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 SEPTEMBER 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT FOR THE TRANSITION PERIOD FROM
_______________ to _______________
Commission File Number 0-32565
NUTRASTAR INCORPORATED
----------------------
(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
-------- ----------
Common stock, no par value, 23,965,065 issued and outstanding as of October 31,
2002.
INDEX
Page
----
PART 1 - FINANCIAL INFORMATION................................................1
ITEM 1. FINANCIAL STATEMENTS.........................................1
ITEM 2. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OR PLAN OF
OPERATIONS... ..............................................21
ITEM 3. CONTROLS AND PROCEDURES.....................................26
PART II - OTHER INFORMATION..................................................27
ITEM 1. LEGAL PROCEEDINGS...........................................27
ITEM 5. OTHER INFORMATION...........................................27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................28
SIGNATURES..............................................................29
(i)
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
1
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONTENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
Page
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
Condensed, Consolidated Balance Sheet 3 - 4
Condensed, Consolidated Statements of Operations 5
Condensed, Consolidated Statements of Cash Flows 6-7
Notes to Condensed, Consolidated Financial Statements 8 - 20
2
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
ASSETS
Current assets
Cash $ 23,230
Accounts receivable 40,440
Inventory, net 85,987
Prepaid expenses 17,247
--------
Total current assets 166,904
Property and equipment, net 189,734
Patents and trademarks, net 53,481
Goodwill 250,001
--------
Total assets $660,120
========
3
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED BALANCE SHEET
September 30, 2002 (unaudited)
-------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 708,187
Accrued salaries and benefits 87,419
Deferred compensation 186,923
Accrued expenses 117,570
Due to officer 13,457
Due to related parties 13,214
Notes payable 100,000
Notes payable to officer 112,000
-----------
Total current liabilities 1,338,770
Put option 130,000
-----------
Total liabilities 1,468,770
-----------
Commitments and contingencies
Convertible, redeemable series A preferred stock,
no par value, $1 stated value
3,000,000 shares authorized
2,084,707 shares issued and outstanding 1,960,249
-----------
Shareholders' deficit
Common stock, no par value
50,000,000 shares authorized
21,649,520 shares issued and outstanding 5,012,296
Common stock committed 806,674
Deferred compensation (894,240)
Accumulated deficit (7,693,629)
-----------
Total shareholders' deficit (2,768,899)
-----------
Total liabilities and shareholders' deficit $ 660,120
===========
4
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
For Three and Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
(unaudited) (unaudited) (unaudited) (unaudited)
Revenues
Net sales $ 247,367 $ 513,450 $ 1,078,094 $ 1,176,918
Commissions revenue -- 93,852 -- 206,138
------------ ------------ ------------ ------------
Total revenues 247,367 607,302 1,078,094 1,383,056
Cost of goods sold 135,549 295,076 689,547 865,273
------------ ------------ ------------ ------------
Gross profit 111,818 312,226 388,547 517,783
Operating expenses 612,798 346,197 2,567,130 1,176,202
------------ ------------ ------------ ------------
Loss from operations (500,980) (33,971) (2,178,583) (658,419)
------------ ------------ ------------ ------------
Other income (expense)
Interest income -- -- 636 --
Interest expense (72,261) (46,451) (78,061) (133,719)
------------ ------------ ------------ ------------
Total other income
(expense) (72,261) (46,451) (77,425) (133,719)
------------ ------------ ------------ ------------
Net loss (573,241) (80,422) (2,256,008) (792,138)
Cumulative preferred
dividend (36,482) -- (109,447) --
------------ ------------ ------------ ------------
Net loss available to common
shareholders $ (609,723) $ (80,422) $ (2,365,455) $ (792,138)
============ ============ ============ ============
Basic and diluted loss
available to common
shareholders per share $ (0.03) $ (0.01) $ (0.11) $ (0.04)
============ ============ ============ ============
Basic and diluted weighted-
average common shares
outstanding 21,649,520 16,419,790 21,649,520 17,776,193
============ ============ ============ ============
5
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
--------------------------------------------------------------------------------------------
2002 2001
----------- -----------
(unaudited) (unaudited)
Cash flows from operating activities
Net loss $(2,256,008) $ (792,138)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 95,066 72,849
Inventory obsolescence 8,702 --
Loss reserve for patents and trademarks 75,359 --
Amortization of deferred compensation 176,947 --
Non-cash issuances of stock options 227,288 --
Non-cash issuances of warrants 850 --
Non-cash issuances of committed stock 162,500 --
Beneficial conversion feature 66,000 --
(Increase) decrease in
Accounts receivable (38,847) (300,915)
Inventory (803) 336,008
Prepaid expenses (8,459) 28
Deposits 316,071 100,525
Increase (decrease) in
Accounts payable 191,070 (70,705)
Accrued salaries and benefits 26,405 67,784
Deferred compensation 186,923 --
Accrued expenses 30,201 173,816
Due to officer (18,572) 27,197
Due to related parties 13,214 --
----------- -----------
Net cash used in operating activities (746,093) (385,551)
----------- -----------
Cash flows from investing activities
Purchase of property and equipment (66,149) (234,349)
Purchase of patents and trademarks (27,030) (28,367)
----------- -----------
Net cash used in investing activities (93,179) (262,716)
----------- -----------
Cash flows from financing activities
Refunds of deposits payable (455,500)
Proceeds from notes payable 114,000 --
6
NUTRASTAR INCORPORATED AND SUBSIDIARIES
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
--------------------------------------------------------------------------------------------
2002 2001
----------- -----------
(unaudited) (unaudited)
Payments on notes payable (14,000) (10,187)
Proceeds from notes payable to officer 112,000
Proceeds from convertible note payable -- 1,125,000
Proceeds from committed stock 245,000 32,500
----------- -----------
Net cash provided by financing activities 457,000 691,813
----------- -----------
Net increase (decrease) in cash (382,272) 43,546
Cash, beginning of period 405,502 5,865
----------- -----------
Cash, end of period $ 23,230 $ 49,411
=========== ===========
Supplemental disclosures of cash flow information
Interest paid $ 2,875 $ --
=========== ===========
Income taxes paid $ 1,600 $ --
=========== ===========
7
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
NutraStar Incorporated ('NutraStar"), a California corporation, markets
proprietary whole food dietary supplements derived from nutrient-dense
stabilized rice bran (a nutraceutical) produced by an affiliated
company, The RiceX Company ("RiceX"), a current shareholder and a
publicly traded company. The Company had a license to distribute
certain derivatives of RiceX's stabilized rice bran, as well as
valued-added rice bran products in the United States of America. This
license was terminated subsequent to September 30, 2002 (see Note 9).
