secured Notes, Richard Clark, the entertainer, and Stanly Moger, one of
NuVim(R)'s directors, agreed to extend their maturity from November 2006 to
January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be due until that date. As compensation,
each received a warrant to purchase 100,000 shares of NuVim's common stock for
$0.35 per share. The warrant may be exercised from February 2007 through August
15, 2015. As a result of this extension, the maturity of an additional $200,000
of debt which is subordinated to the Senior Secured Notes is automatically
extended to January 2009.
On August 25, 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the holder
of an $120,000 unsecured note agreed to extend its maturity from November 2006
to January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be due until that date.
F-39
5,288,237 Shares
[LOGO OF NUVIM]
NUVIM, INC.
PROSPECTUS
, 2006
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 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.
II-1
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 $ 141.46
NASD filing fee
Accounting fees and expenses
Legal fees and expenses
Printing and related expenses
Blue Sky fees and expenses
Transfer agent and warrant agent fees and expenses
Miscellaneous expenses
Total $ 141.46
ITEM 26. SALES OF UNREGISTERED SECURITIES
2004 Issuances
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 $3 initial public offering price, the convertible note is convertible
in 81,667 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 anticipated post offering capitalization and Mr. Clark's holdings, this
warrant has no value because Mr. Clark already owns more than 9.9% purchasable
pursuant to this warrant.
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 June 30, 2005. In the event the loan has not been
repaid, the exercise price is reduced depending on the "Maturity Event," as
defined in the
II-2
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 $1 per share initial
public offering price, this warrant will entitle Mr. Clark and Mr. Moger to
purchase 650,000 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.
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 $36,000.
The issuances were as follows:
TRADE SHARES OF
PAYABLES COMMON
CONSIDERATION STOCK
INVESTOR ($) ISSUED (#)
-------------------- -------------- --------------
Dominick DeBellis $ 16,000 2,666
Santa Fe Productions 10,000 1,667
REAL Advertising 10,000 1,667
2005 issuances
On November 3, 2005, NuVim(R), Inc. (the "Company") issued the following
unregistered securities:
1. The Company issued 250,000 shares of its Common Stock, 250,000 five-year
redeemable warrants exercisable at $1.50 and 250,000 five-year warrants
exercisable at $2.00 to 3 accredited investors for payment of $250,000 news
media program. The program will provide $3,000,000 worth of nationally
syndicated newspaper and radio features at standard rates, at a discounted
amount of $250,000 over a twelve month period. The redeemable warrants may be
called by the Company at any time after its Common Stock closes at a price of
$2.00 or more for five consecutive trading days. Upon 30 days' notice, the
warrants will be redeemed, if not exercised, by the payment of $0.25 per
warrant. The Company has agreed to automatically include 25% (62,500) of the
shares, and all the shares underlying the warrants issued in the next
registration of securities it files, subject to underwriters cut back
provisions. The investors who were purchasing those shares and any shares issued
as dividends for their own investment and agreed to restrictions on resale
placed with the Company's transfer agent and the printing of a legend on his
certificate. Because of these factors, this issuance is exempt from registration
under the Securities Act as not involving a public distribution under sections
4(2) and 4(6) of the Act. The Investors and securities issued are listed Below:
II-3
Global Media Fund 150,000 shares
Global Media Fund warrant to purchase 250,000 shares at $1.50
Global Media Fund warrant to purchase 250,000 shares at $2.00
Richard D. Smith 50,000 shares
Don L. Rose 50,000 shares
2. The Company issued 50,000 shares of its Common Stock to the law firm
Wickersham and Murphy, P.C. in payment of past due accounts payable of
$105,793.50. The Company also issued 10,000 shares of common stock for payment
for legal services provided in the third quarter of 2005 and an additional
10,000 shares as a prepayment for legal services to be provided in the fourth
quarter of 2005. The investors who were purchasing those shares and any shares
issued as dividends for their own investment and agreed to restrictions on
resale placed with the Company's transfer agent and the printing of a legend on
his certificate. Because of these factors, this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under sections 4(2) and 4(6) of the Act.
3. The Company issued of 34,697 shares of its Common Stock to a law firm in
payment of past due accounts payable of $15,613.57 to the law firm Morse Zelnick
Rose and Lander LLP The investors who were purchasing those shares and any
shares issued as dividends for their own investment and agreed to restrictions
on resale placed with the Company's transfer agent and the printing of a legend
on his certificate. Because of these factors, this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under sections 4(2) and 4(6) of the Act.
