Back to GetFilings.com



 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

ý

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2003

 

or

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to           

 

Commission File Number: 33-7106-A

 

NATURADE, INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

23-2442709

 

 

(State or other jurisdiction of incorporation or
organization)

 

(I. R. S. Employer Identification No.)

 

 

 

 

14370 Myford Rd., Irvine, California 92606

(Address of principal executive offices) (Zip code)

 

(714) 573-4800

(Registrant’s telephone number, including area code)

 


 

Indicate by check mark whether the registrant (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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý

 

Indicate the number of shares outstanding of the registrant’s common stock, as of the latest practicable date: 44,533,886 shares as of August 13, 2003.

 

 



 

FORM 10-Q
QUARTERLY REPORT

Quarter Ended June 30, 2003
TABLE OF CONTENTS

 

PART I:

FINANCIAL INFORMATION

Item 1.

Financial Statements

 

Balance Sheets as of June 30, 2003 (unaudited) and December 31, 2002 (audited)

 

Statements of Operations for the three and six month periods ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)

 

Statements of Cash Flows for the six months ended June 30, 2003 (unaudited) and June 30, 2002 (unaudited)

 

Notes to Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4

Controls and Procedures

PART II:

OTHER INFORMATION

Item 1.

Legal Proceedings

Item 2.

Changes in Securities

Item 3.

Defaults Upon Senior Securities

Item 4.

Submission of Matters to a Vote of Security Holders

Item 5.

Other Information

Item 6.

Exhibits and Reports on Form 8-K

SIGNATURES

 

2



 

NATURADE, INC.

 

Balance Sheets

As of June 30, 2003 and December 31, 2002

 

 

 

June 30, 2003

 

December 31, 2002

 

 

 

(Unaudited)

 

(Audited)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

383,335

 

$

722,583

 

Accounts receivable, net

 

1,601,655

 

1,427,058

 

Inventories, net

 

1,189,011

 

1,689,131

 

Prepaid expenses and other current assets

 

325,784

 

105,135

 

Total current assets

 

3,499,785

 

3,943,907

 

 

 

 

 

 

 

Property and equipment, net

 

190,672

 

228,723

 

Other assets

 

57,549

 

49,594

 

Total assets

 

$

3,748,006

 

$

4,222,224

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

2,406,733

 

$

2,750,477

 

Accrued expenses

 

753,235

 

604,194

 

Current portion of Note Payable to Related Party

 

202,345

 

202,345

 

Current portion of long-term debt

 

1,529,186

 

1,816,662

 

Total current liabilities

 

4,891,499

 

5,373,678

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term portion of Notes Payable to Related Parties, less current maturities

 

450,000

 

0

 

 

 

 

 

 

 

Long-term debt, less current maturities

 

21,992

 

37,735

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

 

 

 

 

 

REDEEMABLE CONVERTIBLE PREFERRED STOCK

 

 

 

 

 

Redeemable convertible preferred stock, Series B, less discount of $1,571,429 at June 30, 2003, and $1,714,286 at December 31, 2002, par value $0.0001 per share: authorized 50,000,000 shares; issued and outstanding, 13,540,723 at June 30, 2003 and December 31, 2002 ($2,000,000 redemption value)

 

510,597

 

256,112

 

 

 

 

 

 

 

WARRANT

 

500,000

 

500,000

 

 

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

 

 

Common stock, par value $0.0001 per share; authorized, 100,000,000 shares; issued and outstanding, 44,533,886 at June 30, 2003 and  December 31, 2002

 

4,453

 

4,453

 

Preferred stock, Series A, par value $0.0001 per share; authorized, 2,000,000 shares; issued and outstanding, 0 at June 30, 2003 and December 31, 2002

 

0

 

0

 

Non-Voting Common stock, par value $0.0001 per share; authorized, 2,000,000 shares; issued and outstanding, 117,284 at June 30, 2003 and December 31, 2002

 

12

 

12

 

 

 

 

 

 

 

Additional paid-in capital

 

18,987,458

 

18,987,458

 

Accumulated deficit

 

(21,618,005

)

(20,937,224

)

Total stockholders’ deficit

 

(2,626,082

)

(1,945,301

)

Total liabilities and stockholders’ deficit

 

$

3,748,006

 

$

4,222,224

 

 

See accompanying notes to financial statements.

 

3



 

NATURADE, INC

 

Statements of Operations for the Three Months and Six Months

Ended June 30, 2003 and June 30, 2002

 

 

 

 

Three Months
Ended

 

Three Months
Ended

 

Six Months
Ended

 

Six Months
Ended

 

 

 

June 30, 2003

 

June 30, 2002

 

June 30, 2003

 

June 30, 2002

 

 

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

4,082,684

 

$

3,235,269

 

$

7,948,739

 

$

6,608,285

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

2,242,068

 

1,974,193

 

4,320,304

 

3,859,306

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

1,840,616

 

1,261,076

 

3,628,435

 

2,748,979

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Selling, general and  administrative expenses

 

$

2,009,352

 

1,878,506

 

3,942,481

 

3,988,561

 

Depreciation and amortization

 

18,853

 

21,822

 

38,051

 

45,085

 

 

 

 

 

 

 

 

 

 

 

Total operating costs and expenses

 

2,028,205

 

1,900,328

 

3,980,532

 

4,033,646

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(187,589

)

(639,252

)

(352,097

)

(1,284,667

)

 

 

 

 

 

 

 

 

 

 

Other expense:

 

 

 

 

 

 

 

 

 

Interest expense

 

$

48,622

 

30,783

 

78,917

 

62,575

 

Other expense (income)

 

(2,574

)

(9,737

)

(5,518

)

(21,133

)

 

 

 

 

 

 

 

 

 

 

Loss before provision for income taxes

 

(233,637

)

(660,298

)

(425,496

)

(1,326,109

)

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

800

 

 

800

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(234,437

)

$

(660,298

)

$

(426,296

)

$

(1,326,109

)

Less:

 

 

 

 

 

 

 

 

 

Preferred Stock Dividend

 

(56,504

)

(50,000

)

(111,628

)

(100,000

)

Deemed Dividend

 

(71,428

)

(71,429

)

(142,857

)

(142,858

)

 

 

 

 

 

 

 

 

 

 

Net loss applicable to common shares

 

$

(362,369

)

$

(781,727

)

$

(680,781

)

$

(1,568,967

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted Loss per share

 

$

(0.01

)

$

(0.02

)

$

(0.02

)

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

Weighted Average Number of Shares used in Computation of Basic and Diluted Loss per Share

 

44,533,886

 

43,813,494

 

44,533,886

 

43,614,655

 

 

See accompanying notes to financial statements

 

4



 

NATURADE, INC

 

Statements of Cash Flows for the Six Months

Ended June 30, 2003 and June 30, 2002

 

 

 

Six Months Ended

 

Six Months Ended

 

 

 

June 30, 2003

 

June 30, 2002

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(426,296

)

$

(1,326,109

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

38,051

 

45,085

 

Provision for uncollectable accounts receivable

 

(116,894

)

(171,735

)

Provision for excess and obsolete inventories

 

(16,018

)

(273,796

)

Expense for stock options, warrants and convertible debt

 

 

18,888

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(57,704

)

1,312,000

 

Inventories

 

516,138

 

179,807

 

Prepaid expenses and other current assets

 

(220,649

)

254,570

 

Other assets

 

(7,955

)

(24,342

)

Accounts payable and accrued expenses

 

(194,702

)

(715,927

)

Net cash used in operating activities:

 

(486,029

)

(701,559

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchase of property and equipment

 

 

(1,450

)

Net cash used in investing activities:

 

 

(1,450

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Net borrowings under line of credit

 

(288,683

)

(518,760

)

Proceeds from issuance of debt to related parties

 

450,000

 

 

Payments of long-term debt

 

(14,536

)

(16,841

)

Proceeds from issuance of equity

 

 

2,312,898

 

Net cash provided by financing activities:

 

146,781

 

1,777,297

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

(339,248

)

1,074,288

 

Cash and cash equivalents, beginning of period

 

722,583

 

55,388

 

Cash and cash equivalents, end of period

 

$

383,335

 

$

1,129,676

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

Interest

 

$

64,854

 

$

62,727

 

Taxes

 

$

800

 

$

800

 

 

 

 

 

 

 

Non-cash financing activities:

 

 

 

 

 

Conversion of notes payable to related party to common stock

 

$

0

 

$

5,315,702

 

Surrender of preferred stock for cancellation without conversion in exchange for common stock

 

$

0

 

$

125

 

Discount related to redeemable convertible preferred stock

 

$

0

 

$

2,000,000

 

Equity Transaction

 

$

0

 

$

47,500

 

Preferred stock dividend accrued

 

$

111,628

 

$

100,000

 

Deemed dividend

 

$

142,857

 

$

142,858

 

 

See accompanying notes to financial statements

 

5



 

NATURADE, INC.

