UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
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NUTRACEA
--------
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 87-0673375
------------------------------- -------------------------------
(State of other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
1261 Hawk's Flight Court
El Dorado Hills, California 95762
(Address of Principal Executive Offices) (Zip Code)
---------------------------------------- ----------
Issuer's telephone number: (916) 933-7000
--------------
Indicate by check mark whether the issuer (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the issuer was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days: Yes X No
--- ---
The number of shares of the issuer's common stock outstanding as of August 6,
2004 was 26,413,114.
Transitional Small Business Disclosure Format (Check One): Yes No X
--- ---
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . 2
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS. . . .12
ITEM 3. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . .14
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES. . . . . . . . . . . . . . . . . .16
ITEM 5. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . .16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . . .16
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRACEA
INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet as of June 30, 2004 (Unaudited). . . . . . . . . . .2
Consolidated Statements of Operations for the three and six months
ended June 30, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . . . .3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2004 and 2003 (Unaudited) . . . . . . . . . . . . . . . . . .4
Notes to Unaudited Consolidated Financial Statements. . . . . . . . . . . . . .5
2
NUTRACEA
AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2004
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,012,744
Accounts receivable-trade 1,671
Inventory, net 178,968
Prepaid expenses 15,541
-------------
Total current assets 1,208,924
EQUIPMENT, net 34,583
PATENTS AND TRADEMARKS, net 306,314
GOODWILL 250,001
-------------
TOTAL ASSETS $ 1,799,822
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 525,661
Accrued expenses 65,312
Due to related parties 5,358
Customer deposits 106,486
Convertible, manditorily redeemable series A preferred stock,
no par value, $1 stated value, 20,000,000 shares authorized,
430,000 shares issued and outstanding 212,361
-------------
Total current liabilities 915,178
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value, 100,000 shares authorized,
26,401,408 shares issued and outstanding 42,475,581
Deferred compensation (23,932)
Accumulated deficit (41,567,005)
-------------
Total shareholders' equity 884,644
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,799,822
=============
3
NUTRACEA
AND SUBSIDIARIES
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
For the Six Months Ended For the Three Months Ended
June 30, June 30,
2004 2003 2004 2003
------------- ------------ ------------ -----------
(Restated) (Restated)
REVENUES
Net sales $ 413,070 $ 575,432 $ 291,001 $ 349,441
COST OF GOODS SOLD 231,425 323,120 152,760 195,721
------------- ------------ ------------ -----------
GROSS PROFIT 181,645 252,312 138,241 153,720
OPERATING EXPENSES 20,397,884 1,298,356 2,551,425 835,749
------------- ------------ ------------ -----------
LOSS FROM OPERATIONS (20,216,239) (1,046,044) (2,413,184) (682,029)
------------- ------------ ------------ -----------
OTHER INCOME (EXPENSE)
Interest income 3,057 - 2,119 -
Interest expense (495) (39,877) - (22,686)
------------- ------------ ------------ -----------
Total other income (expense) 2,562 (39,877) 2,119 (22,686)
------------- ------------ ------------ -----------
NET LOSS (20,213,677) (1,085,921) (2,411,065) (704,715)
CUMULATIVE PREFERRED
DIVIDEND (8,373) (75,064) - (37,532)
------------- ------------ ------------ -----------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $(20,222,050) $(1,160,985) $(2,411,065) $ (742,247)
============= ============ ============ ===========
BASIC AND DILUTED LOSS
AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ (1.16) $ (0.47) $ (0.10) $ (0.29)
============= ============ ============ ===========
BASIC AND DILUTED WEIGHTED-
AVERAGE SHARES
OUTSTANDING 17,465,704 2,470,871 24,616,107 2,522,280
============= ============ ============ ===========
4
NUTRACEA
