Filed On 6/22/05 1:38pm ET · SEC File 0-33211 · Accession Number 1144204-5-19606
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
6/22/05 Vital Living Inc 10KSB/A 12/31/04 5:71 1144204
Amendment to Annual Report -- Small Business · Form 10-KSB
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 10KSB/A Amendment to Annual Report -- Small Business 65 405K
2: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2± 10K
3: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2± 10K
4: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
5: EX-32.2 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
10KSB/A · Amendment to Annual Report -- Small Business
Document Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Amendment No. 2
FORM 10-KSBA
ANNUAL REPORT PURCHASE TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2004
Commission file number 000-33211
--------------------
VITAL LIVING, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Nevada 3652 88-0485596
--------------------------------- ---------------------------- ----------------
(State or Other Jurisdiction Of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
5080 North 40th Street, Suite 105, Phoenix, Arizona 85018-2147
------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(602) 389-8600
----------------------------------------------------
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes |X| No |_|
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. Yes |X| No |_|
State issuer's revenue for the most recent fiscal year: $4,161,000.
As of March 17, 2005, the aggregate market value of the voting and
non-voting common stock held by non-affiliates of the issuer (based on the
closing sales price as reported by the OTC Bulletin Board) was $10,552,000
assuming all officers and directors are deemed affiliates for this purpose).
As of March 17, 2005, the issuer had 101,068,713 shares of its common
stock, $0.001 par value, outstanding.
Transitional Small Business Disclosure Format (check one): Yes |X| No |_|
VITAL LIVING, INC.
ANNUAL REPORT ON FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PART I
ITEM 1. DESCRIPTION OF BUSINESS.............................................. 3
ITEM 2. DESCRIPTION OF PROPERTY..............................................16
ITEM 3. LEGAL PROCEEDINGS....................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................16
PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.........16
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS...........17
ITEM 7. FINANCIAL STATEMENTS.................................................24
ITEM 8A. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................24
ITEM 8B. OTHER INFORMATION....................................................24
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................25
ITEM 10. EXECUTIVE COMPENSATION...............................................25
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.......................25
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.....................................25
SIGNATURES...........................................................25
ITEM 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS...........................32
--------------------
Statement Regarding Forward-Looking Statements
The statements contained in this report on Form 10-KSB that are not purely
historical are forward-looking statements within the meaning of applicable
securities laws. Forward-looking statements include statements regarding our
"expectations," "anticipation," "intentions," "beliefs," or "strategies"
regarding the future. Forward-looking statements also include statements
regarding revenue, margins, expenses, and earnings analysis for fiscal 2005 and
thereafter; future products or product development; our product development
strategies; potential acquisitions or strategic alliances; the success of
particular product or marketing programs; the amounts of revenue generated as a
result of sales to significant customers; and liquidity and anticipated cash
needs and availability. All forward-looking statements included in this report
are based on information available to us as of the filing date of this report,
and we assume no obligation to update any such forward-looking statements. Our
actual results could differ materially from the forward-looking statements.
Among the factors that could cause actual results to differ materially are the
factors discussed in Item 1, "Business - Risk Factors."
Note: Amendment No. 2 is being filed to amend the financial statements included
in this report as well as the related material in the risk factor titled "We
have substantial indebtedness and interest obligations that we must satisfy when
due" and both the net loss from continuing operations section and the second
paragraph of the Liquidity and Capital Resources section of the Management
Discussion and Analysis.
3
PART I.
Item 1. Description of Business
Overview
Our Company
We develop and market nutritional fruit and vegetable supplements, protein
supplements, and nutraceuticals products. Through a licensing agreement, we also
have certain rights for the use of a pharmaceutical delivery system known as
"GEOMATRIX." Our principal products currently are Greensfirst(R), Dream
Protein(R), and Complete Essentials(R). We distribute our products primarily in
the following three distribution channels:
o healthcare practitioners, including physicians, condition
specialists, chiropractors, nutritionists, and trainers who promote
or prescribe our products;
o regional nutritional distributors that market our proprietary
products and patient selling system directly to healthcare
practitioners who utilize our proprietary selling system to market
our products directly to consumers; and
o directly to consumers through call centers and websites.
The following table sets forth our current target conditions,
products, and distribution channels:
------------------------------------------------------------------------------
Target Conditions Products Offered Distribution Channels
------------------------------------------------------------------------------
GreensFIRST(R) Healthcare practitioners
General Health Dream Protein(R) Regional distributors
Complete Essentials(R) Consumer direct
------------------------------------------------------------------------------
Cardiovascular Health Essentum(R) Consumer Direct
------------------------------------------------------------------------------
Nutritional supplements represent a convenient and cost-effective way for
an individual to obtain the nutritional benefits of whole foods. Nutritional
supplements are formulated from whole foods and are intended to provide for
improved health, reduced risk of diseases, and the delay onset of age related
indicators while resulting in little added caloric and fat intake. Nutritional
supplements come in powder, capsule, cracker, and other forms.
Nutraceuticals, consisting of vitamins, minerals, herbs, and supplements,
are products that are isolated or purified from foods and generally sold in
medicinal forms not usually associated with foods, including tablets, capsules,
and drops. Nutraceuticals are intended to have physiological benefits or have
the ability to reduce the risk of chronic disease beyond basic nutritional
products. We develop and test our nutraceuticals in collaboration with leading
medical experts in the nutraceuticals field. We have designed our products to be
incorporated by healthcare practitioners into standard patient routines in which
healthcare practitioners recommend and sell our nutritional supplements and
nutraceuticals products to their patients. Use of vitamins, minerals, herbs, and
nutritional supplements continues to rise as consumers seek nutritional products
to improve general health, increase longevity, and enhance the overall quality
of life.
We were incorporated in the state of Nevada on January 22, 2001 under the
name Nutritional Systems, Inc. We acquired substantially all of the assets of
Vital Living, Inc. effective as of May 7, 2001 and changed our name to Vital
Living, Inc. on May 20, 2001. On August 16, 2001, we merged with VCM Technology
Limited, a company reporting under the Securities and Exchange Act of 1934.
Following the merger, we continued as the surviving corporation and commenced
reporting under the Securities and Exchange Act of 1934.
Our executive offices are located at 5080 North 40th Street, Suite 105,
Phoenix, Arizona 85018, and our telephone number is (602) 952-9909. Our website
is located at www.vitalliving.com.
4
Strategy
Our goal is to become a major participant in the nutritional supplement
and nutraceutical markets. Key elements of our strategy to achieve this goal
include the following:
o capitalize on the growing consumer interest in the use of
nutritional supplements and nutraceuticals to complement traditional
health care routines,
o develop products that appeal to health care professionals and
consumers,
o enhance our distribution channels and the participants in those
channels, and
o pursue strategic acquisitions in the highly fragmented nutritional
supplement and nutraceuticals markets to expand our product
offerings, distribution channels, and geographic reach.
Business
Products
Our current principal products are GreensFirst(R), Dream Protein(R),
Complete Essentials(R) and Essentum(R).
GreensFIRST(R) is a highly concentrated formulation of fruits and
vegetables with natural, organic, whole foods and extracts, produced in a powder
for mixing with a variety of liquids. GreensFirst(R) supplies natural vitamins,
minerals, plant enzymes, antioxidants, phytonutrients, and symbiotic intestinal
flora designed to provide for more optimal energy metabolism, fat burning,
digestion, detoxification, immunity, repair, recovery, rejuvenation, and vital
longevity. GreensFIRST(R) is currently distributed through more than 2,500
healthcare practitioners throughout the United States.
Dream Protein(R) is a whey protein highly concentrated formula, consisting
of proprietary hormone free, ultra-lowtemp(TM) whey protein isolate. We start
with hormone free whey from New Zealand cows, which are "meadow fed" and not
given any rBGH or BST Hormones. Dream Protein is also made with an Ultra-Low
Temp(TM) process in which the protein is not denatured (damaged) from an
extensive heat treatment.