Notes to Financial Statements

 

1.                                       The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

 

The results of operations for the interim periods shown in this report are not necessarily indicative of results to be expected for the fiscal year. In the opinion of management, the information contained herein includes all adjustments necessary for fair presentation of the financial statements. All such adjustments are of a normal recurring nature. These financial statements do not include all disclosures associated with the Company’s annual financial statements on Form 10-K and accordingly, should be read in conjunction with such statements.

 

2.                                       Inventories are stated at the lower of weighted average cost or market. Weighted average cost is determined on a first-in, first-out basis. Inventories at June 30, 2003 and December 31, 2002 consisted of the following:

 

 

 

June 30, 2003

 

December 31, 2002

 

 

 

(Unaudited)

 

(Audited)

 

 

 

 

 

 

 

Raw Materials

 

$

164,325

 

$

224,033

 

Finished Goods

 

1,080,769

 

1,537,199

 

Subtotal

 

1,245,094

 

1,761,232

 

Less: Reserve for Excess and Obsolete Inventories

 

(56,083

)

(72,101

)

 

 

$

1,189,011

 

$

1,689,131

 

 

3.                                       The Company rents property and equipment under certain noncancellable operating leases expiring in various years through 2006. Future minimum commitments under operating leases as of June 30, 2003 are as follows:

 

Year

 

Amount

 

 

 

 

 

2003 (July-December)

 

$

203,956

 

2004

 

414,305

 

2005

 

427,624

 

2006

 

283,056

 

Total

 

$

1,328,941

 

 

4.                                       Credit Agreement with Majority Shareholder—In August 1999, the Company entered into a Credit Agreement (the “Credit Agreement”) with Health Holdings and Botanicals, LLC (“Health Holdings”), the majority stockholder of the Company. The Credit Agreement allows for advances (the “Advances”) of $4 million at an interest rate of 8% per annum with a due date of July 31, 2004. During the year ended December 31, 2001, Health Holdings agreed to convert interest earned from October 1, 2000 to September 30, 2001 of $342,406 to the outstanding principal amount as a payment-in-kind resulting in a balance at December 31, 2001 of $4,496,193. As part of the Private Equity Transaction on January 2, 2002 as described more fully in Note 7, Health Holdings converted into Common Stock all of the Company’s Credit Agreement debt due to Health Holdings, plus accrued interest of $67,013 for a

 

6



 

total debt conversion of $4,563,206.

 

5.               Loan Agreement with Majority Shareholder and Other Investors—In August 2000, the Company entered into a Loan Agreement (the “Loan Agreement”) with Health Holdings and other investors (the “Lender Group”). The Loan Agreement allowed for advances (the “Loan Advances”) of up to $1.2 million at an interest rate of 8% per annum with due dates of September 11, 2002 for $50,000 and August 31, 2003 for the remaining balance outstanding. Interest only payments were to be required on a quarterly basis. On June 13, 2001, two investors converted their total debt of $150,000 plus accrued interest of $2,400 into Common Stock, receiving a total of 476,250 shares of the Company’s Common Stock based on the then fair market value of $0.32. As part of the Private Equity Transaction on January 2, 2002 as described more fully in Note 7, Health Holdings converted into Common Stock all of the Company’s Loan Agreement debt due to Health Holdings, plus accrued interest of $11,051 for a total debt conversion of $752,496.

 

The Loan Agreement further provided that the Lender Group could elect to convert all or any part of the Loan Advances into shares of the Company’s Common Stock at a conversion price equal to the lower of (a) the average closing bid of the Company’s Common Stock for the ten trading days prior to the making of a Loan Advance or (b) the average closing bid of the Company’s common stock for the ten trading days prior to the date of receipt of notice of conversion. On August 8, 2002, one investor (a member of the Board of Directors) converted debt of $50,000 which was due September 11, 2002 plus accrued interest of $427 into Common Stock, receiving a total of 720,392 shares of the Company’s common Stock based on the then fair market value of $0.07.

 

On April 14, 2003, the Company entered into a loan agreement (the “Loan Agreement”) with Health Holdings and Botanicals, LLC, a principal shareholder of the Company, and certain other lenders (the “Lender Group”), pursuant to which the Lender Group has agreed to lend the Company $450,000 and, subject to the discretion of the Lender Group, up to an additional $300,000.  All advances under the Loan Agreement bear interest at the rate of 15% per annum, are due on December 31, 2004, are secured by substantially all of the assets of the Company, and are subordinated to the Company’s indebtedness to Wells Fargo Business Credit, Inc. (“Wells Fargo”).  The advances under the Loan Agreement will be used for the Company for working capital and general corporate purposes.  In consideration of the extension of credit under the Loan Agreement, Wells Fargo waived all defaults of the Company as of December 31, 2002 under the Credit and Security Agreement dated as of February 27, 2000 and amended the agreement to, among other things, reduce the covenants regarding minimum net income and minimum book net worth and increased the interest rate to the prime rate plus 4.5%.

 

6.                                       Line of Credit— On January 27, 2000, the Company entered into a three year Credit and Security Agreement with Wells Fargo Business Credit, Inc. (Wells Fargo) that initially allowed for maximum borrowings of up to $3,000,000, based on certain percentages of eligible accounts receivable and inventories as defined. As more fully described in Note 7, Private Equity Transaction, on December 20, 2001, terms of the Credit and Security Agreement were modified to include waiving the enforcement of existing defaults as of December 20, 2001, increasing the credit available to the Company to a maximum of $4,500,000 with an inventory maximum subline of $2,000,000, increasing the floating rate to the prime rate plus 2% and extending the maturity date to December 31, 2003. On September 19, 2002, the terms of the Credit and Security Agreement were modified to include waiving the enforcement of existing defaults, reducing the credit availability of the Company to a maximum of $4,325,000, requiring that the Company maintain certain minimum levels of cash, and reducing the covenants regarding minimum net income and minimum book net worth.  In consideration of the extension of credit under the Loan Agreement on April 14, 2003, Wells Fargo waived all defaults of the Company as of December 31, 2002 under the Credit and Security Agreement dated as of February 27, 2000 and amended the agreement to, among other things, reduce the covenants regarding minimum net income and minimum book net worth and increased the interest rate to the prime rate plus 4.5%. Borrowings under the Credit and Security Agreement, which totaled $1,498,315 at June 30, 2003, are collateralized by substantially all assets of the Company. At June 30, 2003 the prime rate was 4.0% and the interest charge under the Credit and Security Agreement was 8.50%. The Credit and Security Agreement contains covenants, which, among other things, require that certain financial ratios be met. As of June 30, 2003, the Company was in compliance with all covenants.

 

7



 

7.             Private Equity Transaction— On January 2, 2002, the Company privately sold 13,540,723 shares of Series B Convertible Preferred Stock (the “shares”) for $2 million, and warrants to purchase an additional 33,641,548 shares of Series B Convertible Preferred Stock at an aggregate exercise price of $3.5 million (the “Warrants”), for $500,000. The shares and Warrants were purchased by Westgate Equity Partners, L.P. (“Westgate”). The Series B Convertible Preferred Stock bears dividends at a rate of 10% per annum, which will accumulate and compound semi-annually if not paid in cash. On the seventh anniversary of its issuance, the Series B Convertible Preferred Stock will be automatically redeemed by the Company at the original issuance price plus accrued and unpaid dividends, provided the Company is legally able to do so. Two members of the Board of Directors of the Company were elected exclusively by the holders of the Series B Convertible Preferred Stock voting as a separate class.