AND SUBSIDIARIES
Consolidated Statements of Cash Flow
(unaudited)
For the six months ended
June 30,
2004 2003
------------- ------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(20,213,677) $(1,085,921)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 13,942 64,100
Amortization of deferred compensation 49,670 44,006
Non-cash issuances of stock options and warrants 7,761,515 398,650
Non-cash issuances of stock as compensation 10,726,984 -
(Increase) decrease in
Accounts receivable 28,782 (2,808)
Inventory (108,074) (56,155)
Prepaid expenses (684) 22,029
Deposits - (103,021)
Accounts payable 279,252 96,480
Due to factor - 103,066
Accrued salaries and benefits (15,642) (17,145)
Deferred compensation (47,842) 282,869
Accrued expenses 6,459 (10,104)
Customer deposits 5,000 134,816
Due to related parties (13,030) 7,355
------------- ------------
Net cash used in operating activities (1,527,345) (121,783)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (20,849) (1,103)
Purchase of patents and trademarks (44,637) (5,145)
------------- ------------
Net cash used in investing activities (65,486) (6,248)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible notes payable - 156,700
Principal payments on notes payable - (50,000)
Proceeds from notes payable - related parties - 275,422
Payments on notes payable - related parties - (210,000)
Proceeds from issuance of common stock - 104,500
Proceeds from exercise of stock options 2,767,368 1,000
Common stock repurchase (230,000) -
Payment of preferred dividends (31,816) -
------------- ------------
Net cash provided by financing activities 2,505,552 277,622
------------- ------------
Net increase in cash 912,721 149,591
CASH, BEGINNING OF PERIOD 100,023 34,718
------------- ------------
CASH, END OF PERIOD $ 1,012,744 $ 184,309
============= ============
5
NUTRACEA AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-BASIS OF PRESENTATION:
The accompanying unaudited interim consolidated financial statements of NutraCea
have been prepared in accordance with accounting principles generally accepted
in the United States of America and the rules of the Securities and Exchange
Commission ("SEC"), and should be read in conjunction with the audited financial
statements and notes thereto contained in NutraCea's Annual Report filed with
the SEC on Form 10-KSB. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation of
financial position and the results of operations for the interim periods
presented have been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year. Notes to the financial statements that would substantially duplicate
the disclosure contained in the audited financial statements for 2003 as
reported in the 10-KSB have been omitted.
NOTE 2-RESTATEMENT:
NutraCea has restated its Consolidated Financial Statements for the second
quarter of 2003 to correct an error in valuation of stock-based compensation.
This restatement increased operating expenses and the net loss attributable to
common shareholders by $373,900 for the quarter and six months ended June 30,
2003.
For the six months ended For the three months ended
June 30, 2003 June 30, 2003
------------------------------------------- -----------------------------------------
As previously Restatement As As previously Restatement As
reported adjustments restated reported adjustments restated
--------------- ------------ ------------ --------------- ------------ ----------
Operating expenses $ 924,456 373,900 $ 1,298,356 $ 461,849 373,900 $ 835,749
Net loss available to common
shareholders $ (787,085) (373,900) $(1,160,985) $ (368,347) (373,900) $(742,247)
Basic and diluted loss available
to common shareholders per
share $ (0.32) (0.15) $ (0.47) $ (0.15) (0.14) $ (0.29)
The following table presents the effects of the correction and restatement on a
condensed basis.
NOTE 3-STOCK-BASED COMPENSATION:
Compensation is recorded for stock-based compensation grants based on the excess
of the estimated fair value of the common stock on the measurement date over the
exercise price. Additionally, for stock-based compensation grants to
consultants, NutraCea recognizes as compensation expense the fair value of such
grants as calculated pursuant to SFAS No. 123, recognized over the related
service period. SFAS No. 148 requires companies to disclose proforma results of
the estimated effect on net income and earnings per share to reflect application
of the fair value recognition provision of SFAS No. 123.