Complete Essentials(R) is a ultra pure omega 369 dietary supplement that
contains essential fatty acids derived from organic flaxseed oil, borage seed
oil, and deep sea cold water fish oil. Because the human body cannot manufacture
essential fatty acids on its own, our unique dietary supplement is a blend of
healthy oils designed to satisfy an individual's need for essential fatty acids.
Essentum(R) and EssentumNP(R) (collectively "Essentum") are our
proprietary, patent-pending supplements designed by cardiologists to meet
specific nutritional needs for cardiovascular health. Cardiovascular disease
affects nearly 60 million Americans and is one of the leading causes of death in
the United States. The American Heart Association estimates that 100 million
Americans could benefit from improved dietary and exercise regimens to reduce
their risk of heart attack. The nutrients in Essentum are designed to support
healthy levels of cholesterol, triglycerides, and homocysteine, as well as to
provide necessary vitamins and minerals. Because physicians formulated it,
Essentum will not interact with, or reduce the effectiveness of, typical
cardio-related prescription medications.
Sales and Marketing
We market our products through the following distribution channels:
o healthcare practitioners, which includes physicians, condition
specialists, chiropractors, nutritionists, and trainers, who promote
or prescribe our products.
o regional nutritional distributors that market our proprietary
products and patient selling system directly to healthcare
practitioners who utilize our proprietary selling system to market
directly to consumers.
o directly to consumers through call centers and websites.
5
We distribute a majority of our products, including Greensfirst(R), Dream
Protein(R), and Complete Essentials(R), primarily through healthcare
practitioners. We currently sell our Essentum(R) product directly to consumers
through call centers and other means. During 2004 and 2003, our Greensfirst(R)
product was primarily responsible for a significant portion of our revenue.
During 2004 and 2003, Essentum(R) represented an immaterial portion of our
revenue.
During the third quarter of 2004, we entered a joint venture with Wellness
Watchers Systems providing for the development and marketing of the Healthy
Living Kit. The Healthy Living Kit creates a Wellness Smoothie, which is a meal
replacement designed for all types of metabolisms and blood types. It consists
of one scoop of GreensFirst(R) and one scoop of Dream Protein(R) in six ounces
of water along with one Complete Essential(R) Ultra Pure Omega 3-6-9 capsule.
Each Healthy Living Kit Wellness Smoothie meal replacement is a balanced,
low-calorie, low-glycemic, hypoallergenic, high-antioxidant, nutrient-dense food
source. It is created from a combination of potent organic, hormone and
pesticide free all-natural foods. The Health Living Kit along with the lifestyle
program were created to assist healthcare practitioners in dealing with chronic
diseases, such as cancer, heart disease, and diabetes.
We continue to explore other possibilities to distribute our products
nationally and internationally. We may evaluate the regulatory and distribution
structures in Europe, Asia, and other international markets to determine the
best way to distribute our products in those markets.
Research and Development
Our research and development efforts focus on developing, testing, and
substantiating the efficacy of new products in response to what we perceive is a
need in the healthcare practitioner distribution channel to complement existing
product lines currently available to our customers. Additionally, we continually
reformulate existing products in response to literature and market demand.
We believe that flexibility and innovation with respect to new products
are crucial factors in remaining competitive in the nutritional supplements and
nutraceuticals markets and being able to produce the most effective products,
which healthcare practitioners will be willing to prescribe for their patients
for specific conditions. By monitoring market trends and avoiding short-lived
"fad" products, we attempt to anticipate healthcare practitioners demand for
certain product categories. Maintaining flexibility is a key to enabling us to
capitalize on emerging sciences relative to nutritional products as well as
shifts in consumer needs.
Research and development costs amounted to approximately $1.1 million and
$400,000 for 2004 and 2003, respectively. Research and development costs
incurred from our formation until December 31, 2004 were $2.1 million.
Manufacturing
We utilize independent contract manufacturers to produce all of our
products. Competitors that manufacture their own products may have an advantage
over us with respect to pricing, availability of products, and other areas
through their control of manufacturing processes. During the first quarter of
2005, we entered into a one-year contractual arrangement with one of our primary
manufacturers. The potential loss of our relationships with our manufacturers or
their inability to conduct their manufacturing services for us as anticipated in
terms of cost, quality and product delivery could adversely affect our ability
to provide cost-effective, high-quality, and timely product delivery to our
customers. We depend to a great extent on our manufacturers for the safety,
purity, and potency of our products.
Raw Materials and Quality Control
The principal raw materials used in the manufacture of our nutritional
supplements and nutraceuticals are natural ingredients purchased from
manufacturers and other suppliers in the United States, with certain materials
imported from other countries. We purchase these raw materials directly or
through our manufactures and other suppliers. Therefore, with our suppliers and
manufacturers, we maintain the responsibility for documenting all certificates
of analysis for the materials in accordance with good manufacturing practices
("GMP") and guidelines. All raw materials are sent directly to our manufacturers
for milling and other fabrication. We do not have contracts with suppliers of
raw materials used in the production of our products. Historically, we have not
experienced difficulties obtaining raw ingredients for our products on customary
terms. We believe that the materials used in our products are readily available
from numerous sources and that the loss of any of our current suppliers would
not adversely affect our operations. There is no assurance, however, that
suppliers will continue to provide the raw materials needed by us in the
quantities required or on favorable terms. Because we do not control the source
of these raw materials, we also are subject to delays caused by interruptions in
production of materials based on conditions outside our control. Any significant
delay in, or disruption of, the supply of raw materials could have any of the
following results:
6
If supply shortages were to occur and we were unable to meet the demands
of our customers, even if for only a short time, the result could be a long-term
decrease in the anticipated sales of our products. We cannot assure you that, on
a long-term basis, an adequate supply of ingredients will be available to us on
commercially reasonable terms in order for us to meet the supply obligations to
our customers.
Finished products are produced by our manufacturers, which maintain
quality control laboratories and testing facilities. Our manufactured products
are packaged by and protected by a tamper-resistant outer safety seal. All of
this is done by our manufacturers according to current GMPGovernment Regulation
Acquisitions and Strategic Initiatives
During 2004 and 2003, we completed the acquisition of three companies with
complimentary business or products ranging from start-ups to businesses with
revenue up to $2.5 million per year. These acquisitions were intended to shift
our business toward established, higher margin products or to expand into new
product lines. These acquisitions also increased our geographic presence with
locations through various portions of the United States. During 2004, we
discontinued the operations of both MAF BioNutritional, LLC, which was acquired
during 2002, and Christophers's Original Formulas, Inc, which was acquired
during 2003. See Note 9 of the Audited Financial Statements for further
discussion related to discontinued operations. The following information
provides a summary of our acquisitions:
E-Nutraceuticals, Inc. ("ENI"). On August 20, 2003, we acquired ENI for
net consideration of $41.3 million, consisting of 30.5 million shares of common
stock. ENI had developed safe and effective alternatives to prescription
medications for non-life threatening chronic ailments, such as obesity and
depression. In addition, through a collaborative partnership with SkyePharma,
PLC, or Skye, a UK pharmaceuticals company and a major shareholder of our
company, we acquired certain rights to a licensed FDA-approved, proprietary
delivery systems. Under an amended Development and License Agreement, we
acquired exclusive rights to Skye's drug delivery technology, GEOMATRIX(R), and
marketing and royalty rights to pharmaceutical sales using GEOMATRIX(R) in the
Peoples Republic of China, Taiwan, and Hong Kong. ENI did not generate any
material revenue during both 2004 and 2003.