4. The Company issued of 50,000 shares of its Common Stock to the law firm
Maizes and Maizes LLP for duties as the Corporations Secretary for the period
beginning July 1, 2005 and ending December 31, 2005. The investors who were
purchasing those shares and any shares issued as dividends for their own
investment and agreed to restrictions on resale placed with the Company's
transfer agent and the printing of a legend on his certificate. Because of these
factors, this issuance is exempt from registration under the Securities Act as
not involving a public distribution under sections 4(2) and 4(6) of the Act.
On December 23, 2005, NuVim(R), Inc. (the "Company") issued the following
unregistered securities:
The Company issued Secured Convertible Promissory notes in the
aggregate principal amount of $67,600. The notes bear interest at the rate of
12% per annum and are due and payable six months from the issue date. The first
six months of interest was deducted from the proceeds to the Company as prepaid
interest. The notes are redeemable by the Company prior to the maturity date at
110% of the principal amount, plus accrued interest. If the notes are not repaid
on their maturity date they become convertible into shares of common stock at a
price per share equal to 90% of the average closing bid price of the Company's
common stock for the five trading days preceding the issue date, and the
interest increases to 18% per annum. The Company has granted piggy-back
registration rights for the shares of common stock underlying the notes. The
investors represented themselves in writing to be accredited investors who were
purchasing the securities and any shares of common stock issued thereunder, for
their own investment and agreed to restrictions on resale placed with the
Company's transfer agent and the printing of a legend on his certificate.
Because of these factors, this issuance is exempt from registration under the
Securities Act as not involving a public distribution under sections 4(2) and
4(6) of the Act.
In connection with the note sale, the Company issued warrants to
purchase 67,600 shares of common stock at a purchase price of $.40 per share in
connection with the notes. The warrants are exercisable for three years from the
issue date. If the notes are not paid by their maturity date the Company has
agreed to issue an additional 33,800 warrants to purchase common stock for three
years at an exercise price of $.375 and to adjust the exercise price of the
67,600 warrants issued upon closing to $37.5. The Company has granted piggy-back
II-4
registration rights for the shares of common stock underlying the warrants. The
investors represented themselves in writing to be accredited investors who were
purchasing the securities and any shares of common stock issued thereunder for
their own investment and agreed to restrictions on resale placed with the
Company's transfer agent and the printing of a legend on his certificate.
Because of these factors, this issuance is exempt from registration under the
Securities Act as not involving a public distribution under sections 4(2) and
4(6) of the Act.
2006 issuances
Sales for Cash
On April 10, 2006, Paulsen Investment Company, Inc. the company that
served as underwriter of NuVim's recently completed initial public offering of
securities, and NuVim entered into a Placement Agent Agreement pursuant to which
Paulsen would attempt to place up to 2,500,000 shares (subject to additional
allocations with the consent of Paulsen and NuVim) of NuVim's common stock with
accredited investors. Under the agreement a commission of seven percent would be
paid to the selling broker and Paulsen would receive an unaccountable expense
allowance of three percent of the total amount placed under the agreement. The
agreement also provides that NuVim will use its best efforts to register the
shares to be sold under the Securities Act of 1933, as amended within 120
business days of the sale of 2,500,000 shares.
On April 18, 2006, Paulson Investment Company, Inc., the company that
served as underwriter of NuVim's recently completed initial public offering of
securities, purchased 500,000 shares of NuVim's common stock for $100,000.
Paulson represented itself to be an accredited investor who was purchasing the
common stock for its own investment and not for resale. It agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
On May 18, 2006, NuVim accepted twenty-two additional subscriptions
resulting from private placements arranged by Paulson Investment Company, Inc.
The investors purchased 2,470,000 shares of common stock for a total of
$494,000. In addition, Paulson purchased an additional 37,500 shares in exchange
for the cancellation of $7,500 of past due fees. The brokers placed each
investment received a 7% commission and Paulson received a 3% unaccountable
expense allowance. Each investor represented himself to be an accredited
investor who was purchasing the common stock for his own investment and not for
resale. They agreed in writing to restrictions on resale placed with the NuVim's
transfer agent and the printing of a legend on its certificate. Because of these
factors, this sale was exempt from registration under the Securities Act as not
involving a public distribution under section 4(2) and 4(6).
In August and additional 250,000 shares were sold for $50,000 to an
accredited investor. No fees were paid in connection with this sale. The
investor represented himself to be an accredited investor who was purchasing the
common stock for his own investment and not for resale. He agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on his certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
All of the cash was used for working capital.