6
For the six months For the three months
ended June 30, ended June 30,
--------------------------- ------------------------
2004 2003 2004 2003
------------- ------------ ------------ ----------
(Restated) (Restated)
Net loss available
to common shareholders: $(20,222,050) $(1,160,985) $(2,411,065) $(742,247)
As reported:
Less: compensation expense
charged to income: 7,761,515 398,650 490,455 398,650
Plus: proforma compensation
expense: (7,761,515) (491,732) (490,455) (491,732)
------------- ------------ ------------ ----------
Proforma net loss available
to common shareholders: $(20,222,050) $(1,254,067) $(2,411,065) $(835,329)
============= ============ ============ ==========
Basic loss per common share:
As reported: $ (1.16) $ (0.47) $ (0.10) $ (0.29)
Proforma: $ (1.16) $ (0.51) $ (0.10) $ (0.33)
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Agreements
----------
For all agreements where stock is awarded as partial or full consideration, the
expense is valued at the fair value of the stock. Expense for stock options and
warrants issued to consultants is calculated at fair value using the
Black-Scholes valuation method.
Effective January 1, 2004, NutraCea amended two executive employment contracts
to reflect quarterly bonuses. Under the contract, compensation shall be $45,000
per calendar quarter, with 250,000 shares of common stock to be granted in the
event NutraCea achieves gross revenues of $1 million or more for the quarter. In
addition, a one-time stock grant of 550,000 shares of common stock will be
awarded for the first quarter gross revenues equal or exceed $5 million. This
bonus agreement is effective until April 15, 2006, unless extended by the board.
NutraCea also agreed to maintain an annual bonus program for members of the
senior management group, including the Chief Executive Officer. The Chief
Executive Officer shall be eligible to receive an annual bonus under terms
otherwise governing the annual bonus program.
Effective January 1, 2004, NutraCea amended the stock options section of an
executive employment contract dated April 15, 2003. The amendment changed the
vesting conditions on 250,000 shares of common stock to "upon the completion of
the twelfth month of employment " instead of "upon the Company achieving two
successful calendar quarters of net profits from operations of the business of
the Company before interest, taxes, depreciation and amortization as
conclusively determined by the independent certified public accountant for the
Company".
On January 12, 2004, NutraCea entered into a one-year consulting agreement with
a sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 4,000,000 shares of common stock as follows:
300,000 shares at $.50 per share on or before January 12, 2004; 400,000 shares
at $.50 per share on or before February 17, 2004; and 3,300,000 shares at $.50
per share on or before April 19, 2004. Non-cash compensation expense of
$3,911,886 was recorded relating to this agreement. All of the warrants had been
exercised at March 31, 2004.
On January 28, 2004, NutraCea entered into a one-year consulting agreement with
a sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 90,000 shares of common stock at an exercise price
of $.01 per share. Non-cash
7
compensation expense of $137,158 was recorded relating to this agreement. As of
March 31, 2004, these warrants had been exercised.
On February 2, 2004, NutraCea entered into a six -month consulting agreement
with a communications company. Under the terms of the agreement, compensation
shall be $2,500 per month, plus shares of common stock valued at $6,000 issued
at signing of contract. Either party may terminate the agreement with sixty
days written notice. At March 31, 2004, the shares had been issued in full.
On February 23, 2004, NutraCea entered into a one-year consulting agreement with
a marketing company. Under the terms of the agreement, compensation shall be
monthly issuance of shares of common stock valued at $7,500 per month. In
addition, the consultant is entitled to a 3% commission on equity or debt
financing introduced to NutraCea.
On March 1, 2004, NutraCea entered into a 90-day consulting agreement with a
financial relations company. Compensation shall be the issuance of 100,000
shares of common stock per month. As of March 31, 2004, 100,000 shares valued
at $142,000 had been issued to the consultant.
On March 1, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing company. Compensation shall be the issuance of 25,000
shares of common stock. At March 31, 2004, these shares had been issued.
Non-cash compensation expense of $35,500 was recorded relating to this
agreement.
On March 9, 2004, NutraCea entered into a one-year consulting agreement with a
communications company. Under the terms of the agreement, compensation shall be
issuance shares of common stock valued at $36,000. At March 31, 2004, these
shares have been issued in full.