On December 14, 2001, Alliance Consumer International, Inc.
("Alliance") acquired all of the outstanding common stock of NutraStar.
For accounting purposes, the acquisition has been treated as a
recapitalization of NutraStar with NutraStar as the acquirer (reverse
acquisition).
Effective April 27, 2000, NutraStar became an 80% owner of NutraGlo
Incorporated ("NutraGlo"), a Nevada corporation. NutraGlo was
non-operative during 2000. During the year ended December 31, 2001,
NutraGlo started marketing, manufacturing, and distributing NutraStar's
stabilized rice bran and other nutraceuticals to the equine market. In
connection with NutraStar's acquisition of Alliance, NutraStar issued
250,001 shares of common stock in exchange for the remaining 20% of the
common stock of NutraGlo.
The transaction has been accounted for in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which is required for all transactions occurring after
September 30, 2001. In accordance with SFAS No. 141, the purchase price
is to be allocated to assets acquired and liabilities assumed based on
the estimated fair market value at the closing date of the acquisition,
with the excess of the purchase price being allocated to goodwill.
Since assets were not acquired and liabilities were not assumed in
connection with this transaction, the value of the shares issued of
$250,001 has been recorded as goodwill in the accompanying consolidated
balance sheet. As NutraStar was the 80% owner of NutraGlo, the
operations of NutraGlo have been consolidated with NutraStar.
Therefore, pro forma information is not required.
The Company has four primary divisions through which it sells its
products: (1) TheraFoods(TM), which distributes consumer products
including RiSolubles(TM), RiceMucil(R), NutraFlex(TM), and StaBran(R),
(2) NutraCea(R), which was created to compliment medical food products,
(3) NutraBeauticals(R), which provides natural products to improve skin
health, and (4) NutraGlo, which developed a derivative of the
NutraFlex(TM) product for horses.
8
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS (Continued)
General (Continued)
-------------------
For internal reporting purposes, management segregates the Company into
two segments: (1) NutraStar, including the transactions of
TheraFoods(TM) , NutraCea(R), and NeutraBeauticals(R), and (2)
NutraGlo.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of NutraStar
and its wholly owned subsidiaries, NutraStar Technologies, Incorporated
and NutraGlo (collectively, the "Company"). All significant
inter-company accounts and transactions are eliminated in
consolidation.
Basis of Presentation
---------------------
The accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to
Form 10-QSB and Regulation S-B. Accordingly, they do not include all
of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, all normal,
recurring adjustments considered necessary for a fair presentation
have been included. The financial statements should be read in
conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-KSB for the year
ended December 31, 2001. The results of operations for the nine months
ended September 30, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002.
Going Concern
-------------
The Company has received a report from its independent auditors that
includes an explanatory paragraph describing the uncertainty as to the
Company's ability to continue as a going concern. These consolidated
financial statements contemplate the ability to continue as such and do
not include any adjustments that might result from this uncertainty.
Revenue Recognition
-------------------
Revenue is generally recognized upon shipment of product with a
provision for estimated returns and allowances record at that time, if
applicable. Commissions revenue is generally recognized when earned and
collection is reasonably assured.
Deferred Compensation
---------------------
Deferred compensation consists of salaries payable to employees of the
Company that have been earned but not yet paid.
9
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising Expense
-------------------
The Company expenses all advertising costs, including direct response
advertising, as they are incurred. Advertising expense for the nine
months ended September 30, 2002 and 2001 was $57,264 (unaudited) and
$12,172 (unaudited), respectively.
Estimates
---------
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates.
Concentration of Credit Risk
----------------------------
For the nine months ended September 30, 2002, three customers accounted
for 82% of the Company's accounts receivable.
Reclassifications
-----------------
Certain amounts included in the prior period financial statements have
been reclassified to conform with the current period presentation. Such
reclassification did not have any effect on reported net loss.
Recently Issued Accounting Pronouncements
-----------------------------------------
In April 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if
material, classified as an extraordinary item, net of related income
tax effect. As a result, the criteria in Accounting Principles Board
No. 30 will now be used to classify those gains and losses. SFAS No.