Acquisition of the remainder of NuVim Powder LLC
NuVim originally planned to distribute the powder version of its
product through a subsidiary fifty-one percent of which was to be owned by NuVim
and the balance owned by Santa Fe Productions Inc., the venture's production
company, the entertainer Dick Clark, and NuVim director Stanley Moger.
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During the first quarter of 2006, NuVim acquired all of Santa Fe
Productions' 24% interest in the powder subsidiary for a seven year warrant to
purchase 50,000 shares of common stock for a dollar a share.
On April 7, 2006 NuVim agreed with Messrs. Clark and Moger to acquire
their respective 12.5% interests in the powder subsidiary for 225,000 shares of
NuVim common stock each. NuVim executed the agreement on April 18. 2006. The
NuVim shares were exchanged for the interests in the powder subsidiary on April
20, 2006. Clark and Moger are accredited investors who accepted the shares for
their own investment and agreed to restrictions on resale placed with the
Company's transfer agent and the printing of a legend on their certificates.
Because of these factors, this issuance is exempt from registration under the
Securities Act as not involving a public distribution under section 4(2) and
4(6).
Common Stock Issued for Services
On March 9, 2006, NuVim issued 7,850 shares of common stock to
SmallCapVoice.com, a media publicity service for publicity services. It accepted
the shares for investment and not with a view to distribution. To enforce that
understanding, a legend has been endorsed on the certificate evidencing the
shares and a stop transfer order has been placed with NuVim's transfer agent
with respect to these shares. Therefore, this issuance is exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2).
Also on March 9, 2006 NuVim issued of 50,000 shares of its Common Stock
to NuVim's Secretary as payment for services for the period beginning February
1, 2006. Mark Siegel's relationship to NuVim qualifies him as an accredited
investor. He accepted the shares for his own investment and agreed to
restrictions on resale placed with NuVim's transfer agent and the printing of a
legend on his certificate. Because of these factors, this issuance is exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6). The services for which the shares were
issued are valued, pursuant to agreement between NuVim and Mr. Siegel at
$29,000.
On May 9, 2006 NuVim issued 75,000 additional shares of its Common
Stock to NuVim's Secretary as payment for additional services for the period
ending December 31, 2006. Mark Siegel's relationship to NuVim qualifies him as
an accredited investor. He accepted the shares for his own investment and agreed
to restrictions on resale placed with NuVim's transfer agent and the printing of
a legend on his certificate. Because of these factors, this issuance is exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6). The services for which the shares were
issued are valued, pursuant to agreement between NuVim and Mr. Siegel at
$29,250.
During May and June, NuVim agreed with five organizations to provide
various services for 368,563 shares of common stock. The services have a value
of approximately $133,000. Each service provider represented itself to be an
accredited investor who was purchasing the common stock for his own investment
and not for resale. They agreed in writing to restrictions on resale placed with
the NuVim's transfer agent and the printing of a legend on its certificate.
Because of these factors, this sale was exempt from registration under the
Securities Act as not involving a public distribution under section 4(2) and
4(6).
During the third quarter Ashleigh Lynne Howard, NuVim's new
spokesperson agreed to accept 15,000 shares of common stock in lieu of her fees
of approximately $5,000. She accepted the shares for investment and not with a
view to distribution. To enforce that understanding, a legend has been endorsed
on the certificate evidencing the shares and a stop transfer order has been
placed with NuVim's transfer agent with respect to these shares. Therefore, this
issuance is exempt from registration under the Securities Act as not involving a
public distribution under section 4(2).
Also during the third quarter, Jamal Kibria, agreed to accept 100,000
shares in lieu of his fees of about $35,000. The shares are restricted from sale
until 2007. In addition, he accepted the shares for investment and not with a
view to distribution. To enforce that understanding, a legend has been endorsed
on the certificate evidencing the shares and a stop transfer order has been
placed with NuVim's transfer agent with respect to these shares. Therefore, this
issuance is exempt from registration under the Securities Act as not involving a
public distribution under section 4(2).