On March 15, 2004, NutraCea entered into a six-month consulting agreement with a
sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 400,000 shares of common stock, at an exercise
price of $.001 and warrants to purchase up to 1,000,000 shares of common stock
at an exercise price of $1.20, to be exercised within three years. At March 31,
2004, the 400,000 warrants exercisable at $.001 had been exercised. Non-cash
compensation expense of $2,149,598 was recorded relating to this agreement.
On March 19, 2004, NutraCea approved granting a one-time cash bonus of 2/3 of
normal salary to the CEO and President. The bonus amount for both executives is
$180,000, payable April 1, 2004.
On March 25, 2004, NutraCea entered into two, two-year consulting agreements
with two medical advisors. Under the terms of the agreement, compensation shall
be 100,000 shares of common stock each, payable in advance, and options to
purchase 100,000 shares of common stock at a price of $.50 per share for the
second year of service. The 200,000 shares of common stock are valued at
$286,000, and the options are valued at $107,684. Expense for these amounts was
recorded in April 2004 when the shares and options were issued.
On March 25, 2004, NutraCea entered into a three-year consulting agreement with
a development and marketing company. Under the terms of the agreement,
compensation shall be $1 per unit (a minimum 30-day supply of NutraCea product)
for up to a total accumulated payment of $750,000, and $.50 per unit thereafter,
payable quarterly within 45 days after the end of the quarter. In addition,
NutraCea will issue 100,000 shares of common stock for each probiotic
formulation NutraCea markets, and options to purchase 300,000 shares of common
stock at an exercise price of $1 per share with 100,000 options to be vested
immediately and 50,000 shares per year thereafter. The vested options are
valued at $102,782.
8
On April 2, 2004, NutraCea entered into a 180-day consulting agreement with a
marketing and investor relations company. The term can be extended another 180
days by mutual agreement. Under the terms of the agreement, compensation shall
be 400,000 shares of common stock, and $4,000 cash per month. Compensation
shall also include an 8% cash commission on equity or debt financing introduced
to NutraCea, as well as a warrant, exercisable within 3 years, for common shares
to equal 10% of the gross financing proceeds. The warrant is to be priced at
110% of the closing bid price for the preceding 30 business days of the day of
closing, such warrant or shares to be issued at closing.
On April 29, 2004, NutraCea entered into a one-year consulting agreement (with
options to extend for four successive terms of one year each) with two retired
employees of NutraCea. Under the terms of the agreements, annual compensation of
$70,000 and $80,000 each is payable on a monthly basis. In addition, each of
the consultants received warrants to purchase 50,000 shares of common stock at
$.20 a share. The 100,000 warrants are valued at $91,370 and expire in 5 years.
Either party can cancel this agreement with 30-day written notice.
On April 15, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing consultant. Under the terms of the agreement, compensation
shall be warrants to purchase 50,000 shares of common stock at $.80 per share
upon the completion of certain benchmarks. The warrants are valued at $46,758
and expire in 3 years.
On June 2, 2004, NutraCea entered into two consulting agreements with sales and
marketing consultants. Under the terms of the agreements, each consultant shall
be issued 150,000 restricted shares of common stock, valued at $161,500. The
agreement calls for these shares to be included in the next registration
statement filed.
NOTE 5 - COMMON STOCK
Common and Preferred Stock
--------------------------
All stock issued is valued at the fair value of the stock.
On March 25, 2004, NutraCea established the NutraCea Patent Incentive Plan,
which grants 15,000 shares of common stock to each named inventor on each
granted patent which is assigned to NutraCea.
During the quarter ended March 31, 2004, NutraCea issued 544,965 shares of
common stock to consultants for services rendered valued at $723,381.
During the quarter ended March 31, 2004, NutraCea issued 168,095 shares of
common stock to vendors in payment of accounts payable totaling $57,111.
During the quarter ended March 31, 2004, NutraCea issued 6,490,711 shares of
common stock pursuant to the exercise of stock options and warrants for cash
totaling $2,744,507.