 

The Company may redeem the Series B Convertible Preferred Stock at any time prior to December 31, 2004 if the Company receives a bona fide offer from a third party to invest equity capital in the Company and the holders of the Series B Convertible Preferred Stock do not make a Qualified Counter-Offer.  A “Qualified Counter-Offer” is a written offer for an equity investment in the Company that will yield gross proceeds in excess of the third party’s offer (but need not exceed $3,500,000), and which either (A) is accomplished through the exercise of some or all of the Warrants, or (B) will provide capital on the same or better terms as the third party offer.  The Series B Convertible Preferred Stock had a beneficial conversion feature of $2,000,000, which was recorded as a discount and is being amortized over seven years.

 

As part of this transaction, Health Holdings agreed to convert all of the Company’s outstanding debt to Health Holdings, including accrued interest (approximately $5,316,000), and to surrender all of Health Holdings’ Series A Convertible Preferred Stock (1,250,024 shares) for cancellation without conversion, in exchange for 35,989,855 shares of the Company’s common stock. Furthermore, the warrants that Health Holdings holds to purchase up to 600,000 shares of Common Stock have been modified to be exercisable for Non-Voting Common Stock at an exercise price of $1 per share.

 

As part of this transaction, the Company entered into a Management Services Agreement under which certain principals of Westgate or its affiliates will provide management and consulting services to the Company and amended and extended the employment agreement with the Company’s CEO. Also, on December 20, 2001 as part of this transaction and effective on its completion, Wells Fargo agreed to modify terms of its Credit and Security Agreement with the Company, to include waiving the enforcement of existing defaults, increasing credit available to the Company to a maximum of $4,500,000, increasing the floating rate to the prime rate plus 2% and extending the maturity date to December 31, 2003, as more fully described under Footnote 6.

 

Under the terms of the Private Equity Transaction, if Westgate exercises the warrants in full, Westgate would hold a total of 47,182,271 shares of Series B Convertible Preferred Stock which would be convertible into the same number of shares of Common Stock, or 51% of the Company’s Common Stock on a fully diluted basis.

 

After the completion of the Private Equity Transaction, Westgate asserted that the Company’s representations and warranties concerning the Company’s capitalization in the Purchase Agreement were inaccurate in that they omitted to disclose the fact that certain outstanding promissory notes of the Company in an amount of $252,345 (the “Convertible Notes”) were convertible into shares of the Common Stock of the Company at the market price of the Common Stock on the date of conversion.  Convertible Notes in the amount of $50,000 have been converted into 720,392 shares of Common Stock to date, and $202,345 in Convertible Notes remain outstanding and were convertible into 6,744,833 shares as of August 14, 2003.

 

The Company and Westgate agreed to resolve this dispute by adjusting the conversion formula for the Series B Convertible preferred Stock.  In addition, Westgate and Health Holdings agreed that (i) the Company may issue additional options to purchase up to 1,250,000 shares of Common Stock to employees in accordance with the Naturade, Inc. 1998 Incentive Stock Option Plan, and (ii) Health Holdings will grant to Westgate a proxy to vote 1.041 shares of Common Stock owned by Health Holdings for each share of Common Stock issued on exercise of the new options.

 

8



 

The net proceeds of the transactions have been used by the Company for working capital and general corporate purposes.

 

8.              Stock-Based Compensation

 

Employee Stock Option PlanIn February 1998, the Company adopted an Incentive Stock Option Plan (the “Plan”) to enable participating employees to acquire shares of the Company’s common stock. The Plan provided for the granting of incentive stock options up to an aggregate of 850,000 shares, as amended. In October 2001, the Company amended the Plan by increasing to 2,000,000 the number of shares of the Company’s common stock which may be subject to awards granted pursuant to the Plan. The actual number of incentive stock options that may be granted to employees is determined by the Compensation Committee based on the parameters set forth in the Plan. Under the terms of the Plan, incentive stock options may be granted at not less than 100% of the fair market value at the date of the grant (110% in the case of 10% shareholders). Incentive options granted under the Plan vest over a four-year period from the date of grant. The Company has granted 594,450 incentive options under the Plan at the weighted average exercise price per share of $0.34 as of June 30, 2003. These options expire seven years from the date of grant.

 

Director Stock Options In October 1999, 87,500 options were issued to each of two then new board members at an exercise price of $1.03.

 

WarrantsOn January 2, 2002, the Company sold warrants to purchase 33,641,548 shares of Series B Convertible Common Stock. The aggregate purchase price of the warrants was $500,000 and the aggregate exercise price is $3.5 million. This transaction is described more fully in Note 7, Private Equity Transaction.

 

In 1999, the Company granted 600,000 warrants in conjunction with certain financing agreements. These warrants expire ten years from the date of grant. As part of the Private Equity Transaction described in Note 7, the holders of the warrants agreed they would be exercisable for Non-Voting Common Stock.

 

As part of a restructuring of the Company in 1991, equity holders exchanged their shares for new common stock and Class A and Class B Warrants. The Class A Warrants expired at December 31, 1996. The Class B Warrants allowed for the purchase of one share of common stock for $1.25 per share. Between December 31, 1999 and January 14, 2000, 588 warrants were exercised. On January 15, 2000, the remaining 324,520 unexercised Class B warrants expired.

 

A summary of the Company’s outstanding stock options and warrants activity is as follows:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price per
Share

 

Number
Exercisable

 

Weighted
Average
Exercise
price

 

Outstanding at December 31, 2002

 

34,473,548

 

$

0.12

 

34,321,423

 

$

0.11

 

Granted

 

0

 

 

 

 

 

 

 

Exercised

 

0

 

 

 

 

 

 

 

Expired

 

(20,000

)

$

3.30

 

 

 

 

 

Outstanding at March 31, 2003

 

34,453,548

 

$

0.11

 

34,311,673

 

$

0.12

 

Granted

 

0

 

 

 

 

 

 

 

Exercised

 

0

 

 

 

 

 

 

 

Expired

 

(130,000

)

$

1.02

 

 

 

 

 

Outstanding at June 30, 2003

 

34,323,548

 

$

0.11

 

34,215,423

 

$

0.11

 

 

9



 

The following table summarizes information about stock options and warrants outstanding at June 30, 2003

 

Range of
Exercise Prices

 

Options and
Warrants
Outstanding

 

Weighted
Average
Remaining
Contract Life
In Years

 

Weighted
Average
Exercise
Price

 

Options and
Warrants
Exercisable

 

Average
Exercise Price
for Exercisable
Options and
Warrants

 

$ 0.104

 

33,641,548

 

2

 

$

0.10

 

33,641,548

 

$

0.10

 

$ 0.15-.875

 

559,500

 

3

 

$

0.30

 

458,625

 

$

0.29

 

$ 1.03 -1.13

 

122,500

 

2

 

$

1.04

 

115,250

 

$

1.04

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,323,548

 

 

 

$

0.11

 

34,215,423

 

$

0.11

 

 

Pursuant to SFAS 123, the Company has elected to continue using the intrinsic value method of accounting for stock-based awards granted to employees and directors in accordance with APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Had the compensation cost for the Company stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS 123, the Company’s net loss and loss per share would have been the pro forma amounts presented below:

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 2003

 

June 30, 2002

 

June 30, 2003

 

June 30, 2002

 

 

 

 

 

 

 

 

 

 

 

Net loss: As reported

 

$

(362,369

)

$

(781,727

)

$

(680,781

)

$

(1,568,967

)

 

 

 

 

 

 

 

 

 

 

Add:  Stock-based employee compensation expense included in reported net loss, net of related tax effects

 

0

 

0

 

0

 

0

 

Deduct:  Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects

 

(68,386

)

(89,745

)

(136,773

)

(179,489

)

 

 

 

 

 

 

 

 

 

 

Pro forma

 

$

(430,755

)

$

(871,472

)

$

(817,554

)

$

(1,748,456

)

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

Net loss per share: As reported

 

$

(0.01

)

$

(0.02

)

$

(0.02

)

$

(0.04

)

Pro forma

 

$

(0.01

)

$

(0.02

)

$

(0.02

)

$

(0.04

)

 

10



 

9.                                       Segment Reporting - Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company’s chief decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.

 

The Company’s reportable operating segments include health food specialty stores and mass market categories. The Company does not allocate operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only sales, cost of sales and gross profit.