Doctors For Nutrition, Inc. ("DFN"). On October 14, 2003, we acquired DFN
for consideration of $2.7 million, consisting of 3.1 million shares of common
stock. DFN's product line includes GreensFIRST(R), a highly concentrated
formulation of fruits and vegetables. One serving of the product has the
antioxidant power of over 10 servings of fruits and vegetables. Mixed with
water, GreensFIRST(R) contains certified organic fruits, vegetables, and barley
grass, which are first juiced and then spray-dried at low temperature, leaving
all the important nutrients and live enzymes intact. Benefits of usage include
increased energy, improved digestion, and enhanced immune response. DFN
currently distributes GreensFIRST(R) through more than 2,500 practitioner
offices throughout the United States. DFN generated annualized pro forma
revenues of approximately $3.8 million and $1.6 million during the years ended
December 31, 2004 and 2003, respectively.
Wellness Watchers Systems, LLC. On August 17, 2004, we consummated a joint
venture with Wellness Watchers International, Inc., or WWI, and together formed
Wellness Watchers Systems, LLC, or WWS. We paid WWI $805,000 for its 50%
interest in WWS. The purchase price consisted of 3.0 million shares of our
common stock along with a $25,000 cash payment. We and WWI originally owned 50%
of WWS. The operating agreement gave us overall operating responsibility. WWS
manufactures a proprietary brand of dietary protein powder called Dream
Protein(R), which is directly marketed to the health practitioners together with
our GreensFIRST(R) product. WWS plans to introduce complementary products that
will be marketed as part of WWS' Healthy Living Program(R). Part of WWI's
contribution to WWS was the exclusive licensing of certain products, client
lists and marketing
7
strategies, which included Dream Protein(R). WWS has developed a unique
marketing strategy that channels products directly to health practitioners.
Prior to forming WWS, WWI had no prior operating history. During 2004, WWS had
total revenue of $.4 million During February 2005, we acquired 100% interest in
WWS by issuing an additional 1.0 million shares of our stock. In conjunction
with our acquisition of the remainder of WWS and certain other marketing and
operation strategic productivity decisions, during the first quarter of 2005, we
have consolidated the operations of WWS into DFN.
We plan to continue our acquisition strategy in the future. In particular,
we intend to focus on candidates that have strong relationships with key vendors
or have established complimentary distribution channels or customers. We believe
that a number of factors will facilitate our acquisition strategy, including the
following:
o the highly fragmented composition of the nutritional supplement and
nutraceuticals markets;
o our status as a public corporation;
o a decentralized management strategy, which facilitates the acquired
company's management remaining involved in operations should they
desire to do so; and
o the ability of our management to identify acquisition opportunities.
Trademarks and Patents
We own numerous trademarks registered with the U.S. Patent and Trademark
Office and with agencies in certain other major jurisdictions of the world. Our
trademarks include Vital Living(R), Vital Living - The Physician Nutraceutical
Company(R) (plus a logo), Essentum(R), Essentum For Cardiovascular Health(R)
(plus a logo), GreensFirst(R), Dream Protein(R), and Complete Essentials(R).
Federally registered trademarks have a perpetual life as long as they are
renewed on a timely basis and used properly as trademarks, subject to the rights
of third parties to seek cancellation of the marks. We believe that our
registered and unregistered trademarks, patents, and other proprietary rights
are valuable assets and that they have significant value in the marketing of our
products. Accordingly, we intend to vigorously protect our intellectual property
against infringement.
Competition
Our competitors vary by the nature of the distribution channel. In the
healthcare practitioner and regional nutritional distributor channel, we compete
with a number of companies selling whole foods and nutritional supplements,
including Douglas Labs, Integration Therapeutics, Phyto Pharmacia, Metagenics
Standard Process, Allergy Research, and Enzymatic Therapy.
Many of our competitors are substantially larger than us and have
significantly greater financial, technical, marketing, and other resources. We
compete primarily based on our ability to be first to market, and our
distribution channels through healthcare practitioners who desire to have a
nutritional line of products to supplement their practices.
Governmental Regulation
The formulation, manufacturing, packaging, labeling, advertising,
distribution, and sale (hereafter, collectively "sale" or "sold") of dietary and
nutritional supplements, such as those sold by us, are subject to regulation by
one or more federal agencies, principally the Food and Drug Administration, or
FDA, the Federal Trade Commission, or FTC, and to a lesser extent the Consumer
Product Safety Commission and United States Department of Agriculture. Our
activities are also regulated by various governmental agencies for the states
and localities in which our products are sold, as well as by governmental
agencies in certain countries outside the United States. Among other matters,
regulation by the FDA and FTC covers product safety and claims made with respect
to a product's ability to provide health-related benefits.
8
Federal agencies, primarily the FDA and FTC, have a variety of procedures
and enforcement remedies available to them, including the following:
o initiating investigations,
o issuing warning letters and cease and desist orders,
o requiring corrective labeling or advertising,
o requiring consumer redress, such as requiring that a company offer
to repurchase products previously sold to consumers,
o seeking injunctive relief or product seizures,
o imposing civil penalties, or
o commencing civil action and/or criminal prosecution.
In addition, certain state agencies have similar authority. These federal
and state agencies have in the past used these remedies in regulating
participants in the dietary supplements industry, including the imposition by
federal agencies of civil penalties in the millions of dollars against industry
participants. We cannot assure you that the regulatory environment in which we
operate will not change or that such regulatory environment, or any specific
action taken against us, will not result in a material adverse effect on our
operations. In addition, increased sales of, and publicity about, dietary
supplements may result in increased regulatory scrutiny of the dietary
supplements industry.
The Dietary Supplement Health and Education Act, or DSHEA, was enacted in
1994, amending the Federal Food, Drug, and Cosmetic Act (FFD&CA). We believe the
DSHEA is generally favorable to consumers and to the dietary supplement
industry. DSHEA establishes a statutory class of "dietary supplements," which
includes vitamins, minerals, herbs, amino acids, and other dietary ingredients
for human use to supplement the diet. Dietary ingredients on the market as of
October 15, 1994 do not require the submission by the manufacturer or
distributor to the FDA of evidence of a history of use or other evidence of
safety establishing that the ingredient will reasonably be expected to be safe,
but a dietary ingredient which was not on the market as of October 15, 1994 may
need to be the subject of such a submission to FDA at least 75 days before
marketing. Among other things, the DSHEA prevents the FDA from regulating
dietary ingredients in dietary supplements as "food additives" and allows the
use of statements of nutritional support on product labels. The FDA has issued
proposed and final regulations in this area and indicates that further guidance
and regulations are forthcoming. We cannot assure you that the FDA will accept
the evidence of safety for any new dietary ingredient that we may decide to use
and the FDA's refusal to accept such evidence could result in regulation of such
dietary ingredients as food additives, requiring FDA pre-approval based on newly
conducted, costly safety testing. In addition, while the DSHEA authorizes the
use of statements of nutritional support or "structure/function claims in the
labels and labeling of dietary supplements, the FDA is required to be notified
of such statements. We cannot assure you that the FDA will not consider
particular labeling statements used by us to be drug claims rather than
acceptable statements of nutritional support, thereby necessitating approval of
a costly new drug application, or re-labeling to delete such statements. We do
believe, however, that we substantially comply with the regulations promulgated
under DSHEA with regard to labels and labeling of our dietary supplements.
In November 1998, the FTC announced new advertising guidelines
specifically for the dietary supplement industry, entitled "Dietary Supplements:
An Advertising Guide for Industry." These guidelines reiterate many of the
policies the FTC has previously announced over the years, including requirements
for substantiation of claims made in advertising about dietary supplements. We
make every effort to ensure we are in compliance with FTC advertising standards.
The FFD&CA also authorizes the FDA to promulgate good manufacturing
practices (GMP) standards for dietary supplements, which require special quality
controls for the manufacture, packaging, storage, and distribution of
supplements. The final version of FDA's GMP regulation has not been published.