During the quarter ended March 31, 2004, NutraCea issued 280,000 shares of
common stock to two consultants in settlement of contractual agreements valued
at $477,816.
During the quarter ended March 31, 2004, NutraCea issued 5,500,000 shares of
common stock, valued at $8,360,000, to NutraCea's Chief Executive Officer for
current services rendered. 175,000 of these shares replace shares owned by
NutraCea's CEO and used to satisfy NutraCea obligations and the balance of the
shares will be held in escrow to satisfy a deferred compensation arrangement
between NutraCea and the CEO.
On April 1, 2004, NutraCea repurchased 344,956 shares of common stock valued at
$230,000 from the Chief Executive Officer of NutraCea pursuant to a repurchase
agreement of that date.
9
During the quarter ended June 30, 2004, NutraCea issued 1,083,489 shares of
common stock to consultants for services rendered valued at $1,380,287.
During the quarter ended June 30, 2004, NutraCea issued 531 shares of common
stock to a vendor in payment of accounts payable in the amount of $833.
During the quarter ended June 30, 2004, NutraCea issued 438,612 shares of common
stock pursuant to the exercise of stock options and warrants for cash totaling
$22,861.
During the quarter ended June 30, 2004, NutraCea converted 510,000 shares of
preferred stock to 510,000 shares of common stock pursuant to the Mandatory
Conversion paragraph of the Private Placement Memorandum dated November 9,
2001.
During the quarter ended June 30, 2004, NutraCea converted preferred dividends
in the amount of $5,986 into 5,759 shares of common stock.
Stock Options & Warrants
------------------------
Expense for stock options and warrants issued to consultants is calculated at
fair value using the Black-Scholes valuation method.
During the quarter ended March 31, 2004, NutraCea issued 6,547,263 warrants with
exercise prices between $.001 and $5.00 per share to consultants. The warrants
expire at varying times between six months and five years. A total of $7,271,060
in non-cash compensation expense was recorded relating to the issue of these
warrants.
During the quarter ended June 30, 2004 NutraCea issued 451,230 warrants with
exercise prices between $.001 and $5.00 to consultants. The warrants expire at
varying times between three and five years. A total of $490,455 in non-cash
compensation expense was recorded relating to the issue of these warrants.
10
NOTE 6 - BUSINESS SEGMENTS
For internal reporting purposes, management segregates NutraCea into operating
segments as follows for the six and three months ended June 30, 2004 and 2003:
SIX MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
JUNE 30, 2004 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ------------ ------------- -------- -------------- -------------
NutraStar Technologies Incorporated $ 217,197 $ (4,070) $ 495 $ 1,781,789 $ 13,942
NutraGlo Incorporated 195,873 60,109 - 18,033 -
Unallocated corporate overhead - (20,272,278) - - -
------------ ------------- -------- -------------- -------------
Total, NutraCea $ 413,070 $(20,216,239) $ 495 $ 1,799,822 $ 13,942
============ ============= ======== ============== =============
SIX MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
6/30/2003 (RESTATED) NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ------------ ------------- -------- -------------- -------------
NutraStar Technologies Incorporated $ 63,073 $ 106,404 $ 39,877 $ 625,991 $ 64,100
NutraGlo Incorporated 512,359 183,714 - 133,263 -
Unallocated corporate overhead - (1,336,162) - - -
------------ ------------- -------- -------------- -------------
Total, NutraCea $ 575,432 $ (1,046,044) $ 39,877 $ 759,254 $ 64,100
============ ============= ======== ============== =============
THREE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
JUNE 30, 2004 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ------------ ------------- -------- -------------- -------------
NutraStar Technologies Incorporated $ 95,234 $ 92,473 $ - $ 1,781,789 $ 8,764
NutraGlo Incorporated 195,767 (25,740) - 18,033 -
Unallocated corporate overhead - (2,479,917) - - -
------------ ------------- -------- -------------- -------------
Total, NutraCea $ 291,001 $ (2,413,184) $ - $ 1,799,822 $ 8,764
============ ============= ======== ============== =============
THREE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
6/30/2003 (RESTATED) NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
------------------------------------ ------------ ------------- -------- -------------- -------------
NutraStar Technologies Incorporated $ 38,323 $ 85,602 $ 22,686 $ 625,991 $ 31,803
NutraGlo Incorporated 311,118 102,470 - 133,263 -
Unallocated corporate overhead - (870,101) - - -
------------ ------------- -------- -------------- -------------
Total, NutraCea $ 349,441 $ (682,029) $ 22,686 $ 759,254 $ 31,803
============ ============= ======== ============== =============
NOTE 7 - SUBSEQUENT EVENTS
Common and Preferred Stock
--------------------------
All stock issued is valued at the fair value of the stock.