 

Operating segment data for the three and six months ended June 30, 2003 and June 30, 2002 was as follows:

 

 

 

Distribution Channels

 

 

 

 

 

Health Food

 

Mass Market

 

Total

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2003

 

 

 

 

 

 

 

Sales

 

$

1,925,086

 

$

2,157,598

 

$

4,082,684

 

Cost of Sales

 

1,074,735

 

1,167,333

 

2,242,068

 

Gross Profit

 

$

850,351

 

$

990,265

 

$

1,840,616

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2002

 

 

 

 

 

 

 

Sales

 

$

1,854,591

 

$

1,380,678

 

$

3,235,269

 

Cost of Sales

 

1,053,808

 

920,385

 

1,974,193

 

Gross Profit

 

$

800,783

 

$

460,293

 

$

1,261,076

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2003

 

 

 

 

 

 

 

Sales

 

$

3,951,511

 

$

3,997,228

 

$

7,948,739

 

Cost of Sales

 

2,132,556

 

2,187,748

 

4,320,304

 

Gross Profit

 

$

1,818,955

 

$

1,809,480

 

$

3,628,435

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2002

 

 

 

 

 

 

 

Sales

 

$

3,720,149

 

$

2,888,136

 

$

6,608,285

 

Cost of Sales

 

2,059,310

 

1,799,996

 

3,859,306

 

Gross Profit

 

$

1,660,839

 

$

1,088,140

 

$

2,748,979

 

 

Sales are attributed to geographic areas based on the location of the entity to which the products were sold. Geographic segment data for the three and six months ended June 30, 2003 and June 30, 2002 was as follows:

 

 

 

United States

 

International

 

Total

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2003

 

 

 

 

 

 

 

Sales

 

$

4,001,582

 

$

81,102

 

$

4,082,684

 

Cost of Sales

 

2,187,962

 

54,106

 

2,242,068

 

Gross Profit

 

$

1,813,620

 

$

26,996

 

$

1,840,616

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2003

 

 

 

 

 

 

 

Sales

 

$

7,789,697

 

$

159,042

 

$

7,948,739

 

Cost of Sales

 

4,219,545

 

100,759

 

4,320,304

 

Gross Profit

 

$

3,570,152

 

$

58,283

 

$

3,628,435

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2002

 

 

 

 

 

 

 

Sales

 

$

3,197,912

 

$

37,357

 

$

3,235,269

 

Cost of Sales

 

1,951,506

 

22,687

 

1,974,193

 

Gross Profit

 

$

1,246,406

 

$

14,670

 

$

1,261,076

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2002

 

 

 

 

 

 

 

Sales

 

$

6,502,331

 

$

105,954

 

$

6,608,285

 

Cost of Sales

 

3,791,122

 

68,184

 

3,859,306

 

Gross Profit

 

$

2,711,209

 

$

37,770

 

$

2,748,979

 

 

11



 

During the three and six months ended June 30, 2003 and 2002, the Company had sales to customers in excess of 10% of the Company’s total net sales as shown in the table below.

 

Major Customer Table

 

 

 

Customer One

 

Customer Two

 

Customer Three

 

 

 

Sales

 

% of Sales

 

Sales

 

% of Sales

 

Sales

 

% of Sales

 

Three Months ended June 30, 2003

 

$

1,021,000

 

25.0

 

$

637,100

 

15.6

 

$

469,000

 

11.5

 

Six Months ended June 30, 2003

 

$

1,981,100

 

24.9

 

$

1,399,000

 

17.6

 

$

1,030,800

 

13.0

 

Three Months ended June 30, 2002

 

$

614,800

 

19.0

 

$

566,400

 

17.5

 

$

554,800

 

17.1

 

Six Months ended June 30, 2002

 

$

1,162,400

 

17.6

 

$

1,158,700

 

17.5

 

$

1,221,400

 

18.5

 

 

10.                                 Guarantees-In November 2002, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation Number (“FIN”) 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others-an interpretation of FASB Statements No. 5,57 and 107 and rescission of FIN 34.”  The following is a summary of the Company’s agreements that the company has determined is within the scope of FIN 45.

 

Under its bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director’s serving in such capacity.  The term of the indemnification period is for the officer’s or director’s lifetime.  The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited.  However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid.  As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liability recorded for these agreements as of June 30, 2003.

 

The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically business partners, contractors, and customers, landlords and (ii) its agreements with investors.  Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities or, in some cases, as a result of the indemnified party’s activities under the agreement.  These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights.  These indemnification provisions generally survive the termination of the underlying agreement.  In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability.  The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited.  The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.  As a result, the Company believes the estimated fair value of these provisions is minimal.  Accordingly, the Company has no liabilities recorded for these agreements as of June 30, 2003.

 

12



 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This discussion contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, such statements are inherently subject to risk and the Company can give no assurances that such expectations will prove to be correct. Such forward-looking statements involve risks and uncertainties, and actual results could differ from those described herein. Future results may be subject to numerous factors, many of which are beyond the control of the Company. Such risk factors include, without limitation, the risks set forth below under “Risk Factors.” The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unexpected events.

 

All comparisons below are for the three and six month periods ended June 30, 2003 compared to the three and six month periods ended June 30, 2002.

 

General

 

The Company is a branded natural product marketing company focused on high growth, innovative products designed to nourish the health and well being of consumers. The Company concentrates on the rapidly expanding soy food market which reached sales of almost $2.5 billion in 2002 and is expected to grow 15% to 20% per year reaching $5 to $6 billion by 2005, according to Soyatech market research dated February 2001. The Company has purposely avoided the vitamin category, which has been flat, as well as the herbal category, which has experienced 15% to 25% declines per year since the late nineties. The Company’s products include Naturade Total Soy, a full line of nutritionally complete meal replacements available in several flavors of powders, ready-to-drink products and bars, Naturade Soy protein boosters, Aloe Vera 80 health and beauty care products and other niche dietary supplements. The Company’s products are sold in supermarkets (e.g., Kroger, Fred Meyer, Safeway and Albertson’s), mass merchants (e.g., Wal*Mart and Kmart), club stores (e.g., Sam’s Clubs and Costco),  natural food supermarkets (e.g., Whole Foods and Wild Oats) and over 5,000 independent health food stores.

 

Critical Accounting Policies and Use of Estimates

 

In preparing the financial statements, the Company is required to make estimates and judgments which affect the results of its operations and the reported value of assets and liabilities. Actual results may differ from these estimates. The Company believes that the following summarizes critical accounting policies which require significant judgments and estimates in the preparation of its financial statements.

 

Revenue Recognition. Sales are recognized upon shipment and passage of title. The Company accrues for estimated returns at the time of sale. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, Revenue Recognition (“SAB 101”). SAB 101 summarizes certain of the SEC staff’s views in applying generally accepted accounting principles to selected revenue recognition issues in financial statements. Implementation of SAB 101 was required by the fourth quarter of 2000. The implementation of SAB 101 did not have a material impact on the Company’s financial condition or results of operations.

 

Inventory Valuation. Merchandise inventories are stated at the lower of cost (first-in, first-out basis) or market. The Company considers cost to include the direct cost of finished goods provided by co-packers as well as the cost of those components supplied to the co-packers. The Company regularly reviews aged and excess inventories to determine if the carrying value of such inventories exceeds market value with a reserve recorded to reduce the carrying value to market value if necessary.

 

Accounts Receivable Valuation. Accounts receivable is stated net of applicable reserves for returns and allowances, bill backs and doubtful accounts. The Company regularly reviews accounts receivable to determine if the reserve amounts are appropriate by considering historical customer buying patterns, invoice aging, specific promotions and seasonal factors.

 

13



 

Results of Operations

 

 

Net Sales.

 

Total net sales for three months ended June 30, 2003 increased $847,415, or 26.2%, to $4,082,684 from $3,235,269 for the same period in 2002, primarily as a market result of continued growth in the mass market and health food market coupled with new distribution in certain key mass market retailers. Total net sales for the six-month period ended June 30, 2003 increased $1,340,454 or 20.3% to $7,948,739 from $6,608,285 for the same period in 2002 primarily due to improved distribution in the health food market resulting from new product introductions and the strengthening of the channel overall coupled with increasing distribution in the mass market.