We believe however, that we will be in substantial compliance with the
regulations once they are issued. We contractually require that any independent
third party manufacturers doing business with us comply with all existing, or to
be promulgated, regulations. The FFD&CA further authorizes the FDA to promulgate
regulations governing the labeling of dietary supplements, including claims for
supplements pursuant to recommendations made by the Presidential Commission on
Dietary Supplement Labels. These rules, which were issued on or after September
23, 1997, entail specific requirements relative to the labeling of our dietary
supplements. The rules also require additional record keeping and claim
substantiation, reformulation, or discontinuance of certain products, which
would be a material expense to us.
9
The sale of our products in countries outside the United States is
regulated by the governments of those countries. We are not currently marketing
our products outside of the United States except in Canada, China, Mexico, and
the United Kingdom. Our plans to commence or and sales in those countries may be
prevented or delayed by such regulation. While compliance with such regulation
will generally be undertaken by international distributors, we may assist with
such compliance and in certain cases may be liable if a distributor fails to
comply.
We cannot predict the nature of any future laws, regulations,
interpretations, or applications, nor can we determine what effect such
additional regulation, when and if it occurs, would have on our business in the
future. Such additional regulation could require, however, any or all of the
actions listed below, which could have a material adverse effect on our
operations:
o the reformulation of certain products to meet new standards,
o the recall or discontinuance of certain products,
o additional record keeping,
o expanded documentation of the properties of certain products,
o revised, expanded or different labeling, or
o additional scientific substantiation.
Employees
As of March 16, 2005, we had eight full-time employees. Of these
employees, two were engaged in sales and marketing, one was engaged in
production or operational activities, and five were engaged in finance,
administration, or management functions. None of our employees is subject to any
collective bargaining agreements with us, and we believe our relationship with
our employees is satisfactory. Our future success depends, in part, on our
ability to attract, retain, and motivate highly qualified personnel.
Risk Factors
You should consider carefully the following risk factors and all other
information contained herein in evaluating our company and our business. Our
common stock involves a high degree of risk. If any of the following risks
actually occur, our business, financial condition or operating results will
suffer. Moreover, the price of our common stock could decline and you could lose
all of your investment.
Our significant losses and negative cash flow raise questions about our ability
to continue as a going concern.
We have only a limited operating history. Our prospects must be considered
in light of the risks, expenses, and difficulties frequently encountered in
establishing a business in the nutraceuticals industry, which is characterized
by a large number of market participants, intense competition, and a high
failure rate. We incurred net losses of approximately $28.6 million and $30.2
million for the years ended December 31, 2004 and 2003, respectively. We cannot
assure you that we will be able to achieve or sustain revenue growth,
profitability, or positive cash flow on either a quarterly or annual basis or
that profitability, if achieved, will be sustained. If we are unable to achieve
or sustain profitability, we may not be financially viable in the future and may
have to curtail, suspend, or cease operations. Because of our recurring
operating losses and negative cash flow, the report of our independent auditor
on our financial statements for the fiscal years ended December 31, 2004 and
2003 contain an explanatory paragraph stating that the independent auditor has
substantial doubt about our ability to continue as a going concern.
10
If we are unable to generate cash from operations, we may need to raise
additional funds in the near future.
We had working capital deficits of $2.8 million at December 31, 2004.
Historically, we have been dependent on equity or debt financings to fund our
operations and working capital needs. We completed offerings of $4.6 million
aggregate principal in Senior Secured Convertible Notes, which includes the
conversion of $1.6 million in Bridge Note principal and accrued interest, during
the fourth quarter of 2003; an offering of 510,000 shares of our common stock
raising gross proceeds of $510,000 in the first quarter of 2004; an offering of
3.9 million shares of our common stock and 15.6 million warrants, which resulted
in gross proceeds of $975,000 in June and July of 2004; and a special warrant
offering, which began in November 2004 and concluded in January 2005, that
resulting in the issuance of 7.1 million shares of our common stock and issuance
of 6.4 million new warrants that generated $717,000 in gross proceeds. Our
average net cash expenditures (cash generated from continuing operations less
expenses paid) during 2004 was approximately $260,000 per month and we expect to
reduce our net cash expenditures to approximately $110,000 per month in the
first quarter of 2005. However, net cash expenditures may vary greatly on a
monthly basis and this average is not necessarily indicative of future amounts.
We may need to raise additional capital in the very near future to fund our
operations and are currently examining various sources of additional financings.
However, because our Senior Secured Convertible Notes are secured by
substantially all of our assets, we may have difficulty securing additional debt
financing on terms favorable to us or at all. Any equity financing that we
obtain may be highly dilutive to existing stockholders. Our inability to
generate cash flow from operations or to find sources of funding would have an
adverse impact on our ability to maintain our operations.
We have substantial indebtedness and interest obligations that we must satisfy
when due.
We have substantial indebtedness and interest obligations that we must
satisfy in accordance with their terms. In connection with the MAF acquisition
completed during 2002, we have a potential of approximately $401,000 of debt,
which is included in our current liabilities. During the third quarter of 2004,
we entered into an agreement to sell all property, rights, and assets related to
our Boulder Bar product line. The purchaser agreed to assume the debt. However,
the purchaser has not complied with the terms of the agreement, and we are
currently seeking legal remedies. In addition, we have outstanding $4.2 million
aggregate principal amount of Senior Secured Convertible Notes, which are
secured by substantially all of our assets. In October 2004, we obtained
majority consent of the holders of the notes to pay the 12% annual interest
requirement in either cash or shares of our common stock. We cannot assure you
that our operations will generate funds sufficient to repay these debt
obligations as they come due. Our failure to repay any of our indebtedness and
make required interest payments as required by these debt obligations could
result in an event of default. In this event, the holders of our debt could
force us to sell our assets in order to repay obligations owing to them.
We may record future losses because continuing adverse market conditions may
require us to record an impairment of goodwill and other intangibles.
We had approximately $3.2 million of goodwill as of December 31, 2004 and
approximately $20.8 million of net intangible assets at December 31, 2004
cumulatively accounting for approximately 92% of our total assets at December
31, 2004. We adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets," and are required to analyze our goodwill
and other intangible assets for impairment issues on an annual basis or when
events occur that would indicate that an intangible asset impairment had
occurred. The value of our goodwill and other intangible assets is exposed to
future adverse changes if we experience declines in operating results or
experience significant negative industry or economic trends or if future
performance is below historical trends. We periodically review goodwill and
intangible assets for impairment using the guidance of applicable accounting
literature. We are subject to financial statement risk to the extent that the
goodwill and other intangible assets become impaired, and any impairment losses
related to goodwill and other intangible assets may result in a non-cash charge
to earnings.
11
We may lose our exclusive licensing rights to the GEOMATRIX technology if
SkyePharma terminates the Development and License Agreement which we are a party
to.
We are party to a Development and License Agreement with SkyePharma PLC
under which we have certain exclusive licensing rights to the GEOMATRIX
technology. We are in dispute with SkyePharma over the terms of the agreement
and have failed to make payments, which total $750,000 called for under the
agreement. On April 6, 2004, we received a demand letter from SkyePharma related
to the past due payments under the agreement, which triggered a 30-day
negotiation period under the agreement. This 30-day period is required before
initiating formal collection proceedings. We are currently in discussions to
modify both the terms and payment schedules under the agreement. We cannot
assure you that these negotiations will be successful and that we will reach a
satisfactory resolution of this matter. In the event a satisfactory resolution
cannot be reached and SkyePharma exercises its rights of termination under the
agreement, we may lose substantial and possibly all rights gained under this and
related contracts with SkyePharma.
Any acquisitions that we undertake could be difficult to integrate, disrupt our
business, dilute stockholder value, and harm our operating results.
We plan to continue to review opportunities to buy other businesses that
would expand our product offerings, enhance our product distribution, expand the
geographical breadth of our markets, or otherwise offer other growth
opportunities. In the past two years, we have acquired three businesses, and we
may acquire additional businesses in the future. If we make any future
acquisitions, we may issue stock that would dilute existing stockholders'
percentage ownership, incur substantial debt, or assume contingent liabilities.