On July 1, 2004, NutraCea issued 12,066 shares of common stock to consultants
for services rendered valued at $12,500.
On July 9, 2004, the holder of a Put/Call Agreement dated January 15, 2002
notified NutraCea of its intent to exercise its Put Right for 130,000 preferred
shares to NutraCea for purchase at $1.00 per share, or $130,000, plus all
accumulated but unpaid dividends.
Stock Options & Warrants
------------------------
Expense for stock options and warrants issued to consultants is calculated at
fair value using the Black-Scholes valuation method.
On July 9, 2004, NutraCea issued 25,000 stock options with an exercise price of
$.20, expiring in five years, to an employee of the Company. Non-cash
compensation expense of $21,000 was recorded relating to the issue of these
options.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-QSB includes "forward-looking" statements about future financial
results, future business changes and other events that have not yet occurred.
For example, statements like NutraCea "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from NutraCea's expressed expectations because of risks and
uncertainties about the future. NutraCea does not undertake to update the
information in this Form 10-QSB if any forward-looking statement later turns out
to be inaccurate. Details about risks affecting various aspects of NutraCea's
business are discussed throughout this Form 10-QSB and should be considered
carefully.
RESULTS OF OPERATIONS
Revenues of NutraCea decreased by $162,362, to $413,070 for the six months ended
June 30, 2004 from $575,432 for the six months ended June 30, 2003. Revenues
also decreased by $58,440, to $291,001 for the quarter ended June 30, 2004 from
$349,441 for the quarter ended June 30, 2003. The decreases are primarily due to
decreased purchases by the major customer of the Company's subsidiary NutraGlo
Incorporated.
Cost of goods sold decreased by $91,695, to $231,425 for the six months ended
June 30, 2004 from $323,120 for the six months ended June 30, 2003. Cost of
goods sold also decreased by $42,961, to $152,760 for the quarter ended June 30,
2004 from $195,721 for the quarter ended June 30, 2003. The decrease relates
directly to the decrease in sales.
Operating expenses increased by $19,099,528, to $20,397,884 for the six months
ended June 30, 2004 from $1,298,356 for the six months ended June 30, 2003.
Operating expenses also increased by $1,715,676, to $2,551,425 for the quarter
ended June 30, 2004 from $835,749 for the quarter ended June 30, 2003. Non-cash
stock and option awards increased by $18,368,279, to $18,776,929 for the six
months ended June 30, 2004 from $398,650 for the six months ended June 30, 2003,
and by $1,478,911, to $1,877,561 for the quarter ended June 30, 2004 from
$398,650 for the quarter ended June 30, 2003. We are continuing in 2004 to
conserve our positive cash position by issuing options and stock for services
whenever possible. Other significant operating expense increases are as follows:
For the six For the
months ended quarter ended
June 30, 2004
----------------------------
Commissions and finders fees $ 209,438 $ 39,000
Professional fees 174,130 119,400
Promotional and marketing 77,375 32,165
Travel 63,027 48,145
------------- -------------
$ 523,970 $ 238,710
============= =============
In addition, salaries and wages increased during the six months ended June 30,
2004 by approximately $130,000 due to one-time cash bonuses to the Company's CEO
and President.