 

Mass Market Net Sales.  For the three months ended June 30, 2003, mass market net sales increased $776,920 or 56.3% to $2,157,598 from $1,380,678 for the three months ended June 30, 2002, primarily as a result of new distribution sales initiated in 2002 converting into repeat (turn) business, combined with new distribution in club stores.  Mass market net sales for the six months ended June 30, 2003 increased $1,109,092 or 38.4% to $3,997,228 from $2,888,136 for the six months ended June 30, 2002 primarily due to turn business coupled with increased penetration into club stores such as Sam’s Club and BJ’s Wholesale.

 

Health Food Net Sales.  For the three months ended June 30, 2003, health food net sales increased $70,495, or 3.8%, to $1,925,086 from $1,854,591 for the three months ended June 30, 2002. This increase was a result of the increased distribution of new products combined with expansion of existing products into retail outlets. Health food sales for the six months ended June 30, 2003 increased $231,362 or 6.2% to $3,951,511 from $3,720,149 for the six months ended June 30, 2002.  This increase was a result of the greater volume by a distributor who recently assumed the sales to a major retail outlet coupled with increased penetration  by another distributor that resulted from the introduction of new products and increased distribution to other established retail outlets.

 

Channels of Distribution On a percent of net sales basis, the breakdown of sales between the mass market and health food channels for the three month period ended June 30, 2003 was 47.2% for the health food channel and 52.8% for the mass market channel compared to 57.3% in the health food channel and 42.7% in the mass market channel for the same period in 2002.  The breakdown for the six-month period ended June 30, 2003 was 49.7% for the health food channel and 50.3% for the mass market channel compared to 56.3% in the health food channel and 43.7% in the mass market channel for the same periods in 2002.  Management believes its strategy to increase mass market distribution has directly caused this shift in distribution.

 

For the three months ended June 30, 2003, domestic net sales increased $803,670 or 25.1%, to $4,001,582 from $3,197,912 for the three months ended June 30, 2002.  Domestic net sales for the six months ended June 30, 2003 increased $1,287,366 or 19.8% to $7,789,697 from $6,502,331 for the same period in 2002.  Increases in domestic net sales are primarily due to the previously mentioned increase in new distribution in the mass market and increased health food sales.  For the three months ended June 30, 2003, international sales increased $43,745, or 117.1%, to $81,102 from $37,357, and for the six months ended June 30, 2003, international net sales increased $53,088 or 50.1% to $159,042 from $105,954 as the Company’s efforts to gain new distribution in Canada have begun to produce results.

 

 

Gross Profit

 

Gross profit as a percentage of net sales for the three months ended June 30, 2003 increased 6.1% to 45.1% of net sales, from 39.0% for the three months ended June 30, 2002. The increase was due to lower product cost related to the increased sales mix of the reformulated Naturade Total Soy® product formula coupled with continued efforts to reduce product and packaging costs.  Gross profit as a percentage of net sales for the six months ended June 30, 2003 increased 4.0% to 45.6% from 41.6% for the six months ended June 30, 2002 primarily due to reductions in product costs resulting from increased sales mix of reformulated Naturade Total Soy®.

 

14



 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses (“S, G &A”) for the three months ended June 30, 2003 increased $130,846 to $2,009,352 or 49.2% of net sales from $1,878,506 or 58.1% of net sales for the three months ended June 30, 2002. This increase is primarily due to increased sales volume.  As a percentage of sales, S,G & A expenses decreased 8.9% primarily due to a $132,300 decrease in brand expenses related to managements strategy to control promotion expenses partially offset by a $123,500 increase in overhead expenses, principally from manpower increases. As a percent of sales, brand expenses were 12.7% and 17.3%, respectively, for the three months ended June 30, 2003 and 2002. The decrease in brand expenses, as a percent of net sales, is primarily due to the Company’s strategy to control overall costs and match brand expenses with proven sales opportunities.

 

Selling, general and administrative expenses (“S, G &A”) for the six months ended June 30, 2003 decreased $46,080 to $3,942,481 or 49.6% of net sales from $3,988,561 or 60.4% of net sales for the six months ended June 30, 2002. This decrease is primarily due to a $129,200 decrease in overhead expenses, principally from manpower and consulting fee reductions partially offset by increases related to freight and commission expense resulting form increased sales volume.  Brand expenses for the period were 13.8% of net sales down 2.6% from 16.4% for the same period in 2002. The decrease in brand expenses, as a percent of net sales, is primarily due to the Company’s strategy to control overall costs and match brand expenses with proven sales opportunities

 

Interest Expense

 

Interest expense for the three months ended June 30, 2003 increased $17,839 compared to the three months ended June 30, 2002 due to borrowings on the Loan Agreement with a majority shareholder, more fully explained in Note 5, partially offset by lower borrowing levels combined with lower base cost of money on the Company’s credit facility.

 

Cash Flows

 

Net cash provided by inventories was $516,138 for the six months ended June 30, 2003 as compared to net cash provided by inventories of $179,807 for the six months ended June 30, 2002 primarily due to lower December sales in 2002 and higher inventories at the end of the period resulting in an increase in cash provided when inventories were worked down to normal levels.

 

Net cash used in accounts receivable was $57,704 for the six month period ended June 30, 2003 compared to net cash provided from accounts receivable of $1,312,000 for 2001 principally due to decreased sales volume in December 2002 resulting in lower accounts receivable at December 31, 2002 then at December 31, 2001.

 

Net cash used in accounts payable and accrued expenses was $194,702 for the six month period ended June 30, 2003 compared to net cash used of $715,927 for 2002 principally due to lower purchase of inventory related to lower December 2002 sales resulting in lower vendor payables at December 2002 combined with increased vendor terms negotiated with key vendors during 2003.

 

The provision for excess and obsolete inventory used $16,018 in cash for the six month period ended June 30, 2003 compared to $273,796 used in 2002 principally due to the disposal of excess product lines in 2002 and the implementation of an inventory management system in 2003 decreasing excess inventory levels.

 

Net cash used by prepaid expenses was $220,649 for the six month period ended June 30, 2003 compared to net cash provided in 2002 of $254,570 principally due to increased prepaid insurance costs related to Directors & Officers insurance premiums.

 

15



 

Liquidity and Capital Resources

 

The Company used cash of $486,029 from operating activities in the six months ended June 30, 2003, compared to a use of cash of $701,559 in operating activities for the six months ended June 30, 2002. This decrease in cash used from operating activities is primarily due to the reduction in the Company’s operating loss of $899,813 compared to the same period in 2002 partially offset by an increase in receivables of $57,704, a reduction in inventories of $516,138 and a reduction of payables and accrued expenses of $194,702 for the six months ended June 30, 2003.

 

The Company’s working capital increased $38,057 from ($1,429,771) at December 31, 2002 to ($1,391,714) at June 30, 2003. This increase was largely due to the increases in inventory as a result of increased service levels partially offset by a decrease in accounts payable and borrowings on the Company’s credit facility.

 

Cash used in investment activities during the six months ended June 30, 2003 was $0 compared to $1,450 for the six months ended June 30, 2002.

 

The Company’s cash provided by financing activities was $146,781 for the six months ended June 30, 2003, compared to cash provided by financing activities of $1,777,297 for the six months ended June 30, 2002. The June 30, 2003 amount was the result of the Loan Agreement (described in Note 6) partially offset by net pay downs on the Company’s line of credit.  The June 30, 2002 amount was the result of the $2.5 million from the Private Equity Transaction, conversion into equity of the Health Holdings Credit Agreement and Loan Agreement debt, and a decrease in borrowings under the Credit and Security Agreement. See Notes 4, 5 and 7 to the Financial Statements.

 

As of June 30, 2003, the Company was in compliance with all of the covenants of the Credit and Security Agreement with Wells Fargo.

 

The accompanying financial statements have been prepared on a going-concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At June 30, 2003, the Company has an accumulated deficit of $21,618,005, a net working capital deficit of $1,391,714 and a stockholders’ capital deficiency of $2,626,082, and has incurred recurring net losses. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company’s independent auditors qualified their opinion on the Company’s December 31, 2002 financial statements by including an explanatory paragraph in which they expressed substantial doubt about the Company’s ability to continue as a going concern

 

The Company believes that its existing cash balances and financing arrangements will provide it with sufficient funds to finance its operations during the next twelve months, provided that Wells Fargo does not exercise its right to terminate, or demand immediate payment of all amounts outstanding under the Credit and Security Agreement. However, the Company may seek to raise additional funds through the sale of public or private equity and/or debt financings or from other sources. No assurance can be given that additional financing will be available in the future or that, if available, such financing will be obtainable on terms acceptable to the Company or its stockholders.