64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has
been rescinded. SFAS No. 44 has been rescinded as it is no longer
necessary. SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to
sale-leaseback transactions be accounted for in the same manner as
sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are
not substantive in nature, in some instances, they may change
accounting practice. The Company does not expect adoption of SFAS No.
145 to have a material impact, if any, on its financial position or
results of operations.
10
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Accounting Pronouncements (Continued)
-----------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force ("EITF")
Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring)." This statement requires that a liability
for a cost associated with an exit or disposal activity be recognized
when the liability is incurred. Under EITF Issue 94-3, a liability for
an exit cost, as defined, was recognized at the date of an entity's
commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after
December 31, 2002 with earlier application encouraged. This statement
is not applicable to the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of
Certain Financial Institutions." SFAS No. 147 removes the requirement
in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize
any excess of the fair value of liabilities assumed over the fair
value of tangible and identifiable intangible assets acquired as an
unidentifiable intangible asset. This statement requires that those
transactions be accounted for in accordance with SFAS No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." In addition, this statement amends SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," to
include certain financial institution-related intangible assets. This
statement is not applicable to the Company.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 2002 consisted of the
following:
Furniture and equipment $ 18,417
Software 352,773
--------
371,190
Less accumulated depreciation 181,456
Total $189,734
========
Depreciation expense was $87,370 (unaudited) and $69,407 (unaudited)
for the nine months ended September 30, 2002 and 2001, respectively.
11
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 4 - PATENTS AND TRADEMARKS
Patents and trademarks at September 30, 2002 consisted of the
following:
Patents $ 92,210
Trademarks 51,809
--------
144,019
Less accumulated amortization 15,179
Less loss reserve 75,359
Total $ 53,481
========
Amortization expense was $7,696 (unaudited) and $3,442 (unaudited) for
the nine months ended September 30, 2002 and 2001, respectively.
NOTE 5 - GOODWILL
Goodwill represents the purchase price of the remaining 20% of
NutraGlo. As of January 1, 2002, the Company adopted SFAS No. 142. SFAS
No. 142 prohibits the amortization of goodwill, but requires that it be
reviewed for impairment at least annually or on an interim basis if an
event occurs or circumstances change that could indicate that its value
has diminished or been impaired. Recoverability of goodwill is measured
by a comparison of its carrying value to the future net cash flows
expected to be generated by it. Cash flow projections are based on
historical experience, management's view of growth within the industry,
and the anticipated future economic environment. Since the Company
purchased the remaining 20% of NutraGlo on December 12, 2001,
amortization expense was not recorded as of December 31, 2001. As such,
the transitional disclosure provisions of SFAS No. 142 do not apply.
NOTE 6 - NOTES PAYABLE
During the years ended December 31, 2001 and 2000, the Company raised
an aggregate of $2,080,000 through the issuance of short-term
promissory notes and convertible promissory notes.
Activities related to the promissory notes are as follows:
o The promissory notes, with an aggregate principal balance of
$1,180,000, bore interest ranging from 8% to 12% per annum. As of
December 31, 2001, all of the promissory notes had been retired.
12
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 6 - NOTES PAYABLE (Continued)
o The convertible notes, with an aggregate principal balance of
$900,000, were immediately converted into shares of the Company's
preferred stock at $1 per share and bore interest ranging from 8%
to 15% per annum. As the convertible notes were convertible at
rates that approximated market value, no discount was recorded
relative to a beneficial conversion feature.
o As of December 31, 2001, the Company had paid notes in the amount
of $490,000 in cash. Notes with a principal balance of $1,340,000
and accrued interest of $90,196 had been converted into 1,430,196
shares of the Company's Series A preferred stock. Related to
these conversions, the Company issued an additional 345,511
shares of Series A preferred stock to certain of the note holders
and recorded related interest charges of $345,511. The remaining
notes with a principal balance of $250,000 and accrued interest
of $18,687 had been converted into committed common stock.
Related to the conversion, the Company recorded interest charges
of $130,487 for additional shares that will be issued.
o In connection with certain of the notes, the Company issued
warrants to purchase 350,000 shares of the Company's common stock
at an exercise price of $1 per share. The warrants expire on June
25, 2006 and are immediately exercisable. The Company recorded a
discount related to the detachable warrants of $114,083, which
represented the portion of the proceeds allocated to the warrants
based on the relative fair values of the debt and warrants. At
the date of conversion, $103,905 of the discount remained
unamortized and has been debited to convertible Series A
preferred stock as part of the conversion. In relation to these
issuances, interest expense of $10,178 was recorded.
13
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
o On September 19, 2002, the Company entered into a convertible
promissory note agreement with an investor for $50,000. Interest
accrues at 4% monthly, and the note payable is due on December
30, 2002. The note is convertible into shares of common stock at
the holder's discretion in part or in whole at a price equal to
60% of the market price. As this note is convertible at a price
below market value, a total of $33,000 of interest expense was
recorded relative to a beneficial conversion feature. In
addition, as part of the agreement, the Company committed 500,000
shares of common stock to the investor as collateral for the
note.
o On September 20, 2002, the Company entered into a convertible
promissory note agreement with an investor for $50,000. Interest
accrues at 2% monthly, and the note payable is due on December
20, 2002. The note is convertible into shares of common stock at
the option of the holder at a price of $0.12 per share. As this
note is convertible at a price below market value, a total of
$33,000 of interest expense was recorded relative to a beneficial
conversion feature. In addition, the note is guaranteed by a
third party.