Interest expense decreased by $39,382, to $495 for the six months ended June 30,
2004 from $39,877 for the six months ended June 30, 2003. Interest expense also
decreased by $22,686, to
12
zero interest expense for the quarter ended June 30, 2004 from $22,686 for the
quarter ended June 30, 2003.The decrease is due to the elimination of interest
expense on notes that were paid off in 2003.
The Company posted an operating loss of $2,413,184 for the quarter ended June
30, 2004 compared to an operating loss of $682,029 for the same quarter in 2003.
The operating losses are due to the significant operating expenses consisting
primarily of non-cash stock option and warrant awards made to certain officers
and consultants of NutraCea. The Company recorded operating losses of
$20,216,239 for the six month period ended June 30, 2004 compared to $1,046,044
for the first half of 2003. The six month operating loss in 2004 was due
primarily to the significant operating expenses incurred in the first quarter of
2004 relating to the issuance of the Company's common stock as compensation and
pursuant to the exercise of outstanding options and warrants.
During the quarter ended June 30, 2004 the Company entered into the following
consulting agreements:
On April 2, 2004, NutraCea entered into a 180-day consulting agreement with
Chamberlain Capital Partners LLC, a marketing and investor relations
company, for the purpose of developing a new corporate web site.
On April 29, 2004, NutraCea entered into a one-year consulting agreement
(with options to extend for four successive terms of one year each) with
Dr. Cherukuri and Dr. Cheruvanky, two retired employees of NutraCea, for
the purpose of continuing patent development work and product quality
control.
On June 2, 2004, NutraCea entered into one-year consulting agreements with
Craig Horn and Carl Kruse for the purpose of identifying and evaluating
various stock analysts to assist the Company with investor communications.
On June 7, 2004, NutraCea entered into a three-year consulting agreement
with Nussentials, LLC to develop and manage a market for NutraCea products
specifically in the direct consumer arena.
Off-Balance Sheet Arrangements
------------------------------
During the quarter ended June 30, 2004, the Company did not engage in any
off-balance sheet arrangements as defined in Item 303 (c) of the SEC's
Regulation S-B.
LIQUIDITY AND SOURCES OF CAPITAL
NutraCea has incurred significant operating losses since its inception, and, as
of June 30, 2004 NutraCea had an accumulated deficit of $41,567,005. However,
at June 30, 2004, NutraCea had cash and cash equivalents of $1,012,744 and
working capital of $293,746.
To date, NutraCea has funded its operations, in addition to sales revenues,
through a combination of short-term debt and the issuance of common and
preferred stock. During the six months ended June 30, 2004, NutraCea has issued
a total of 14,627,566 shares of common stock of which approximately 7.6 million
shares were issued as compensation to officers and consultants of the Company.
During the six months ended June 30, 2004, NutraCea raised a total of $2,767,368
from the exercise of options and warrants to purchase 6,929,323 shares of common
stock. NutraCea continues to pursue cost cutting or expense deferral strategies
in order to conserve working capital.
Based on management's financial projections, NutraCea has enough cash reserves
to finance its business plan through fiscal year 2004
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Due to the Company's limited cash flow and operating losses, it is unlikely that
the Company could obtain financing through commercial or banking sources.
Consequently, the Company is dependent on continuous cash infusions from major
investors and the exercise of outstanding warrants and options in order to fund
its current operations. If these sources of capital were unwilling or unable to
provide additional working capital to the Company, the Company would probably
not be able to sustain its full range of operations. There is no written
agreement or contractual obligation which would require the Company's past
funding sources to fund the Company's future operations up to certain amounts or
indeed continue to finance the Company's operations at all.
As of June 30, 2004, NutraCea's principal commitments include a lease commitment
that expires in 2006 of $ 5,358 per month for the Company's corporate offices.
Management of NutraCea believes that it will need to raise additional capital to
continue to develop, promote and conduct its operations. Such additional
capital may be raised through public or private financing as well as borrowing
from other sources. Although the Company believes that current and/or future
investors will continue to fund the Company's expenses, there is no assurance
that such investors will continue to fund the Company's ongoing operations or
the terms upon which such investments will be made.