Our recent acquisitions, as well as potential future potential acquisitions,
involve numerous risks, including the following:
o problems integrating the purchased products, operations, personnel,
distribution channels, and systems with our own;
o unanticipated costs or undisclosed liabilities associated with the
acquisition;
o diversion of management's attention from our existing businesses;
o potential compliance issues with regard to acquired companies that
did not have adequate internal controls;
o adverse effects on existing business relationships with suppliers
distributors, and customers;
o risks associated with entering markets in which we have no or
limited prior experience; and
o potential loss of key employees and customers of purchased
organizations.
For example, certain of our acquired companies have continued to incur losses
from operations or have required significant cost outlays and caused increases
in our selling, general, and administrative expenses.
Our acquisition strategy entails reviewing and potentially reorganizing
acquired business operations, corporate infrastructure and systems, and
financial controls. Unforeseen expenses, difficulties, and delays frequently
encountered in connection with expansion through acquisitions could inhibit our
growth and negatively impact our profitability. We may be unable to identify
suitable acquisition candidates or to complete the acquisitions of candidates
that we identify. Increased competition for acquisition candidates may increase
purchase prices for acquisitions to levels beyond our financial capability or to
levels that would not result in the returns required by our acquisition
criteria. In addition, we may encounter difficulties in integrating the
operations of acquired businesses with our own operations or managing acquired
businesses profitably without substantial costs, delays, or other operational or
financial problems.
We may issue common or preferred stock and incur substantial indebtedness
in making future acquisitions. The size, timing, and integration of any future
acquisitions may cause substantial fluctuations in operating results from
quarter to quarter. Consequently, operating results for any quarter may not be
indicative of the results that may be achieved for any subsequent quarter or for
a full fiscal year. These fluctuations could adversely affect the market price
of our common stock.
12
Our ability to grow through acquisitions will depend upon various factors,
including the following:
o the availability of suitable acquisition candidates at attractive
purchase prices,
o the ability to compete effectively for available acquisition
opportunities, and
o the availability of funds or common stock with a sufficient market
price to complete the acquisitions.
As a part of our acquisition strategy, we frequently engage in discussions
with various companies regarding their potential acquisition by us. In
connection with these discussions, we and each potential acquisition candidate
exchange confidential operational and financial information, conduct due
diligence inquiries, and consider the structure, terms, and conditions of the
potential acquisition. In certain cases, the prospective acquisition candidate
agrees not to discuss a potential acquisition with any other party for a
specific period of time, grants us an option to purchase the prospective
business for a designated price during a specific time, and agrees to take other
actions designed to enhance the possibility of the acquisition, such as
preparing audited financial information. Potential acquisition discussions
frequently take place over a long period of time and involve difficult business
integration and other issues, including in some cases, management succession and
related matters. As a result of these and other factors, a number of potential
acquisitions that from time to time appear likely to occur do not result in
binding legal agreements and are not consummated.
We rely on others for our production, and any interruptions of these
arrangements could disrupt our ability to fill our customers' orders.
We outsource through contract manufacturers for all of our production
requirements. Competitors that manufacture their own products may have an
advantage over us with respect to pricing, availability of products, and other
areas through their control of the manufacturing processes. Any increase in
labor, equipment, or other manufacturing costs could adversely affect our cost
of sales. Qualifying new manufacturers is time-consuming and might result in
unforeseen manufacturing and operations problems. The loss of our relationships
with our manufacturers or their inability to conduct their manufacturing
services for us as anticipated in terms of cost, quality, and timeliness could
adversely affect our ability to fill customer orders in accordance with required
delivery, quality, and performance requirements. If this were to occur, the
resulting decline in revenue would harm our business.
We depend on third parties to maintain satisfactory manufacturing and delivery
schedules, and their inability to do so could increase our costs, disrupt our
supply chain, and result in our inability to deliver our products, which would
adversely affect our results of operations.
We depend on our manufacturers to maintain high levels of productivity and
satisfactory delivery schedules. Although we a have long-term contract with one
of our manufacturers that does not guarantee adequate production capacity,
prices, lead times, or delivery schedules. Our manufacturers serve many other
customers, a number of which have greater production requirements than we do. As
a result, our manufacturers could determine to prioritize production capacity
for other customers or reduce or eliminate deliveries to us on short notice. At
times, we have experienced lower than anticipated manufacturing turnarounds and
lengthening of delivery schedules. We may encounter manufacturing delays and
longer delivery schedules in commencing volume production of our new products.
Any of these problems could result in our inability to deliver our products in a
timely manner and adversely affect our operating results. We depend to a great
extent on our manufacturers for the safety, purity, and potency of our products.
We depend on a limited number of wholesale distributors to sell a significant
portion of our products.
We currently market our products on a wholesale basis through our
distributors operating in the United States. We depend on these distributors to
sell our products to retailers throughout the United States. If a significant
distributor discontinues selling our products, performs poorly, does not pay for
purchased products, reorganizes, or liquidates and is unable to continue selling
our products, our business, financial condition, and operating results could be
adversely affected. Our failure or inability to replace poorly performing
distributors could have a material adverse effect on our business.
13
Any material increase in the cost of the raw materials used to manufacture our
products could have a material adverse effect on our cost of sales.
We do not have contracts with all of our suppliers of the raw materials
used in the production of our products. Historically, we have not experienced
any difficulties obtaining the raw ingredients for our products on customary
terms. We are, however, subject to variations in the prices of the raw materials
used in the manufacture of our products. We may not be able to pass along any
cost increases to our customers. As a result, any material increase in the cost
of raw materials used in the manufacture of our products could have a material
adverse effect on our cost of sales.
If we are unable to compete effectively with existing or new competitors, our
existing business will decline and our anticipated business plan will not be
successfully implemented.
We believe the market for nutritional supplements and nutraceuticals
products is continually evolving and is highly dependent upon changes in the
demographic and social trends. We compete with numerous competitors, many of
which have significantly greater financial, technical, marketing, and other
resources than we do. In making decisions regarding the development of new
products and the enhancement and extension of our current products, we encounter
competition in attempting to anticipate the needs and preferences of healthcare
practitioners, consumers, and nutritionists. Consumer preferences, particularly
in the nutritional supplements and nutraceuticals market, are continuously
changing and are difficult to predict. We believe we can compete effectively by
reacting quickly to expected and perceived customer requirements and desires by
maintaining relationships with our existing strategic partners, and identifying
and reaching agreements with new partners. However, we cannot assure you that
our assessment of the market place is correct, or that our products will be
accepted now or in the future.
Our failure to comply with current or future governmental regulations could
adversely affect our business.
The formulation, manufacturing, packaging, labeling, advertising,
distribution, and sale of dietary supplements, such as those sold by us, are
subject to regulation by a number of federal, state and local agencies,
principally, the FDA, and the FTC, as well as foreign agencies in areas where we
may operate. Among other matters, this regulation is concerned with product
safety and claims made with respect to a product's ability to provide
health-related benefits. These agencies have a variety of procedures and
enforcement remedies available to them, including the following:
o initiating investigations;
o issuing warning letters and cease and desist orders;
o requiring corrective labeling or advertising;
o requiring consumer redress, such as requiring that a company offer
to repurchase products previously sold to consumers;
o seeking injunctive relief or product seizures; and
o imposing civil penalties or commencing criminal prosecution.
Federal and state agencies have in the past used these remedies in
regulating participants in the dietary supplements industry, including the
imposition by federal agencies of civil penalties in the millions of dollars
against a few industry participants. In addition, publicity related to dietary
supplements may result in increased regulatory scrutiny of the nutritional
supplements industry.