NOTE 7 - NOTES PAYABLE TO OFFICER
Activities related to notes payable to officer are as follows:
o On March 4, 2002, the Company entered into a note payable
agreement with an officer of the Company, which bears interest at
10% per annum and is due on March 3, 2003. As of September 30,
2002, the note payable balance was $100,000.
o On July 9, 2002, the Company entered into a promissory note
agreement with the Chief Executive Officer of the Company for
$12,000. Interest accrues at 10% per annum, and the note payable
is due on August 9, 2002. As of September 30, 2002, the note had
been renegotiated, and the due date was extended to November 8,
2002.
NOTE 8 - PUT OPTION
During the year ended December 31, 2001, the Company issued 130,000
shares of Series A preferred stock to a related party as payment of
accounts payable totaling $130,000. On January 15, 2002, these holders
of the Series A preferred stock executed a put/call agreement. The put
allows for the holder to sell to the Company all, but not less than
14
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
all, of the 130,000 shares of the Company's Series A preferred stock,
or common stock if any of the Series A preferred stock were converted,
for $130,000, plus all accumulated, but unpaid dividends, at any time
after six months from January 15, 2002. Related to the put option and
the related conversion of debt, the Company has recorded a liability of
$130,000.
In addition, the Company maintains the right to call the option and
purchase back the shares of the Series A preferred stock for $130,000,
plus any unpaid and accrued dividends at any time, subject to certain
provisions.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Agreements
----------
On April 12, 2002, the Company entered into a two-year marketing
agreement, whereby the Company is to pay a commission of 10% of gross
receipts on sales from customers introduced to the Company by the
consultant, subject to certain requirements. In relation to this
agreement, the Company granted to the consultants five-year options to
purchase up to 150,000 shares of the Company's common stock at an
exercise price of $0.75 per share, vesting according to the achievement
of certain levels of gross receipts. The agreement automatically renews
after the initial two-year term.
15
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Agreements (Continued)
----------------------
On May 6, 2002, the Company entered into a one-year finder's and
advisory agreement, whereby the finder is to seek businesses that are
consistent with the Company's business and strategic plans or to
introduce the Company to investors. The fees paid to the finder for
finding investors to fund the Company are based upon certain
percentages, ranging from 2% to 10%, plus unaccountable expenses,
depending on the amount funded by the investors. In addition, 10% of
the transaction value will be paid in cashless warrants. If the finder
arranges a credit line or other types of debt placement, the fees paid
to the finder will be 2% of the total debt placement.
If the finder introduces a business or entity and the Company engages
in a merge-type transaction or other similar transactions, the fees
paid to the finder are based upon certain percentages, ranging from 3%
to 7%, depending on the transaction value. In addition, 10% of the
transaction value will be paid in cashless warrants. This agreement is
automatically renewed after the initial one-year term.
On June 10, 2002, the Company entered into a one-year finder's fee
agreement, whereby the Company is to pay the finder 5% of the gross
revenues generated from a commercial transaction other than financing,
a merger, or some other form of business combination. For every
$100,000 in gross revenues that are generated by the finder, the
Company will issue warrants to the finder to purchase 5,000 shares of
common stock, which will be exercisable immediately, at the then
current market price on a cashless basis, subject to certain
limitations.
Termination of Agreement
------------------------
During the nine months ended September 30, 2002, the Company received
notice from RiceX, stating that the Company was in default under the
terms of its distribution agreement with RiceX dated December 12, 2001.
On July 9, 2002, RiceX exercised its right to terminate the exclusive
distribution agreement and the related license agreements with the
Company due to the Company's default. Purchase of inventory from RiceX
as of September 30, 2002 totaled $237,805. The Company has recorded a
loss reserve for the license agreement totaling $75,359 as of September
30, 2002.
Litigation
----------
On April 4, 2002, a complaint was filed against the Company by
Millennium Integrated Services, Inc. ("MISI"). MISI provided Web site
development services to the Company at a cost of $204,405. MISI is
seeking contract payment of $204,405, plus interest of $32,031 and
damages for alleged conversion and misappropriation of trade secrets.
On April 9, 2002, MISI filed a Motion for a Writ of Attachment that
would allow MISI to seize and hold the Company's assets worth $236,436,
pending the resolution of the lawsuit. This Writ of Attachment was
granted on April 10, 2002.
16
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 9 - COMMITMENTS AND CONTINGENCIES (Continued)
Litigation (Continued)
----------------------
Certain of the Company's accounts receivable totaling $26,342 as of
September 30, 2002 have been attached to secure an accounts payable
balance to MISI of $189,990 as of September 30, 2002. The Company
believes that the settlement of this case may have a material effect on
the Company's cash flows.
On July 16, 2002, the Company was summoned to answer a complaint filed
by Faraday Financial, Inc. ("Faraday"). Between December 2000 and March
2001, the Company issued convertible promissory notes totaling $450,000
and a promissory note totaling $50,000. On December 13, 2001, Faraday
entered into a settlement agreement with the Company, whereby Faraday
agreed to cancel the promissory notes in exchange for 735,730 shares of
preferred stock. Faraday claims that the settlement agreement required
that the Company effect a registration statement covering the preferred
stock by June 30, 2002. In the event the Company failed to effect a
registration statement by June 30, 2002, the Company was to immediately
forfeit to Faraday 735,730 shares of common stock in the name of the
Chief Executive Officer of the Company.