Common Stock issued for Executive Compensation
On April 20, 2006 NuVim and two current and one retired executives
reached agreement on the number of shares to be granted in lieu of a cash bonus
for 2005 and the additional restrictions to be imposed on their ability to sell
the shares. A total of 661,500 shares were granted, 341,500 to Mr. Kundrat, the
CEO, 200,000 to John L. Sullivan, the Vice-President of Sales, and 120,000 to
Paul J. Young, until April 1, 2006 the Vice
II-6
President of Operations and now a member of the Advisory Board. All are
accredited investors who have agreed in writing that they are accepting the
shares for investment purposes and will not sell the shares until after May 1,
2007. Legends indicating that the shares are unregistered have been placed on
the certificates and stop transfer orders with respect to these certificates
have been placed with NuVim's transfer agent. As a result, this issuance is
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
On April 21, 2006 Michael Vesey agreed, in connection with his
resignation reported below in Item 5.02(b), to accept 98,955 shares of NuVim
common stock in payment of accrued salary of $19,791. In addition, he accepted
85,000 shares of common stock in lieu of his executive cash bonus for 2005. Mr.
Vesey also agreed that he will not sell his shares before May 1, 2007. Mr. Vesey
is an accredited investor who is accepting the shares for investment purposes.
Legends indicating that the shares are unregistered have been placed on the
certificates and stop transfer orders with respect to these certificates have
been placed with NuVim's transfer agent. As a result, this issuance is exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Common Stock issued on Conversion of Secured Convertible Promissory Notes
In June 2006, the holders of the Secured Convertible Promissory Notes
agreed to the conversion of their Notes into an aggregate of 335,000 shares of
common stock. In addition, the holders surrendered the warrants that had been
issued in connection with the Notes for cancellation. Each of the Note holders
was an accredited investor. Legends indicating that the shares are unregistered
have been placed on the certificates and stop transfer orders with respect to
these certificates have been placed with NuVim's transfer agent. As the shares
of common stock were issued in exchange for NuVim securities without the payment
of any additional consideration, the issue was exempt under Section 3(a)9 of the
Securities Act.
Also in June 2006, 8 creditors agreed to accept 410,585 shares of
common stock at a price of $0.35 per share to settle an aggregate of
approximately $144,000 of current or past due trade debt and a Note. Each
investor represented himself to be an accredited investor who was purchasing the
common stock for his own investment and not for resale. They agreed in writing
to restrictions on resale placed with the NuVim's transfer agent and the
printing of a legend on its certificate. Because of these factors, this sale was
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Warrants issued in connection with Note Extension
In connection with the extension of the maturity of their Senior
Secured Motes, Richard Clark, the entertainer, and Stanley Moger, one of our
directors, each received a warrant to purchase 100,000 shares of NuVim's common
stock for $0.35 per share. Because of their relation to NuVim, both are
accredited investors The warrant provides restrictions on resale on the warrant
and on any shares to be issued there under placed with the NuVim's transfer
agent and the printing of a legend on the warrant and any stock certificates to
be issued upon exercise. Because of these factors, this warrant issue was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
ITEM 27. EXHIBITS
EXHIBIT INCORPORATED FILED
NO. DOCUMENT DESCRIPTION BY REFERENCE HEREWITH
- --------- ---------------------------------------------------------------------------------------- ------------ --------
3.1 Registrant's Certificate of Incorporation, as amended (2)
3.2 Registrant's Certificate of Amendment of Certificate of Incorporation (2)
3.3 Registrant's Second Amended and Restated Designation and Description of Series A
Preferred Stock (4)
II-7
EXHIBIT INCORPORATED FILED
NO. DOCUMENT DESCRIPTION BY REFERENCE HEREWITH
- --------- ---------------------------------------------------------------------------------------- ------------ --------
3.4 Registrant's Amended and Restated Designation and Description of Series C Preferred
Stock (4)
3.5 Registrant's By-laws (2)
4.1 Revised Form of Common Stock Certificate (4)
4.2 Revised Form of Class A Public Warrant (4)
4.3 Revised Form of Class B Public Warrant (4)
4.4 Revised Form of Unit Certificate (4)