 

16



 

Impact of Contractual Obligations and Commercial Commitments

 

The following summarizes the Company’s contractual obligations at June 30, 2003 and the effects such obligations are expected to have on liquidity and cash flow in future periods.

 

 

 

Payments Due by Period

 

Contractual
Obligations

 

Total

 

Less than 1 Year

 

1-3 Years

 

4-5 Years

 

After 5 Years

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-Term Debt

 

$

2,203,523

 

$

1,731,531

 

$

471,992

 

$

0

 

$

0

 

Capital Lease Obligations

 

$

0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

$

1,328,940

 

$

203,956

 

$

1,124,984

 

$

0

 

$

0

 

Unconditional Purchase Obligations

 

$

0

 

 

 

 

 

 

 

 

 

Other Long-Term Obligations

 

$

0

 

 

 

 

 

 

 

 

 

Total Contractual Cash Obligations

 

$

3,532,463

 

$

1,935,487

 

$

1,596,976

 

$

0

 

$

0

 

Series B Convertible Redeemable Preferred Stock

 

$

2,000,000

 

$

0

 

$

0

 

$

0

 

$

2,000,000

 

 

 

$

5,532,463

 

$

1,935,487

 

$

1,596,976

 

$

0

 

$

2,000,000

 

 

Recently Issued Statements of Financial Accounting Standards.

 

In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Instruments with Characteristics of Both Liabilities and Equity (“FAS 150”) which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  FAS 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances).  This statement is effective at the beginning of the first interim period beginning after June 15, 2003 for public companies.  The adoption of FAS 150 will require the Company to reclassify its redeemable convertible preferred stock to a liability at its fair value during the quarter ending September 30, 2003.  The redeemable convertible preferred stock is currently recorded on the Company’s balance sheet in a separate category between liabilities and equity.

 

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletins (“ARB”) No. 51, Consolidated Financial Statements (“FIN 46”).  FIN 46 clarifies the application of ARB No. 51 to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties.  The Company does not believe the adoption of FIN 46 will have a material impact on its financial position and results of operations.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure (“FAS 148”), which amends Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“FAS 123”). FAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirements of FAS 123 to require more prominent and more frequent disclosures in financial statements of the effects of stock-based compensation. The transition guidance and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002. The adoption of FAS 148 did not have a material impact on the Company’s consolidated balance sheet or results of operations as the Company intends to continue to account for its equity based compensation plans using the intrinsic method.  The Company provided the interim disclosures required by FAS 148 beginning in the first quarter of 2003.

 

In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB

 

17



 

Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 31, 2002. The Company adopted this Statement as of January 1, 2003 and it had no material impact on its financial statements.

 

In June 2002, the FASB issued FAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, which addresses accounting for restructuring and similar costs. FAS No. 146 supersedes previous accounting guidance, principally Emerging Issues Task Force (“EITF”) Issue No. 94-3. The Company will adopt the provisions of SFAS No. 146 for restructuring activities initiated after December 31, 2002. FAS No. 146 requires that the liability for costs associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at the date of a company’s commitment to an exit plan. FAS No. 146 also establishes that the liability should initially be measured and recorded at fair value. Accordingly, FAS No. 146 may affect the timing of recognizing future restructuring costs as well as the amount recognized.

 

                In May 2002, the FASB issued FAS 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. FAS 145 eliminates Statement 4 (and Statement 64, as it amends Statement 4), which requires gains and losses from extinguishments of debt to be aggregated and, if material, classified as an extraordinary item, and thus, also the exception to applying Opinion 30 is eliminated as well. This statement is effective for years beginning after May, 2002 for the provisions related to the rescission of Statements 4 and 64, and for all transactions entered into beginning May, 2002 for the provision related to the amendment of Statement 13.  The adoption of SFAS 145 did not have a material impact on the Company’s operations and financial position.

 

 

Risk Factors

 

The short and long-term success of the Company is subject to certain risks, many of which are substantial in nature. Stockholders and prospective stockholders in the Company should consider carefully the following risk factors, in addition to other information contained herein. This Form 10-Q contains forward-looking statements which are subject to a variety of risks and uncertainties. The Company’s actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth below.

 

Future losses and ability to continue as a going concern

 

Naturade’s independent accountants have qualified their opinion on the Company’s December 31, 2002 financial statements, expressing substantial doubt concerning the Company’s ability to continue as a going concern. At June 30, 2003, the Company had an accumulated deficit of $21,618,005, net working capital deficit of $1,391,714 and a stockholders’ capital deficiency of $2,626,082. The Company anticipates that it will incur net losses for the foreseeable future and will need access to additional financing for working capital and to expand its business. Moreover, as of December 31, 2002, the Company was in default of the minimum book net worth and minimum net income covenants in the Credit and Security Agreement with its principal lender and only recently received a written waiver of such default. Without a waiver of any future defaults that may occur, or a modification of the Credit and Security Agreement, the lender could terminate the agreement and demand immediate payment of the full amount of indebtedness. Management has taken a number of steps to address this situation, including the Private Equity Transaction completed on January 2, 2002, the Loan Agreement entered into on April 14, 2003 under which the Company can borrow, subject to certain conditions, $450,000 and can borrow up to an additional $300,000 at the discretion of the lenders and efforts to decrease operating losses by expanding sales and reducing costs. Nevertheless, the Company expects to incur operating losses for some time in the future and cannot give assurance that additional financing will be available when needed or that it will obtain needed waivers or modifications of the Credit and Security Agreement. If unsuccessful in those efforts, Naturade could be forced to cease operations and investors in Naturade’s Common Stock could lose their entire investment.

 

18



 

Dependence on current and ongoing financing

 

The Company’s success is dependent on its current financing as well as new financing to support its working capital requirements and fund its operating losses. Starting in 2000, the Company embarked on a strategy to rollout the Naturade Total Soy® product line to the mass market, which requires a high level of marketing expenditures. Although the Company obtained $2.5 million as part of the Private Equity Transaction on January 2, 2002, and entered into the Loan Agreement as of April 14, 2003 under which the Company can borrow $450,000 and can borrow up to an additional $300,000 at the discretion of the lenders, the Company may not have adequate financial resources to fund this strategy. Further, no assurance can be given that the Company will have access to additional funds or, if funds can be obtained, that the terms on which they can be obtained will be satisfactory. In such event, the Company’s business and results of operations, and its ability to continue as a going concern, will be materially adversely affected.

 

 

Future Sales of Equity Securities Could Dilute the Company’s Common Stock

 

The Company may seek to obtain new financing from various sources, including the sale of its securities. Future sales of Common Stock or securities convertible into Common Stock at or below recent market prices could result in dilution of the Common Stock. In addition, the conversion of the 13.5 million shares of Series B Convertible Preferred Stock originally sold to Westgate Equity Partners, L.P. (“Westgate”), for $2 million, together with conversion of the 35,989,555 shares of Series B Convertible Preferred Stock issuable on exercise of warrants held by Westgate, which have an exercise price of approximately $0.104 per share (and, including the original cost of the warrant, a total consideration of approximately $0.119 per share), has resulted in dilution of the Common Stock. The perceived risk of dilution may cause some of the Company’s stockholders to sell their shares, which could further reduce the market price of the Common Stock.

 

Naturade may face interruption of production and services due to increased security measures in response to terrorism

 

Naturade’s business depends on the free flow of products and services through the channels of commerce. Recently, in response to terrorist activities and threats aimed at the U.S., transportation, mail, financial and other services have been slowed or stopped altogether. Further delays or stoppages in transportation, mail, financial or other services could have a material adverse effect on the Company’s business, results of operations and financial condition. Furthermore, the Company may experience an increase in operating costs, such as costs for transportation, insurance and security, as a result of the terrorist activities and potential activities. The Company may also experience delays in receiving payments from payers that have been affected by terrorist activities and potential activities. The U.S. economy in general is being adversely affected by the terrorist activities and potential activities and any economic downturn could adversely impact the Company’s results of operations, impair its ability to raise capital or otherwise adversely affect its ability to grow its business.