In addition, the Chief Executive Officer entered into an escrow
agreement to ensure the automatic forfeiture of the common stock and
entered into a guarantee to be personally responsible to Faraday for
the original $500,000 loan amount, plus 12% interest per annum. Faraday
has filed its fourth claim for relief for a judgment against the
Company for $500,000, plus accrued, but unpaid interest, attorneys'
fees and costs, and other such costs. As of September 30, 2002,
management believes the maximum exposure for the Company is
approximately $500,000, plus interest and fees.
In addition, the Company is involved in certain legal proceedings and
claims which arise in the normal course of business. Management does
not believe that the outcome of these matters will have a material
effect on the Company's financial position or results of operations.
NOTE 10 - SHAREHOLDERS' DEFICIT
Common Stock Committed
----------------------
On March 15, 2002, the Company committed to issue 153,333 shares of
common stock with a detachable purchase warrant to purchase 153,333
shares of common stock at an exercise price of $1.20 per share in
exchange for $100,000. As of September 30, 2002, the Company had not
issued the stock and has recorded the transaction as committed stock.
On April 1, 2002, the Company committed to issue 25,000 shares of
common stock to a consultant for consulting expenses totaling $25,250.
17
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
Common Stock Committed (Continued)
----------------------------------
On June 10, 2002, the Company committed to issue 60,606 shares of
common stock with detachable purchase warrants to purchase 60,606
shares of common stock at an exercise price of $0.50 per share in
exchange for cash totaling $25,000.
During the three months ended September 30, 2002, the Company committed
to issue 594,611 shares of common stock to various investors for cash
totaling $120,000.
The following table reconciles total shares and amount recorded as
common stock committed:
Shares Amount
--------- ---------
Committed upon conversion of debt and
accrued interest 399,174 $ 399,174
Committed upon receipt of cash 808,550 245,000
Committed for consulting services 260,000 162,500
--------- ---------
Total 1,467,724 $ 806,674
========= =========
Common Stock and Stock Options
------------------------------
On January 7, 2002, the Company entered into a five-year employment
agreement with an employee. In relation to this agreement, the Company
issued options to purchase 155,000 shares of common stock. The options
vest over four years in increments of 80,000, 25,000, 25,000, and
25,000, have an exercise price of $1 per share, and expire on January
7, 2012. As of September 30, 2002, the Company recorded compensation
expense and deferred compensation totaling $48,438 and $145,312,
respectively, in relation to this transaction.
On January 10, 2002, the Company entered into a six-month consulting
services agreement for marketing services. In relation to this
agreement, the Company issued options to purchase 25,000 shares of
common stock at an exercise price of $1 per share. The options expire
in 10 years. The Company recorded consulting expense of $47,250 in
relation to this transaction.
On February 4, 2002, the Company entered into a six-month marketing
services agreement for public relations and advertising services. In
relation to this agreement, the Company paid a retainer of $35,000 upon
execution of the agreement, issued 35,000 shares of restricted common
stock, and issued options to purchase 50,000 shares of the Company's
common stock at an exercise price of $3 per share. The options expire
in two years. The Company recorded consulting expense totaling $90,250
in relation to this transaction.
18
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
Common Stock and Stock Options (Continued)
------------------------------------------
On February 21, 2002, the Company entered into a one-year financial
advisory services agreement. In relation to this agreement, the Company
paid a non-refundable retainer of $20,000, issued 200,000 restricted
shares of common stock, and issued options to purchase 100,000
restricted shares of common stock at $1 per share, 100,000 at $2.50 per
share, and 100,000 at $4 per share. The Company recorded consulting
expense totaling $159,000 in relation to this transaction.
On June 10, 2002, the Company issued warrants to purchase shares of
common stock at $0.50 per share to a consultant for consulting expenses
valued at $850.
On June 19, 2002, the Company issued options to purchase 50,000 shares
of common stock at an exercise price of $1 per share to a consultant
for consulting expenses valued at $14,000.
On August 13, 2002, the Company issued options to purchase 28,000
shares of common stock at an exercise price of $0.25 per share to a
debtor. In relation to this transaction, the Company recorded interest
expense of $5,600.
NOTE 11 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2002, certain expenses of
the Company totaling $35,243 were paid by RiceX. Certain of these
expenses were reimbursed by the Company, and at September 30, 2002,
$13,214 was owed to RiceX.
NOTE 12 - LINES OF BUSINESS
For internal reporting purposes, management segregates the Company into
two segments as follows for the nine months ended September 30, 2002:
NutraStar NutraGlo Eliminations Total
------------------------------------------------------
Total revenues $ 624,011 $ 454,083 $ -- $ 1,078,094
Loss from operations $(2,002,315) $ (176,268) $ -- $(2,178,583)
Identifiable assets $ 371,565 $ 743,898 $(455,343) $ 660,120
Capital expenditures $ 66,149 $ 66,149
Depreciation and
amortization $ 95,066 $ -- $ -- $ 95,066
19
NUTRASTAR INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002 (unaudited)
--------------------------------------------------------------------------------
NOTE 12 - LINES OF BUSINESS (Continued)
Operations of NutraGlo were insignificant during the nine months ended
September 30, 2001 and therefore are not presented.
NOTE 13 - SUBSEQUENT EVENTS
In October 2002, the Company entered into a promissory note agreement
with its Chief Executive Officer for $50,000. Interest accrues at 10%
per annum, and the note payable is due on November 1, 2002. In November
2002, the Company repaid $18,000 and signed an amendment to the
agreement, extending the due date for the remaining balance of $32,000
to December 8, 2002.