4.5 Revised Form of Warrant Agreement between the Registrant and American Stock Transfer &
Trust Company (1)
4.6 Revised Form of Representative's Purchase Warrant (1)
10.1 Employment Agreement between the Registrant and Richard P. Kundrat, dated as of
September 9, 2004 (2)
10.2 Employment Agreement between the Registrant and John L. Sullivan, dated as of
September 9, 2004 (2)
10.3 Employment Agreement between the Registrant and Paul J. Young, dated as of
September 9, 2004 (2)
10.4 Employment Agreement between the Registrant and Michael Vesey, dated as of
December 1, 2004 (3)
10.5 Form of Indemnification Agreement between the Registrant and its directors (2)
10.6 Revised 2005 Incentive Stock Option Plan (4)
10.7 Revised 2005 Directors' Stock Option Plan (4)
10.8 2000 Employee Stock Option Plan (2)
10.9 2001 Employee Stock Option Plan (2)
10.10 2002 Employee Stock Option Plan (3)
10.11 2000 Employee Equity Incentive Plan (2)
10.12 Amended and Restated License Agreement between the Registrant and Stolle Milk
Biologics, Inc., dated as of May 1, 2004 (2)
10.13 Amended and Restated Supply Agreement between the Registrant and Stolle Milk Biologics,
Inc., dated as of May 1, 2004 (2)
10.14 Loan Agreement between the Registrant and Dick Clark dated as of July 26, 2004 (2)
10.14.1 Letter Agreement dated November 3, 2004 amending certain terms of the Amendment to
Services Agreement and Convertible Promissory note each dated July 26, 2004 and
Second Amendment to Services Agreement and Warrant, each dated September 14, 2004 (3)
10.14.2 Letter Agreement dated March 28, 2005 amending certain terms of the Amendment to
Services Agreement and Convertible Promissory note each dated July 26, 2004 and Second
Amendment to Services Agreement and Warrant, each dated September 14, 2004 (4)
10.14.3 Letter Agreement dated April 30, 2005 amending certain terms of the Amendment
to Services Agreement and Convertible Promissory note each dated July 26, 2004 and
Second Amendment to Services Agreement and Warrant, each dated September 14, 2004 (5)
10.14.4 Letter Agreement dated May 31, 2005 amending certain terms of the Amendment to Services
Agreement and Convertible Promissory note each dated July 26, 2004 and Second Amendment
to Services Agreement and Warrant, each dated September 14, 2004 (1)
10.15 Security Agreement between the Registrant and Dick Clark dated as of July 26, 2004 (2)
10.16 Form of Secured Promissory Notes Up to $1 Million (Bridge Financing) (2)
10.17 Convertible Note dated as of July 26, 2004 payable to Dick Clark (2)
10.18 Warrant to Purchase $650,000 of Common Stock dated as of September 14, 2004 (2)
10.19 Warrant to Purchase up to 9.9% of the Outstanding Capital Stock, dated as of
July 26, 2004 (2)
10.20 Services Agreement between the Registrant and Olive Enterprises, Inc., dated
February 20, 2000 (2)
II-8
EXHIBIT INCORPORATED FILED
NO. DOCUMENT DESCRIPTION BY REFERENCE HEREWITH
- --------- ---------------------------------------------------------------------------------------- ------------ --------
10.21 Amendment to Services Agreement between the Registrant and Olive Enterprises, Inc.,
dated as of July 26, 2004 (2)
10.22 Second Amendment to Services Agreement between the Registrant and Olive Enterprises,
Inc., dated as of September 14, 2004 (2)
10.23 Form of Subordination Agreement (Bridge Financing) (2)
10.24 Consent to Grant Security Interest, Waiver, Subordination and Amendment Agreement
between Registrant and Stolle Milk Biologics, Inc., dated August 5, 2004 (2)
10.25 Processing and Packing Agreement between the Registrant and Clover Farms Dairy Company,
dated June 27, 2000 (2)
10.26 Amendment to Processing and Packing Agreement between the Registrant and Clover Farms
Dairy Company, effective April 1, 2003 (2)
10.27 Second Amended and Restated Stockholders Agreement dated as of August 2, 2004 (2)
10.28 Amended and Restated Registration Rights Agreement, dated as of August 2, 2004 (2)
10.29 Wachovia line of credit documents (4)
10.30 Lease between the Registrant and Paramus Plaza IV Associates, dated December 8, 1999
and Addendum II to Lease, dated December 8, 1999 (2)
10.31 First Amendment to Lease between the Registrant and Paramus Plaza IV Associates, dated
November 5, 2002 (2)
10.32 Second Amendment to Lease between the Registrant and Paramus Plaza IV Associates, dated
November 23, 2004 (2)
10.33.1 Letter Agreements dated December 31, 2004 between Spencer Trask Private Equity Fund I
LP, Spencer Trask Private Equity Fund II LP, Spencer Trask Specialty Group LLC and
Kevin Kimberlin Partners LP, on the one hand, and the registrant on the other, with
respect to the debt extinguishment transactions between the parties, as amended by
agreements of March 28, 2005 (4)