 

Impact of government regulation

 

The Company’s operations, properties and products are subject to regulation by various foreign, federal, state and local government entities and agencies, including the FDA and FTC. Among other matters, such regulation is concerned with statements and claims made in connection with the packaging, labeling, marketing and advertising of the Company’s products. The governmental agencies have a variety of processes and remedies available to them, including initiating investigations, issuing warning letters and cease and desist orders, requiring corrective labeling or advertising, requiring consumer redress, seeking injunctive relief or product seizure, imposing civil penalties and commencing criminal prosecution.

 

As a result of the Company’s efforts to comply with changes in applicable statutes and regulations, the Company has from time to time reformulated, eliminated or relabeled certain of its products and revised certain aspects of its sales, marketing and advertising programs. The Company may be subject in the future to additional laws or regulations administered by federal, state, local or foreign regulatory authorities, the repeal or amendment of laws or regulations

 

19



 

which the Company considers favorable, such as DSHEA, or more stringent interpretations of current laws or regulations. The Company cannot predict the nature of future laws, regulations, interpretations or applications, nor can the Company predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on the Company’s business in the future. Such future laws and regulations could, however, require the reformulation of products to meet new standards, the recall or discontinuance of products that cannot be reformulated, the imposition of additional record keeping requirements, expanded documentation of product efficacy, expanded or modified labeling and scientific substantiation, including health warnings or restrictions on benefits described for our products. Any of or all of such requirements could hurt sales of our products or increase our costs, resulting in material harm to the Company’s results of operations and financial condition.

 

Technological changes

 

The Company currently is engaged in developing nutraceuticals, which are characterized by extensive and costly research efforts and rapid technological progress and change. New process developments are expected to continue at a rapid pace in both industry and academia. The Company’s future success will depend on its ability to develop and commercialize its existing product candidates and to develop new products. There can be no assurance that the Company will successfully complete the development of any of its existing product candidates or that any of its future products will be commercially viable or achieve market acceptance. In addition, research and development and discoveries by others could render some or all of the Company’s programs or potential product candidates uncompetitive or obsolete.

 

Dependence on continued business from the Company’s key customers

 

The Company’s three largest customers together account for 55.5% of sales revenue for the six-month period ended June 30, 2003. One mass market customer, Wal*Mart and Sam’s Club, represented approximately 24.9% of Naturade’s total sales, and two health food distributors accounted for 30.6% of total sales for the six-month period ended June 30, 2003. The loss of such customers could have a material adverse effect on the Company’s results of operations. From time to time, major customers of Naturade have experienced financial difficulties. Naturade does not have long-term contracts with any of its customers and, accordingly, there can be no assurance that any customer will continue to place orders with Naturade to the same extent it has in the past, or at all.

 

Dependence on third-party manufacturers

 

The use of contract manufacturers and the resulting loss of direct control over production could result in the Company’s failure to receive timely delivery of products of acceptable quality. Although the Company believes that alternative sources of contract manufacturing services are available, the loss of one or more contract manufacturers could have a material adverse effect on the Company’s results of operations until an alternative source is located and has commenced producing the Company’s products.

 

Although the Company requires that its contract manufacturers comply with FDA manufacturing guidelines, Naturade cannot assure that these third-party companies will always act in accordance to these regulations. If the manufacturing facilities used by the Company’s third-party manufacturers did not meet those standards, the production of the Company’s products could be delayed until the necessary modifications are made to comply with those standards or alternate manufacturers are located. Furthermore, the potential exists for circumstances to arise which would require Naturade to seek out alternate manufacturers who operate in compliance with the FDA’s requirements.

 

Competition

 

The market for nutraceutical products is highly competitive. Many of the Company’s competitors have substantially greater capital resources, research and development capabilities, and manufacturing and marketing resources, capabilities and experience than the Company. The Company’s competitors may succeed in developing products that are more effective or less costly than any products that may be developed by the Company.

 

20



 

Dependence on qualified personnel

 

The Company’s success is dependent upon its ability to attract and retain qualified sales, marketing, scientific and executive management personnel. To commercialize its products and product candidates, the Company must maintain and expand its personnel, particularly in the areas of product sales and marketing. The Company faces intense competition for such personnel from other companies, academic institutions, government entities and other research organizations. There can be no assurance that the Company will be successful in hiring or retaining qualified personnel. Moreover, managing the integration of such new personnel could pose significant risks to the Company’s development and progress and increase its operating expenses.

 

Variability of quarterly results

 

The Company has experienced, and expects to continue to experience, variations in its net sales and operating results from quarter to quarter. The Company believes that the factors which influence this variability of quarterly results include the timing of the Company’s introduction of new product lines, the level of consumer acceptance of each product line, general economic and industry conditions that affect consumer spending and retailer purchasing, the availability of manufacturing capacity, the timing of trade shows, the product mix of customer orders, the timing of placement or cancellation of customer orders, the weather, transportation delays, the occurrence of chargebacks in excess of reserves and the timing of expenditures in anticipation of increased sales and actions of competitors. Accordingly, a comparison of the Company’s results of operations from period to period is not necessarily meaningful, and the Company’s results of operations for any period are not necessarily indicative of future performance.

 

Product liability exposure

 

Product liability risk is inherent in the testing, manufacture, marketing and sale of the Company’s products and product candidates, and there can be no assurance that the Company will be able to avoid significant product liability exposure. The Company may be subject to various product liability claims, including, among others, that its products include inadequate instructions for use or inadequate warnings concerning possible side effects and interactions with other substances. The Company currently maintains a general liability insurance policy and a product liability insurance policy. There can be no assurance that the Company will be able to maintain insurance in sufficient amounts to protect the Company against such liabilities at a reasonable cost. Any future product liability claim against the Company could result in the Company paying substantial damages, which may not be covered by insurance and may have a material adverse effect on the business and financial condition of the Company.

 

Naturade may not be able to identify suitable strategic partners to realize the Company’s growth strategy.

 

In addition to internal expansion of its existing business, Naturade has a strategy to expand its business externally by identifying compatible companies for strategic alliances and strategic investments in Naturade. Naturade may not succeed in identifying these potential strategic partners or may be unable to conclude agreements with them. If so, Naturade’s future growth may be limited, and it may be unable to achieve profitability.

 

21



 

Expanding the Company’s sales in the mass market has increased branding costs and resulted in less stable demand for the Company’s products.

 

Naturade, traditionally a marketer for the health food market, has recently built a presence in the mass market. While yielding increased revenue, selling to the mass market has also resulted in significant new costs and risks for Naturade.  Mass market sales require greater expenditures for branding.  Mass market brand expenses were 10.8% of net sales as compared to health food brand expenses of 10.1% of net sales for the six months ended June 30, 2003.  Compared to sales in the health food market, the aggregate volume of mass market orders can vary significantly from period to period and tends to be more sensitive to short term or local variations in market conditions. The instability can make planning difficult and can cause unexpected reductions in sales, or in orders that exceed Naturade’s short-term capacity, in either case resulting in lost revenue. Failure to manage the costs and risks associated with the mass market could cause material adverse harm to Naturade’s business.

 

The dietary supplement industry as a whole is experiencing a decline in sales.

 

Naturade’s business consists primarily of selling natural products and functional foods, including soy protein based products. While Naturade’s sales decreased in 2002, the soy foods category as a whole has recently experienced increased sales. Other categories of dietary supplements have experienced reduced sales in recent periods after several years of dramatic growth. In particular, revenues in both the herbal and health food store categories have significantly declined. There can be no assurance that this general consumer trend will not be experienced by Naturade’s product categories as well. Even if Naturade is successful in increasing sales within its market category, a decline in the overall market for natural products or functional foods could have a material adverse affect on Naturade’s business.