In October 2002, the Company issued 675,217 shares of common stock from
committed stock totaling $225,000.
20
ITEM 2. MANAGEMENT'S DISCUSSIONS 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 haven't yet occurred. For
example, statements like the Company "expects," "anticipates" or "believes" are
forward-looking statements. Investors should be aware that actual results may
differ materially from the Company's expressed expectations because of risks and
uncertainties about the future. The Company 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 the Company's
business are discussed throughout this Form 10-QSB and should be considered
carefully.
Plan of Operation for the Next Twelve Months
NutraStar Technologies, Inc. ("NTI") was formed on February 4, 2000 and became
the wholly-owned subsidiary of NutraStar Incorporated (the "Company") on
December 14, 2001. To date, the Company has focused on new product development
and its relationship with the producer of its raw materials, RiceX, and on its
strategic alliances. The Company has commenced the limited distribution of its
stabilized rice bran and rice bran products on the Internet and through
direct-to-consumer response advertising campaigns. In the near future, the
Company intends to commence the full distribution of its products as private
label brands through strategic distributors on the occurrence of certain events,
including the raising of additional capital required to implement the Company's
business plan.
The Company anticipates that in the next 12 to 24 months, it will need an
additional $2.5 million to $5 million in financing. The Company anticipates that
it will need up to $2.5 million to develop distribution channels for its
proprietary products and $2.5 million for additional working capital, including
the purchase of inventory for anticipated sales growth. The Company expects to
obtain this additional funding from private placements of debt and/or equity
securities, or possibly through a public offering of its common stock.
Results of Operation
Third Quarter 2002 versus Third Quarter 2001
--------------------------------------------
During the quarter ended September 30, 2002, NutraStar generated net sales of
$247,367 compared to $513,450 for the third quarter of 2001, a decrease of 52%
in comparison to 2001. The decrease was caused by several factors including
certain key customers deferring purchases to a later date, a loss of two
customers related to legal proceedings in which the Company is involved and an
overall lack of working capital which prevented the Company from aggressively
pursuing its marketing plan. Since July, 2002 the Company's primary supplier,
RiceX, has required cash on delivery for product sold to the Company. The net
sales also reflect the Company's focus on the marketing of its own products, as
opposed to cross-selling RiceX products which explains the absence of commission
revenues from the sale of RiceX products during the most recent quarter.
21
During the third quarter of 2001, the Company recognized commission revenues
from RiceX of $93,852. This commission revenue resulted in total revenues of
$607,302 for the quarter ended September 30, 2001.
The cost of goods sold for the quarter ended September 30, 2002 decreased 54% to
$135,549 compared to $295,076 for the quarter ended September 30, 2001. This
decrease reflects the reduced production of products for resale during the third
quarter of 2002 due to the lack of adequate rice soluble inventory. The
Company's gross profit decreased to $111,818 for the quarter ended September 30,
2002 compared to $312,226 for the quarter ended September 30, 2001; while the
gross profit margin decreased from 51% in the third quarter of 2001 to 45% in
the same period of 2002. Operating expenses of $612,798 in the third quarter of
2002 reflects an increase of 77% over the comparable quarter in fiscal year 2001
which had operating expenses of $346,197. This increase reflects the Company's
increase in employee related expenses of $29,022 over 2001 and the increase in
professional fees of $103,900 to $152,530 in the third quarter of 2002 as the
Company is using outside consultants in such areas as legal, financial and
marketing in an attempt to limit direct hires until additional funding is
obtained.
The Company incurred an operating loss of $500,980 during the quarter ended
September 30, 2002 compared to an operating loss of $33,971 during the quarter
ended September 30, 2001. This material increase in operating loss reflects the
significant increase in operating expenses relating to the Company's expanded
business operations, coupled with the Company's decline in net sales during the
most recent quarter.
During the quarter ended September 30, 2002, the Company recognized interest
expense of $72,261, which reflects interest paid on short-term promissory notes
outstanding during all or part of the third quarter and represents an increase
in interest expense compared to $46,451 for the quarter ended September 30,
2001. This increase in interest expense reflects an increase in the amount of
promissory notes and other debt instruments outstanding during the quarter ended
September 30, 2002. This expense increased the Company's overall net loss for
the third quarter of 2002 to $573,241 compared to a net loss of $80,422 recorded
for the comparable quarter of 2001.
Due to the December 14, 2001 share exchange with Alliance, for accounting
purposes, the acquisition has been treated as a recapitalization of NutraStar
(formerly Alliance) with NTI as the acquirer (reverse acquisition).
Consequently, the financial statements of NTI are presented as those of the
Company. As a result, a comparison of the current financial statements as
compared to those of Alliance as previously reported in its Form 10-SB might not
be deemed relevant.
Nine Month Period Ended September 30, 2002 versus 2001
------------------------------------------------------
Total revenue for the nine months ended September 30, 2002 was $1,078,100
compared to $1,383,056 for the nine months ended September 30, 2001. This 22%
decrease reflects the Company's substantially reduced sales in the third quarter
22
of 2002. Cost of sales decreased by 20% from $865,273 for the nine months ended
September 30, 2001 to $689,547 for the first nine months of 2002. This decrease
was due to increased production of higher margin products for resale as well as
lower production costs due to lower sales incurred in the third quarter of 2002.