Our failure to comply with applicable laws could subject us to severe
legal sanctions, which could have a material adverse effect on our business and
results of operations. We cannot assure you that the regulatory environment in
which we operate will not change or that such regulatory environment, or any
specific action taken against us, will not result in a material adverse effect
on our business and operations. We cannot assure you that a state will not
interpret claims presumptively valid under federal law as illegal under that
state's regulations, or that future FDA regulations or FTC decisions will not
restrict the permissible scope of such claims. Additionally, we cannot assure
you that such proceedings or investigations or any future proceedings or
investigations will not have a material adverse effect on our business or
operations.
14
If we are deemed to be subject to the federal Medicare Anti-Kickback statutes or
similar state statutes, it could have a material adverse effect on our business
and operations.
The healthcare industry is subject to extensive federal and state
regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services, and payment for services. As
Essentum(R) is not subject to Medicare or Medicaid reimbursement, we do not
believe that our activities are subject to regulation under the federal
Anti-Kickback statutes. The Anti-Kickback statutes generally prohibit persons
from knowingly and willfully soliciting, receiving, offering or providing
remuneration, directly or indirectly, to induce either the referral of an
individual, or the furnishing, recommending, or arranging for a good or service,
for which payment may be made under a federal healthcare program such as the
Medicare and Medicaid programs. However, the statute was drafted broadly and it
has resulted in many arrangements and practices that are lawful in businesses
outside of the healthcare industry to be deemed unlawful. As a result, there has
been a lack of uniform interpretation of the Anti-Kickback statutes, which make
compliance even more difficult. The penalties for violating these statutes can
be severe and include criminal penalties and civil sanctions, fines,
imprisonment and possible exclusion from the Medicare and Medicaid programs.
Many states have adopted laws similar to the federal Anti-Kickback statutes.
Some of these state prohibitions apply to referral of patients for healthcare
services reimbursed by any source, not only the Medicare and Medicaid programs.
Although we believe that we comply with both federal and state anti-kickback
laws, any finding of a violation of these laws could subject us to criminal and
civil penalties or possible exclusion from federal or state healthcare programs.
Such penalties would adversely affect our financial performance and our ability
to operate our business.
Our insurance may be inadequate to cover us against product liability claims
that may be brought against us.
We maintain liability insurance with policy limits generally of $1.0
million per occurrence and $2.0 million in the aggregate. Our insurance coverage
includes property, casualty, comprehensive general liability, and products
liability insurance. We believe that our insurance coverage is adequate. The
testing, marketing, and sale of health care products, however, entail an
inherent risk of product liability. We cannot assure you that product liability
claims relating to dietary supplement products will not be asserted against us,
our licensees, or third parties with whom we operate. Many claims related to
dietary supplements have already been brought against businesses in our
industry. Further, we cannot assure you that such insurance will provide
adequate coverage against any potential claims. A product liability claim or
product recall could have a material adverse effect on our business, financial
condition, or results of operations.
15
We depend on key employees and the loss of either of their services could harm
our business.
We are heavily dependent upon Stuart A. Benson, our President and Chief
Executive Officer, and Gregg Linn, our Chief Financial Officer. We have entered
into employment agreements with both Mr. Benson and Mr. Linn that provide for
them to be employed by us through December 2007. The agreements, however, cannot
assure us of their continued service. The loss of either Mr. Benson or Mr. Linn
could have a material adverse effect on us. Under the terms of Mr. Benson's
employment agreement, we are permitted to apply to obtain, and have made
application with respect thereto, for a "key-man" insurance policy for Mr.
Benson in the amount of $500,000. We will be the beneficiary of this policy when
and if the insurance is obtained.
Our existing stockholders will experience dilution if we issue additional
securities.
As of March 17, 2005, we had 101,068,713 outstanding shares of common
stock, 1,500,000 shares of preferred stock currently convertible into 1,500,000
shares of common stock, options to purchase 5,471,390 shares of common stock,
which are subject to stockholder approval, warrants to purchase 30,459,713
shares of common stock, and Senior Secured Convertible Notes convertible into
17,860,192 shares of common stock. If we issue additional shares, or if our
existing stockholders exercise or convert their outstanding options, warrants,
or notes, our other stockholders may find their holdings drastically diluted,
which if it occurs, means that they will own a smaller percentage of our
company. Further, any issuance of additional securities to various persons or
entities in lieu of cash payments will lead to further dilution. If all
convertible instruments were converted and all outstanding warrants and options
were exercised, we would have 153,747,341 shares of common stock outstanding.
We are party to a voting agreement pursuant to which certain officers, directors
and stockholders can elect a majority of our Board of Directors.
We are party to a voting agreement with Stuart A. Benson, our President
and Chief Executive Officer, Donald C. Hannah, chairman of our Board of
Directors, and SkyePharma, PLC and Fifth Avenue Capital, Inc., both significant
stockholders. As a result of voting together under the terms of the agreement,
the parties have the ability to elect a majority of our Board of Directors and
to approve most, if not all, of any corporate actions requiring shareholder
approval without the vote of any other shareholders.
The market price of our common stock is highly volatile and subject to wide
fluctuations as a result of many factors.
Our common stock has been traded on the OTC Bulletin Board since March 28,
2002. The market price of our common stock has been highly volatile and may
continue to be volatile in the future. Many factors could affect the trading
price of our common stock, including the following:
o the low price, thin trading volume, and relatively small public
float of our common stock;
o variations in our quarterly operating results;
o introduction of new products and customer acceptance of products;
o general trends in the nutritional supplement and nutraceuticals
markets;
o the number of holders of our common stock; and
o the interest of securities dealers in maintaining a market for our
common stock.
As long as there is only a limited public market for our common stock, the
sale of a significant number of shares of our common stock at any particular
time could be difficult to achieve at the market prices prevailing immediately
before such shares are offered and could cause a severe decline in the price of
our common stock.
16
Because our common stock is subject to the SEC's penny stock rules,
broker-dealers may experience difficulty in completing customer transactions and
trading activity in our securities may be adversely affected.
Because we currently have less than $5,000,000 of net tangible assets and
the market price of our common stock is less than $5.00 per share, transactions
in our common stock are subject to the "penny stock" rules promulgated under the
Securities Exchange Act of 1934. These rules require broker-dealers that
recommend our securities to persons other than institutional accredited
investors to do each of the following:
o make a special written suitability determination for the purchaser;
o receive the purchaser's written agreement to a transaction prior to
sale;
o provide the purchaser with risk disclosure documents which identify
certain risks associated with investing in "penny stocks" and which
describe the market for these "penny stocks" as well as a
purchaser's legal remedies; and
o obtain a signed and dated acknowledgment from the purchaser
demonstrating that the purchaser has actually received the required
risk disclosure document before a transaction in a "penny stock" can
be completed.
As a result, broker-dealers may find it difficult to effectuate customer
transactions and trading activity in our securities may be adversely affected.
Therefore, the market price of our securities may be depressed, and you may find
it more difficult to sell our securities.
We have never paid any cash dividends on our common stock.
We have never paid any cash dividends on our common stock, and we do not
expect to pay cash dividends on our common stock in the foreseeable future. In
addition, the terms of our outstanding preferred stock and Senior Secured
Convertible Notes restrict our ability to pay cash dividends.
Item 2. Description of Property
We lease our corporate offices under a three-year lease, which expires in
2007.
Item 3. Legal Proceedings
We are involved in various legal proceedings arising out of our operations
in the ordinary course of business. We do not believe that any such proceedings
will have a material adverse effect on our business, operating results, or
financial condition.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II.
Item 5. Market for Common Equity, Related Stockholder Matters, and small
Business Issuer Purchases of Equity Securities
Our common stock has been traded in the OTC Bulletin Board under the
symbol VTLV.OB since March 28, 2002. The following table sets forth the high
and low sales prices of our common stock for each calendar quarter indicated.