10.33.2 Agreement dated May 2, 2005 further amending the agreements with Spencer Trask (5)
10.33.3 Agreement dated May 18, 2005 further amending the agreements with Spencer Trask (1)
10.34 Security Agreement between the Registrant and Spencer Trask Speciality Group LLC, dated
January 31, 2002 (4)
10.35.1 Modification and Extension Agreement between Stolle Milk Biologics, Inc. and the
Registrant dated March 28, 2005 (4)
10.35.2 Amendment of March 28, 2005 Modification and Extension Agreement (1)
10.36.1 Conversion Agreement dated April 30, 2005 between the Registrant and Dick Clark (5)
10.36.2 Amended and Restated Conversion Agreement between the Registrant and Dick Clark, dated
May 31, 2005 (1)
10.36 Proposal/Memorandum of Understanding between the Registrant and Global Media Fund, LLC (6)
10.37 Form of Secured Convertible Pro missory note between the Registrant and Lenders (6)
10.38 Form of Warrant Agreement between the Registrant and Lenders (6)
10.39 Form of Warrant Agreement between the Registrant and Midtown Partners (6)
10.40 Placement Agent Agreement between the Registrant and Midtown Partners (6)
10.40.1 Letter Terminating Placement Agent Agreement between the Registrant and Midtown Partners (6)
10.41 Dick Clark/Stanley Moger Consent to Secured Convertible Note financing (6)
10.42 Warrant issued in connection with acquisition of 24% interest in NuVim Powder LLC (7)
10.43 Placement Agent Agreement (7)
II-9
EXHIBIT INCORPORATED FILED
NO. DOCUMENT DESCRIPTION BY REFERENCE HEREWITH
- --------- ---------------------------------------------------------------------------------------- ------------ --------
10.44 2006 Employee Stock Option Plan (8)
10.45 Note Extension Letter with Richard Clark and Stanley Moger (9)
10.46 Note Extension Letter with Kirkpatrick & Lockhart Nicholson Graham LLP (9)
21 Subsidiaries of the Registrant (2)
23.1 Consent of Wickersham & Murphy, a Professional Corporation (included in Exhibit 5.1) (1)
23.2 Consent of WithumSmith+Brown, P.C., Independent Registered Public Accounting Firm
24 Power of Attorney (included on Page II - 12 of this Registration Statement)
(1) Previously filed as part of Pre-effective Amendment No. 6 to the
Registration Statement filed on June 6, 2005.
(2) Previously filed as part of the Registration Statement filed on
December 2, 2004.
(3) Previously filed as part of Pre-effective Amendment No.1 to the
Registration Statement filed on February 3, 2005.
(4) Previously filed as part of Pre-effective Amendment No.3 to the
Registration Statement filed on March 31, 2005.
(5) Previously filed as part of Pre-effective Amendment No.5 to the
Registration Statement filed on May 4, 2005.
(6) Previously filed as part of the 2005 Annual Report on Form 10-KSB
(7) Previously filed as part of the Current Report on Form 8-K filed
April 21, 2006
(8) Previously filed as part of the Current Report on Form 8-K filed
May 30, 2006
(9) Previously filed as part of the Current Report on Form 8-K filed
August 28, 2006
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 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
II-10
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.
II-11
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 17th day of October, 2006.
NUVIM, INC.
By: /s/ RICHARD P. KUNDRAT
-----------------------------------
Richard P. Kundrat, Chairman of the
Board and Chief Executive Officer
Power Of Attorney
The undersigned directors of NuVim, Inc. herby constitute and appoint
Mark Alan Siegel, with full power to act and with full power of substitution and
re-substitution, our true and lawful attorney-in-fact with full power to execute
in our name and behalf in the capacities indicated below any and all amendments
(including post-effective amendments and amendments thereto) to this
registration statement under the Securities Act of 1933 and to file the same,
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission and hereby ratify and confirm each and every
act and thing that the designated attorney-in-fact, or his substitutes, shall
lawfully do or cause to be done by virtue thereof.
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 Chief Executive Officer and October 17, 2006
- ------------------------ Chairman of the Board
Richard P. Kundrat (Principal Executive Officer)
/s/ RICHARD P. KUNDRAT Chief Financial Officer October 17, 2006
- ------------------------ (Principal Financial and
Richard P. Kundrat Accounting Officer)
/s/ CALVIN L. HODOCK Director October 17, 2006
- ------------------------
Calvin L. Hodock
/s/ STANLEY H. MOGER Director October 17, 2006
- ------------------------
Stanley H. Moger
/s/ PETER V. DECRESCENZO Director October 17, 2006
- ------------------------
Peter V. DeCrescenzo
/s/ DOUG SCOTT Director October 17, 2006
- ------------------------
Doug Scott
II-12