The 25% decrease in gross profits to $388,547 for the nine months ended
September 30, 2002 from $517,783 in the similar period of 2001 was due primarily
to the lower gross profits realized in the third quarter of 2002.
Operating expenses increased 118% from $1,176,202 for the first nine months of
2001 to $2,567,130 for the comparable period of 2002. The significant increase
in operating expenses represents the Company's continued expansion of operations
during fiscal year 2002 in a number of areas as well as increased legal fees
related to the preparation of the Company's SB-2 registration statement and
handling various legal proceedings, increased consulting fees and accounting
costs. During the nine months ended September 30, 2002 employee related expenses
rose $114,325 to $761,651 primarily as a result of additional hired employees
during the first quarter of 2002. These higher costs resulted in a loss from
operations of $2,178,583 for the nine month period ended September 30, 2002
compared to an operating loss of $658,419 for the same period in 2001.
Factoring in the interest expense for the nine months ended September 30, 2002
and 2001 of $78,061 and $133,719 respectively, resulted in a net loss of
$2,256,008 for the nine months ended September 30, 2002 which represents a 185%
increase compared to a loss of $792,138 for the same period in 2001.
Liquidity and Sources of Capital
NutraStar has incurred significant operating losses since its inception, and, as
of September 30, 2002 NutraStar has an accumulated deficit of $7,693,629. At
September 30, 2002, NutraStar had cash and cash equivalents of $23,230 and a net
working capital deficit of $1,171,866.
To date, NutraStar 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 quarter ended September 30, 2002, NutraStar raised a
total of $100,000 from the sale of convertible promissory notes. For the nine
months ended September 30, 2002, NutraStar has raised a total of $471,000 from
the sale of equity and debt securities, which includes proceeds of $112,000 from
notes payable to the Chairperson of NutraStar.
The Company is dependent on the proceeds from future debt or equity investments
to fund its operations and fully implement the Company's business plan. If the
Company is unable to raise sufficient capital, the Company will be required to
delay or forego some portion of its business plan, which will have a material
adverse effect on the Company's anticipated results from operations and
financial condition. Alternatively, the Company may seek interim financing in
the form of bank loans, private placement of debt or equity securities, or some
combination thereof. Such interim financing may not be available in the amounts
or at the times when the Company requires, and will likely not be on terms
favorable to the Company.
23
Due to the Company's need for outside capital and its operating losses, the
financial statements include a going concern footnote explaining the
uncertainties relating to the Company's ability to continue operations.
Contract With Key Supplier
NutraStar had entered into an agreement with The RiceX Company ("RiceX"),
whereby RiceX would sell NutraStar its rice bran solubles and rice bran fiber
concentrates at prices equal to the lower of RiceX's standard price or the price
negotiated by other customers for like quantities and products (the "RiceX
Agreement"). The RiceX Agreement also provided that RiceX would not sell any
rice bran solubles or rice bran fiber concentrate products in the United States
except to NutraStar. On July 9, 2002, this Agreement was terminated. As a result
of this termination, NutraStar no longer has the right to be the exclusive
distributor of the RiceX rice solubles and rice bran fiber concentrates in the
United States; however, NutraStar has continued to buy such products from RiceX
on a nonexclusive basis.
The RiceX Agreement also provided for a license from RiceX to NutraStar to
utilize three patents relating to the use of rice bran supplements to treat
diabetes and hyperlipidemia. NutraStar will continue to be allowed to utilize
these patents until a new use agreement can be negotiated.
In addition to the risks associated with the termination of the RiceX Agreement,
the potential inability of RiceX to deliver the amount of product that NutraStar
requires or the possible interruption in product delivery for any reason, would
all have a material adverse effect on NutraStar's business, results from
operations, and financial condition, because NutraStar could not readily find
and implement alternative suppliers and likely not on advantageous terms.
RiceX's ability to manufacture certain of NutraStar's core products is currently
limited to the production capability of RiceX's Dillon, Montana plant (the
"Dillon Plant"). Currently, the Dillon Plant is capable of producing only a
limited quantity of NutraStar's products, which may not be sufficient to meet
NutraStar's long-term sales goals. NutraStar and RiceX are exploring ways to add
production capacity during the next year.
Recent Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations. This statement applies to legal obligations associated with the
retirement of long-lived assets that result from the acquisition, construction,
development, and/or the normal operation of long-lived assets, except for
certain obligations of lessees. This statement is not applicable to the Company.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, the accounting and reporting provisions
of APB No. 30, Reporting the Results of Operations - Reporting the Effects of
24
Disposal of a Segment of a Business, and Extraordinary, Unusual, and
Infrequently Occurring Events and Transactions, for the disposal of a segment of
a business, and amends Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The adoption of SFAS No.
144 has not had a material impact, if any, on its financial position or results
of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 updates, clarifies, and simplifies existing accounting
pronouncements. This statement rescinds SFAS No. 4, which required all gains and
losses from extinguishments of debt to be aggregated and if material, classified
as an extraordinary item, net of related income tax effect. As a result, the
criteria in APB No. 30 will now be used to classify those gains and losses. SFAS
No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded as it is no longer necessary. SFAS No.
145 amends SFAS No. 13 to require that certain lease modifications that have
economic effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-lease transactions. This statement also makes technical
corrections to existing pronouncements. While those corrections are not
substantive in nature, in some instances, they may change accounting practice.