 

Effect of adverse publicity

 

The Company’s products are formulated with vitamins, minerals, herbs and other ingredients that the Company regards as safe when taken as suggested by the Company and that scientific studies have suggested may involve health benefits. While the Company conducts extensive quality control testing on its products, the Company generally does not conduct or sponsor clinical studies relating to the benefits of its products. The Company is highly dependent upon consumers’ perception of the overall integrity of its business, as well as the safety and quality of its products and similar products distributed by other companies which may not adhere to the same quality standards as the Company. The Company could be adversely affected if any of the Company’s products, or any similar products distributed by other companies, should prove or be asserted to be harmful to consumers or should scientific studies provide unfavorable findings regarding the effectiveness of such products. The Company’s ability to attract and retain distributors could be adversely affected by negative publicity relating to it or to other direct sales organizations or by the announcement by any governmental agency of investigatory proceedings regarding the business practices of the Company or other direct sales organizations.

 

Intellectual property protection

 

Our success depends in part on our ability to preserve our trade secrets and know-how, and operate without infringing on the property rights of third parties. The Company does not have any patents, and as a result another company could replicate one or more of Naturade’s products. The Company’s policy is to pursue registrations for all of the trademarks associated with its key products. The Company relies on common law trademark rights to protect its unregistered trademarks as well as its trade dress rights. Common law trademark rights generally are limited to the geographic area in which the trademark is actually used, while a U.S. federal registration of a trademark enables the registrant to stop the unauthorized use of the trademark by any third party anywhere in the U. S. The Company intends to register its trademarks in certain foreign jurisdictions where the Company’s products are sold. However, the protection available, if any, in such jurisdictions may not be as extensive as the protection available to the Company in the U.S.

 

Currently, the Company has 18 U.S. trademarks as well as a California registration of one trademark. The Company also maintains trademark registrations in approximately eleven foreign countries. Because of its limited financial resources, the Company cannot in all cases exhaustively monitor the marketplace for trademark violations. It

 

22



 

will evaluate and pursue potential infringement on a case-by-case basis in accordance with its business needs and financial resources. If the Company is not aware of some infringing uses or elects not to pursue them, the value of its trademarks could be substantially weakened. If the Company takes action to enforce its property rights, litigation may be necessary. Any such litigation could be very costly and could distract the Company’s personnel. Due to limited financial resources, Naturade may be unable to pursue some litigation matters. In matters it does pursue, Naturade can provide no assurance of a favorable outcome. An unfavorable outcome in any proceeding could have a material adverse effect on the Company’s business, financial condition and results of operations.

 

Introduction of new products

 

Each year, the Company introduces new products to meet consumer demands and counter competitive threats. These new products include product line extensions, such as new flavors to currently existing products, as well as new formulations or configurations, such as ready-to-drink products and bars. The Company experiences significant costs in formulating new products, designing packaging and merchandising. While the Company conducts extensive market research to determine consumer trends in both the mass market and health food market, there can be no assurance that the Company’s new products will be accepted by consumers and retailers. In addition, there can be no assurance that once new products are initially distributed to mass market and health food retailers, there will be repeat orders for these new products. Furthermore, expensive introductory retailer charges for additional shelf space may negate any initial increase in sales.

 

Stock price

 

The market price of the Company’s Common Stock is likely to be volatile and could be subject to significant fluctuations in response to the factors such as quarterly variations in operating results, operating results which vary from the expectations of securities analysts and investors, changes in financial estimates, changes in market valuations of competitors, announcements by the Company or its competitors of a material nature, loss of one or more customers, additions or departures of key personnel, future sales of Common Stock and stock market price and volume fluctuations. Also, general political and economic conditions such as recession, or interest rate or currency rate fluctuations may adversely affect the market price of the Company’s Common Stock.

 

Closely controlled stock

 

At June 30, 2003, Westgate Equity Partners, L.P. beneficially owned approximately 55.0% of the Company’s Common Stock, Health Holdings beneficially owned 41.5% of the Company’s Common Stock, and executive officers and directors of the Company as a group beneficially owned 97.5% of the Company’s Common Stock. Shares “beneficially owned” include shares that a person owns or has a right to acquire within 60 days, either directly or through affiliates. Accordingly, Westgate Equity Partners, LLC and Health Holdings have the ability to control the outcome on all matters requiring stockholder approval, including, but not limited to, the election and removal of directors, any merger, sale, consolidation or sale of substantially all of the assets of the Company, and to control the Company’s management and affairs.

 

23



 

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

 

 

The Company’s earnings are affected by fluctuations in the value of the U.S. dollar as compared to foreign currencies as a result of international purchases. As a result, the Company bears the risk of exchange rate gains or losses that may result in the future as a result of this financing structure. The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s long-term debt.

 

The Company’s long-term debt primarily consists of a $4.5 million line of credit originally entered into on January 27, 2000 and amended on April 14, 2003, a $450,000 Loan Agreement with a majority shareholder and other investors and a $252,345 Loan Agreement with investors, after giving affect to the Health Holdings debt-to equity conversion on January 2, 2002 as part of the Private Equity Transaction as described more fully in Note 7 to the Financial Statements. The $4 million Credit Agreement with the majority shareholder of the Company was converted into equity on January 2, 2002 as part of the Private Equity Transaction. The line of credit bears interest at prime rate plus 4.5%. The Loan Agreement with a majority shareholder and other investors bears interest at 15% per annum and is due on December 31, 2004.  The Loan Agreement bears interest at 8% per annum with due dates of September 11, 2002 for $50,000 and of August 2003 for the remaining balance. However, given the fixed interest rate on the Loan Agreement, interest rate changes generally will have no effect on the interest rates under the Loan Agreement or on the Company’s results of operations. Given the variable interest rate on the line of credit, the impact of interest rate changes on the line of credit could have a material impact on the Company’s results of operations. For, the six month period ended June 30, 2003 the interest expense on the line of credit was $53,756. If the interest rate on the line of credit for the six month period ended June 30, 2003 had increased by one percent to prime rate plus 5.5%, this would result in an interest expense of $60,272.

 

ITEM 4. Controls and Procedures

 

 

The Company’s Chief Executive Officer, Bill D. Stewart and Chief Financial Officer Stephen M. Kasprisin, with the participation of the Company’s management, carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14.  Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective in making known to them material information relating to the Company (including its consolidated subsidiaries) required to be included in this report.

 

Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives.  The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures.  These include the fact that human judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such a simple errors or mistakes or intentional circumvention of the established process.

 

                There was no change in the Company’s internal control over financial reporting, known to the Chief Executive Officer or the Chief Financial Officer that occurred during the period covered by the report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

24



 

PART II. Other Information

 

ITEM 1. Legal Proceedings

 

NONE

 

ITEM 2. Changes in Securities

 

NONE

 

ITEM 3. Defaults upon Senior Securities

 

NONE.

 

ITEM 4. Submission of Matters to a Vote of Security Holders

 

At the Annual Meeting of the Shareholders on July 31, 2003, the stockholders re-elected four members of the Board of Directors, as follows:

 

 

 

Number of Shares

 

 

 

For

 

Withheld

 

Abstain

 

 

 

 

 

 

 

 

 

Lionel P. Boissiere, Jr.

 

42,722,596

 

0

 

647,886

 

William B. Doyle, Jr.

 

42,722,596

 

0

 

647,886

 

Bill D. Stewart

 

42,722,596

 

0

 

647,886

 

David Weil

 

42,722,596

 

0

 

647,886

 

 

At the Annual Meeting, the holder of Company’s Series B Convertible Preferred Stock, voting as a separate class, re-elected two members of the Board of Directors, as follows:

 

Jay W. Brown

 

13,540,723

 

0

 

0

 

Robert V. Vitale

 

13,540,723

 

0

 

0

 

 

At the Annual Meeting, the stockholders also voted to ratify the appointment of BDO Seidman, LLP as the Company’s independent certified public accountants for the fiscal year ending December 31, 2003, as follows:

 

For

 

42,730,213

 

Against

 

757

 

Abstain

 

639,512

 

 

ITEM 5. Other Information

 

NONE

 

25



 

ITEM 6. Exhibits

 

Exhibit No.

 

Description

31

 

Certification Pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

ITEM 12. Reports on Form 8-K

 

None

 

26



 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

 

 

NATURADE, INC.

 

 

(Registrant)

 

 

 

 

By

 

DATE: August 14, 2003

 

/s/ Bill D. Stewart

 

 

 

Bill D. Stewart

 

 

Chief Executive Officer

 

 

 

 

By

 

DATE: August 14, 2003

 

/s/Stephen M. Kasprisin

 

 

 

Stephen M. Kasprisin

 

 

Chief Financial Officer

 

27