CRITICAL ACCOUNTING POLICIES
NutraCea's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of financial statements require
managers to make estimates and judgments that affect the reported amounts of
assets and liabilities, revenues and expenses and disclosures on the date of the
financial statements. On an on-going basis, the Company's accountants' evaluate
the estimates, including, but not limited to, those related to revenue
recognition. The Company uses authoritative pronouncements, historical
experience and other assumptions as the basis for making judgments. Actual
results could differ from those estimates.
The Company has adopted the fair value based method of accounting prescribed in
Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for
Stock-Based Compensation," for its employee stock option plans.
The Company has adopted SFAS No. 145, "Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13 and Technical Corrections" which
requires gains and losses from extinguishment of debt to be reported as part of
recurring operations.
ITEM 3. CONTROLS AND PROCEDURES
NutraCea has adopted and implemented internal disclosure controls and procedures
designed to provide reasonable assurance that all reportable information will be
recorded, processed, summarized and reported within the time period specified in
the SEC's rules and forms. Under the supervision and with the participation of
NutraCea's management, including NutraCea's President and Chief Executive
Officer and NutraCea's Controller and Principal Financial Officer, NutraCea has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of
the fiscal quarter covered by this report. Based on that evaluation, the
President and Chief Executive Officer and the Controller and Principal Financial
Officer have concluded that these disclosure controls and procedures are
effective. There were no changes in NutraCea's internal controls or in other
factors during or since the end of the fiscal quarter covered by this report
that have had a material effect or are reasonably likely to have a material
effect on internal controls subsequent to the end of the fiscal quarter covered
by this report.
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PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER
PURCHASES OF EQUITY SECURITIES
Sales of Unregistered Securities During the Quarter
During the quarter ended June 30, 2004, NutraCea issued 701,068 shares of
restricted common stock to consultants for services rendered valued at $840,600.
During the quarter ended June 30, 2004, NutraCea issued 340,000 shares of
restricted common stock to officers and directors for services rendered valued
at $498,800.
During the second quarter, the Company issued a warrant to one consultant to
purchase common stock equal to 10% of any financing proceeds arranged by the
consultant.
During the second quarter, the Company issued options and warrants to purchase
451,230 shares of the Company's common stock. Such warrants were valued at
$490,455.
During the quarter ended June 30, 2004, NutraCea issued 531 shares of common
stock to a vendor in payment of accounts payable in the amount of $833.
During the quarter ended June 30, 2004, NutraCea issued 188,612 shares of common
stock pursuant to the exercise of stock options and warrants for cash totaling
$22,611.
All of the above issuances were made without any public solicitation, to a
limited number of investors or related individuals or entities and were acquired
for investment purposes only. Each of the individuals or entities had access to
information about NutraCea and was deemed capable of protecting their own
interests. The securities were issued pursuant to the private placement
exemption provided by Section 4(2) of the Securities Act of 1933 ("1933 Act").
These are deemed to be "restricted securities" as defined in Rule 144 under the
1933 Act and bear a legend stating the restrictions on resale.
ITEM 5. OTHER INFORMATION
On February 23 and March 19, 2004, respectively, Eliot Drell, MD and Ernie
Bodai, MD were appointed to serve on the Board of Directors until the next
annual shareholders meeting and Board election.
Subsequent to the quarter ended June 30, 2004, John Howell resigned as President
and as a director of NutraCea.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as exhibits to this report:
31.1 Certification by CEO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
31.2 Certification by CFO pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002
32.1 Certification by CEO and CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K: None
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRACEA
Dated: August 16,2004 /s/Patricia McPeak
------------------
Patricia McPeak
Chief Executive Officer
Dated: August 16,2004 /s/ Joanna Hoover
-----------------
Joanna Hoover,
Chief Financial Officer
(Principal Accounting Officer)
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