17
Year ended December 31, 2002: High Low
---- ---
Second quarter............................. $3.40 $2.45
Third quarter.............................. $1.56 $0.91
Fourth quarter............................. $1.34 $0.64
Year ended December 31, 2003:
First quarter ............................. $0.95 $0.74
Second quarter............................. $1.25 $0.70
Third quarter.............................. $1.52 $1.12
Fourth quarter............................. $1.34 $1.13
Year ended December 31, 2004:
First quarter ............................. $0.92 $0.77
Second quarter............................. $0.57 $0.30
Third quarter.............................. $0.24 $0.17
Fourth quarter............................. $0.20 $0.14
On March 17, 2005, the closing price of our stock was $0.12 and we had 458
record holders of our common stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
Overview
We develop and market fruit and vegetable supplements, protein supplements
and nutraceutical products which are marketed for distribution through
physicians, medical groups, chiropractic offices, and retail outlets.
Additionally, through a licensing agreement, we have certain rights for a
pharmaceutical delivery systems (our GEOMATRIX technology). Nutraceuticals are
products that are isolated or purified from foods and generally sold in
medicinal forms not usually associated with foods, including tablets, capsules,
or drops. These nutraceuticals may have physiological benefits or have the
ability to reduce the risk of chronic disease beyond basic nutritional products.
We develop and test our nutraceuticals in collaboration with leading medical
experts in the nutraceuticals field. We have designed them to be incorporated by
healthcare practitioners into a standard patient system where healthcare
practitioners recommend and sell our whole food and nutraceuticals products to
their patients. Our focus has been with our Greensfirst(R), Dream Protein(R) and
Complete Essentials(R) products. Additionally, we have targeted cardiovascular
health.
Our business strategy is to capitalize on the growing complimentary and
alternative medicine market by creating condition-specific formulations that
offer a broad range of benefits. Our products focus on general health by
utilizing nutraceuticals and whole foods as a means to gain the healthcare
practitioner confidence and support. We plan to focus on certain target
conditions, providing the market with high quality, relevant products through
our healthcare practitioner distribution channels.
Results of Operations
The following sets forth selected financial data and its percentage of net
sales for the years ended December 31:
18
· Enlarge/Download Table
2004 2003
Increase
Amount % Amount % (Decrease)
------ --- ------ --- ----------
Revenue $4,161,000 -100% $498,000 -12% $ 3,663,000
Cost of goods sold 2,801,000 -67% 237,000 -6% 2,564,000
------------- ------------
Gross profit 1,360,000 -33% 261,000 -6% 1,099,000
Administrative expenses
Salaries and benefits 992,000 -24% 11,449,000 -275% (10,457,000)
Professional and consulting fees 1,676,000 -40% 3,203,000 -77% (1,527,000)
Selling, general and administrative 1,937,000 -47% 1,275,000 -31% 662,000
Research and development 1,180,000 -28% 411,000 -10% 769,000
Depreciation and amortization 4,560,000 -110% 1,811,000 -44% 2,749,000
Impairment of goodwill 14,976,000 -360% 6,777,000 -163% 8,199,000
------------- -------------
Total 25,321,000 -609% 24,926,000 -599% 395,000
------------- -------------
Net loss from continuing operations (23,961,000) 576% (24,665,000) 593% 704,000
Other income (expense)
Other expense (76,000) 2% (43,000) 1% (33,000)
Interest income 2,000 0% 5,000 0% (3,000)
Interest expense (1,962,000) 47% (2,503,000) 60% 541,000
------------- -------------
Net loss from continuing operations $ (25,997,000) 625% $ (27,206,000) 654% $ (1,209,000)
Year Ended December 31, 2004 Compared With Year Ended December 31, 2003
Revenue
Total revenue for the year ended December 31, 2004 was $4.2 million
compared with $498,000 for the year ended December 31, 2003, an increase of $3.7
million. This increase was primarily attributable to the growth in our
Greensfirst(R) product line, which was acquired as part of the DFN acquisitions
in the fourth quarter of 2003
Cost of Goods Sold and Gross Profit
Cost of goods sold for the year ended December 31, 2004 was $2.8 million
compared with $237,000 for the year ended December 31, 2003, an increase of $2.6
million. This increase reflected the increase in revenues in our DFN subsidiary
along with a $728,000 inventory reserve for our X-Fat(R) inventory. The gross
profit percentage for the year ended December 31, 2004 was 50%, excluding the
X-Fat(R) inventory reserve compared with 52% for the year ended December 31,
2003. The small decline in the gross margin reflects the change in our marketing
strategy in 2004 where a greater portion of our products are sold to
distributors at wholesale pricing as compared with 2003, where a greater portion
were sold directly to healthcare practitioners.
Administrative Expenses
Salary and Benefit Costs
Salary and benefit costs for the year ended December 31, 2004 was $992,000
compared with $11.4 million for the year ended December 31, 2003, a
decrease of $10.5 million. The decrease was substantially due to a
non-cash repricing adjustments required in accordance with FIN No. 44(1)
related to warrants issued to one of our officers during 2003.
(1) In accordance with Financial Interpretation No. ("FIN") 44,
"Accounting for Certain Transactions Involving Stock Compensation,"
a non-cash charge to compensation expense is required if the price
of our common stock on the last trading day of a reporting period is
greater than the exercise price of certain stock options and
warrants issued to officers or employees. The requirements of FIN 44
may also result in a credit to compensation expense to the extent
that the trading price declines from the trading price as of the end
of previous reporting period, except that a credit is not recorded
to the extent our common stock trades below the exercise price of
the options or warrants. In accordance with FIN 44, we adjust
compensation expense upward or downward on a monthly basis based on
the trading price at the end of each period.
19
Professional and consulting fees
Professional and consulting fees were $1.7 million during the year ended
December 31, 2004 compared with $3.2 million for the year ended December 31,
2003, a decrease of $1.5 million. This decrease was primarily comprised of
repricing adjustments in accordance with FIN 44 related to options previously
issued in our agreement with the Arizona Heart Institute, our distribution
partner for Essentum(R), and amortization of common stock, options or warrants
issued under various consulting or other service contracts, as most of these
contracts during 2003.
Selling, general, and administrative expenses
Selling, general, and administrative expenses for the year ended December
31, 2004 was $1.9 million compared with $1.3 million for the year ended December
31, 2003, an increase of $663,000. The increase related primarily to additional
expenditures during 2004 in our DFN subsidiary.
Research and development costs
Research and development costs are expensed as incurred and totaled $1.2
million for the year ended December 31, 2004 compared with $411,000 for the year
ended December 31, 2003, an increase of $769,000. This increase was primarily
related to outstanding obligations in 2004 to Skye related to the development of
our rights in the Geomatrix(R) technology.
Depreciation and amortization expenses
Depreciation and amortization expense for the year ended December 31, 2004
was $4.6 million compared with $1.8 million for the year ended December 31,
2003, an increase of $2.8 million. The increase was primarily attributable to
amortization of intangibles acquired or recorded as part of acquisitions, as
well as increased depreciation related to acquired tangible assets.
Impairment of Goodwill and Other Intangible Assets:
Goodwill and other intangibles created by our acquisitions are tested for
impairment at least annually, or upon occurrence of such events that may
indicate impairment exists, in accordance with SFAS No. 142. As a result of
lower than expected operating results net cash flows, we revised our
expectations and, as a result, recorded a goodwill impairment loss of $15.0
million and $6.8 million during 2004 and 2003, respectively. The change in fair
value of each component of goodwill and other intangibles were estimated using
certain operational results and assumptions, as described below.
MAF. The gross value of goodwill related to the MAF acquisition was $5.0
million. On September 30, 2004, we entered into an agreement to sell all
property, rights, and assets related to our Boulder Bar product line. The
purchaser agreed to assume the debt of approximately $400,000. However, the
purchaser has not complied with the terms of the agreement, and we are currently
seeking legal remedies. As a result of this transaction and MAF's inability to
generate positive cash flow from operations, we have discontinued its operations
and recorded impairment charges of $104,000 and $38,000 related to intangible
assets and other MAF assets deemed to be of no remaining value, respectively.