This statement is not applicable to the Company.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." This statement
requires that a liability for a cost associated with an exit or disposal
activity to be recognized when the liability is incurred. Under EITF Issue 94-3,
a liability for an exit cost, as defined, was recognized at the date of an
entity's commitment to an exit plan. The provisions of this statement are
effective for exit or disposal activities that are initiated after December 31,
2002 with earlier application encouraged. This statement is not applicable to
the Company.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions." SFAS No. 147 removes the requirement in SFAS No. 72 and
Interpretation 9 thereto, to recognize and amortize any excess of the fair value
of liabilities assumed over the fair value of tangible and identifiable
intangible assets acquired as an unidentifiable intangible asset. This statement
requires that those transactions be accounted for in accordance with SFAS No.
141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." In addition, this statement amends SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include certain financial
institution-related intangible assets. This statement is not applicable to the
Company.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations
are based upon our 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
25
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, we evaluate our estimates, including, but not
limited to, those related to revenue recognition. We use authoritative
pronouncements, historical experience and other assumptions as the basis for
making judgments. Actual results could differ from those estimates. We believe
that the following critical accounting policies affect our more significant
judgments and estimates in the preparation of our consolidated financial
statements.
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of provisions for
returns in accordance with interpretative guidance provided by Staff Accounting
Bulletin (SAB) No. 101. The majority of the Company's sales are to distributors
and these distributors generally have no right to return products. Commission
revenue is generally recognized when earned and collection is reasonably
assured.
ITEM 3. CONTROLS AND PROCEDURES
Within 90 days prior to the date of this Form 10-QSB, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer along with the
Company's Chief Financial Officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief
Executive Officer along with the Company's Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
recording, processing summarizing and reporting material information relating to
the Company required to be disclosed in this Form 10-QSB.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
26
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 4, 2002, a Complaint was filed against NTI by Millennium Integrated
Services, Inc. ("MISI") in Superior Court, Sacramento County, (Case No.
02A502006). MISI provided website development services to NTI, at a cost of
$204,405. MISI is seeking contract payment of $204,405 plus interest of $32,031
as well as damages for alleged conversion and misappropriation of trade secrets.
On April 9, 2002, MISI filed a Motion for a Writ of Attachment which would allow
MISI to seize and hold NTI assets worth $236,436 pending the resolution of the
lawsuit. On April 10, 2002, a Writ of Attachment was granted by the Court. As of
September 30, 2002, Company accounts receivable totaling $26,342 had been
attached pursuant to the Writ of Attachment. NTI believes it has valid defenses
and offsets to the payment for these services and either will appeal the Court's
action or attempt to settle this matter. Settlement of this case could have a
material affect on the Company's cash flow depending on how quickly any
settlement would need to be paid. Conversely, litigating this matter could also
have a material adverse affect on NutraStar's operations and financial results.
On July 16, 2002, a Complaint was filed against NTI by Faraday Financial, Inc.
("Faraday"), in the United States District Court, for the District of Utah (Case
No. 02-CV-00959). The lawsuit stems from a settlement agreement entered into in
December, 2001, pursuant to which Faraday converted $500,000 of debt into
735,730 shares of NutraStar preferred stock. Among other terms, the settlement
agreement required that a registration statement covering the resale of the
735,730 shares be in effect by June 30, 2002. Although NutraStar filed a
registration statement on June 4, 2002, such registration statement has not been
declared effective. In the event that NutraStar failed to effect a registration
statement by June 30, 2002, NutraStar's Chief Executive Officer, Ms. Patricia
McPeak, was to transfer to Faraday an additional 735,730 shares of her common
stock and become personally liable to Faraday for the original $500,000 debt
amount plus 12% interest per annum. Faraday is also seeking a judgment against
NutraStar for $500,000 plus accrued, but unpaid interest. Faraday is also
claiming attorneys' fees and other costs related to the lawsuit. On August 29,
2002, NutraStar filed a motion to dismiss the Complaint due to lack of personal
jurisdiction for both itself and Ms. McPeak. On November 27, 2002, NutraStar's
motion to dismiss was denied as to both NutraStar and Ms. McPeak. The case is in
its early stages. Consequently, Management is not able to determine the impact
on NutraStar's financial condition.
ITEM 5. OTHER INFORMATION
Subsequent to the end of the quarter for which this Form 10-QSB is being filed,
Joseph Ferrara resigned as president of NutraStar effective November 1, 2002. As
a result of Mr. Ferrara's departure, an "Office of the President" was created
which includes Patricia McPeak, the Chief Executive Officer, and two outside
consultants, Etienne Taylor and Brian Jones. The Office of the President will be
responsible for the management of the day-to-day operations of the company.
Messrs. Taylor and Jones, who is a CPA, specialize in managing corporate
restructuring.
27
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
(i) 99.1 - Certification by CEO pursuant to Sections 302
of the Sarbanes-Oxley Act of 2002.
(ii) 99.2 - Certification by CFO pursuant to Sections 302
of the Sarbanes-Oxley Act of 2002.
(iii) 99.3 - Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K:
(i) On August 13, 2002, the Company filed a Form 8-K reporting
an Item 5 event regarding the termination of its exclusive
selling agreement with The RiceX Company
28
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.
NUTRASTAR INCORPORATED
Dated: December 6, 2002 /s/ James Kluber
-------------------------------------
James Kluber, Authorized Officer and
Chief Financial Officer
(Principal Accounting Officer)
29