During 2003, we determined that as a result of marketplace competition and
various other factors, a portion of the goodwill related to the MAF Acquisition
was impaired and accordingly, we recorded a $4.4 million impairment charge to
goodwill.
NSI. The gross value of goodwill related to the COF acquisition was $3.9
million. In order to resolve certain disputes between a former employee of the
COF subsidiary, on July 9, 2004, we settled all matters via an execution of a
Settlement and Release Agreement calling for the settlement of all claims and
the sale of certain assets and liabilities back to the previous owners of COF.
As part of the agreement, we agreed to pay the previous owners of COF $150,000
in six equal monthly installments beginning July 2004 in exchange for the return
of 2,600,000 shares of our common stock originally paid as part of the
acquisition price. In addition, we will assign certain assets and the previous
owners and COF will assume certain liabilities of NSI as of the effective date,
the previous owners of COF will sublease our leased facilities located in
Spanish Fork, Utah for a period of one year from the effective date, and
20
executive employment agreements with two former employees, which was executed as
part of the COF acquisition, become null and void. Should either party fail to
perform its obligations under the agreement, certain rights and options exist
allowing the parties to terminate the agreement. During 2004, we paid $50,000 of
$150,000 required payments under the Agreement. The remaining $100,000 balance
was paid directly to the Internal Revenue Service as a result of being served
with a final demand notice from the IRS related to obligations from the previous
owners of COF. These amounts were the obligation of the previous owners of COF,
which was ratified in the agreement. However, in order to avoid any further
claims related to this matter, in November 2004, we entered into a settlement
agreement with the IRS related to this matter and paid the remaining $100,000
obligation under the agreement directly to the IRS. The IRS has agreed not
pursue us related to this matter.
As of December 31, 2004, we had not received the 2.6 million shares of
common stock back from the previous owners of COF. Accordingly, we are currently
seeking specific remedies.
During the period ended December 31, 2003, we experienced an operating
loss of approximately $533,000, prior to depreciation, amortization, and
interest charges, and the business was not able to generate positive cash flow
from operations to date. As a result, we determined the goodwill recorded
because of the COF acquisition was impaired by $2.4 million, which has been
recorded as goodwill impairment expense during 2003.
DFN. The gross value of goodwill related to the DFN Acquisition was
$2,113,000. During 2004, we generated operating income of approximately
$751,000, before depreciation, amortization, and interest charges. We expect
increasing net cash flows from operations, as we increase the national
distribution of GreensFIRST(R) along with our Dream Protein(R) and Complete
Essentials(R) product lines by cross-selling into distribution channels
currently and expanding sales of GreensFIRST(R) into net markets. We also
anticipate launching additional products currently under development. Based on
our analysis, we do not believe the goodwill amount at December 31, 2004 is
impaired and have not recorded an adjustment to the carrying value.
WWS. The gross value of goodwill related to the WWS acquisition was
$805,000. WWS was acquired in the second quarter of 2004 and, to date, has been
well received by our existing distribution channels and has played a major role
in increasing the number of health practitioners to which we market our
products. Accordingly, we do not believe the goodwill amount at December 31,
2004 is impaired and have not received an adjustment to the carrying value.
ENI. Our primary intangibles, outside of goodwill discussed above, were
obtained in the ENI acquisition and consist of several licensing and marketing
agreements. The GEOMATRIX(R) system, with an associated gross intangible value
of $20.8 million at December 31, 2004, is our licensed technology. We are in
dispute with SkyePharma over the terms of the Development and Licensing
Agreement and failed to make payments of $750,000 called for under the licensing
agreement during 2004. On April 6, 2004, we received a demand letter from
SkyePharma related to the past due payments under the Development and License
Agreement, which triggered the 30-day negotiation period under the agreement.
This 30-day period is required before initiating formal collection proceedings.
We are currently in discussions to modify both the terms and payment schedules
under the licensing agreement. Although we believe we will reach a settlement of
the terms and conditions of the agreement with SkyePharma, we cannot assure you
that these negotiations will be successful and that we will reach a satisfactory
resolution of this matter. In the event a satisfactory resolution can not be
reached and SkyePharma exercises their rights of termination under the
agreement, we may lose substantial and possibly all rights gained under this and
related contracts with SkyePharma. Accordingly, amounts recorded as intangible
assets associated with this agreement, which represent substantially all of our
intangible assets, would be impaired. During 2004, certain events occurred that
caused us to modify the business model underlying the original valuation of
these intangibles, including the anticipated timing of future cash flows and the
sources from which revenue will be derived. As a result, we determined that the
net book value of the intangible assets associated with the GEOMATRIX(R) license
and marketing agreements was impaired by $9,545,000 and $1,727,000,
respectively; therefore, $11,272,000 was recorded as impairment expense during
2004.
X-Fat(R), with a related gross intangible value of $4,093,000 at December
31, 2003, is our licensed dietary supplement aimed at weight loss and was
launched in test markets throughout the United States in early March 2004.
During 2004, certain events occurred that caused us to modify the business model
underlying the original valuation of this intangible, including the anticipated
timing of future cash flows and the sources from which revenue will be derived.
As a result, we determined that the net book value of the intangible assets
associated with X-Fat(R) license agreements was impaired by $3.7 million and was
recorded as impairment expense during 2004.
21
Other Income (Expense):
Interest Expense for the year ended December 31, 2004 was $2.0 million
compared with $2.5 million for the year ended December 31, 2003, a decrease of
$541,000. The decrease relates primarily to the expensing debt issuance cost of
$542,000 in 2003 that did not occur in 2004
Net loss from continuing operations
Our net loss from continuing operations for the years ended December 31,
2004 was $25.9 million compared with $27.2 million for the year ended December
31, 2003, a decrease of $1.3 million. Of these losses, approximately $21.2
million and $22.7 million during 2004 and 2003, respectively, related to
non-cash charges described herein and as follows and included only those items
that would not have been required to be settled in cash or other assets by their
original terms.
· Enlarge/Download Table
2004 2003
------------ ------------
Net Loss From Continuing Operations $(25,997,000) $(27,206,000)
Non-cash charges
Officer compensation for common stock,
options, warrants, and warrant amendments 581,000 10,362,000
Common stock, options, warrants, issued
for services, including amortization of such (664,000) 1,696,000
Impairment loss 14,976,000 6,777,000
Interest and other charges related to debt financing 1,772,000 2,050,000
Depreciation and amortization 4,560,000 1,827,000
------------ ------------
Total non-cash charges 21,225,000 22,712,000
------------ ------------
Net loss excluding non-cash charges $ (4,772,000) $ (4,494,000)
------------ ------------
Liquidity and Capital Resources
At December 31, 2004, we had $466,000 in cash, primarily as a result of
our warrant offering that began in November 2004 and concluded in December 2004,
which resulted in approximately $700,000 in gross proceeds.
Cash flows used in operating activities of approximately $3,550,000 and
$4,737,000 in 2004 and 2003, respectively, have decreased over prior year as a
result of our decision during 2004 to both discontinue the operations of MAF and
COF and the consolidation of our entire operations in Phoenix. We anticipate
that during 2005 the effects of the consolidation in Phoenix as well as certain
expense containment and efficiency initiatives that began in 2004 and continued
into 2005 along with continued growth in our core revenues will result in
improved cash flow from operations. Cash flows from financing activities was
$2,294,000 and $5,560,000 in 2004 and 2003, respectively, reflecting the
financings (as outlined below), partially offset by servicing of indebtedness.
To date, we have funded our operations and acquisition activity primarily
from cash generated from private placements and with funds from borrowings under
various debt instruments, as summarized in the table below, generating an
aggregate in net cash proceeds of $7.9 million during 2004 and 2003.
The following summarizes private placement offerings completed during 2004
and 2003:
22
| 10KSB/A | 22nd Page of 65 | TOC | |
|---|
