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6/22/05 Vital Living Inc 10KSB/A 12/31/04 5:71 1144204
Amendment to Annual Report -- Small Business · Form 10-KSB
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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
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10KSB/A · Amendment to Annual Report -- Small Business
Document Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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
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VITAL LIVING, INC.
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(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
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(Address of Principal Executive Offices) (Zip Code)
(602) 389-8600
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(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
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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:
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Target Conditions Products Offered Distribution Channels
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GreensFIRST(R) Healthcare practitioners
General Health Dream Protein(R) Regional distributors
Complete Essentials(R) Consumer direct
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Cardiovascular Health Essentum(R) Consumer Direct
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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.
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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
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Shares or Price Net Cash Options & Exercise
Date Description Principal Per Share Proceeds Warrants Price
---- ----------- --------- --------- -------- -------- -----
April, 2003 Series B Preferred 1,000,000 $1.00 $875,000 1,000,000 Series E $1.60
500,000 Series D $1.30
July, 2003 Series C Preferred 500,000 $1.00 $438,000 500,000 Series E $1.60
August, 2003 Series D Preferred 1,000,000 $1.00 $815,000 N/A N/A
October - 3,060,000 No Series $1.00
December, 2003 Bridge Notes 1,530,000 $1.00 $1,316,000 1,530,000 No Series $1.50
December, 2003 Senior Secured Notes 4,587,738 $1.00 $2,502,000 4,587,738 No Series $1.00
March-April, 2004 Common Stock 510,000 $1.00 $469,000 N/A N/A
June-July, 2004 Common Stock 3,900,000 $0.25 $897,000 11,700,000 Series G $0.25
3,900,000 Series H $0.25
Nov 2004-Dec 2004 Warrant Offering 7,056,706 $0.10 $631,000 6,560,000 No Series $0.10
----------
$7,943,000
----------
In addition to the above offerings, during the fourth quarter of 2003, we
used short-term notes payable to various shareholders and related parties,
borrowing an aggregate principal amount of $396,672. The notes generally matured
in 60 days and bore interest at stated rates ranging between 10% and 28%, with
12 months of interest earned and payable immediately. The notes, including
interest earned of $58,672, were paid in full prior to December 31, 2003.
Going concern
The accompanying consolidated financial statements have been prepared
assuming we will continue on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. We have suffered recurring losses from operations, have a working
capital deficit, and are dependent on funding from sources other than
operations. Since inception, we have been required to raise additional capital
by the issuance of both equity and debt instruments. There are no commitments
from prior funding sources should cash flows be insufficient to fund ongoing
operations and other cash commitments as they come due. These factors raise
substantial doubt about our ability to continue as a going concern. We will be
required to raise additional capital in the near term through offerings of
securities to fund operations and will attempt to continue raising capital
resources if we do not begin to generate revenue sufficient to maintain our
company as a viable entity. No assurance can be given that such financing will
be available or, if available, that it will be on commercially favorable terms.
Moreover, available financing may be dilutive to current investors.
We are in the process of improving, acquiring, or developing products for
sale that would generate revenue to sustain our operations, as well as
consolidating our operations in order to gain cost synergies and efficiencies.
If successful, these actions will serve to mitigate the factors that have raised
doubt about our ability to continue as a going concern and increase the
availability of resources for funding of our current operations and future
market development. In addition, in March and April 2004, we entered into
purchase agreements with investors and sold 510,000 shares of common stock at
$1.00 per share with rights to receive a portion of net revenues, as defined
therein, from the sale of X-Fat(R). The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded assets or liabilities that might be necessary should we be unable to
continue as a going concern.
Critical Accounting Policies
Acquisitions
We account for acquisitions in accordance with Statement of Financial
Accounting Standards, ("SFAS") No. 141 "Business Combinations" and accordingly
apply the purchase method of accounting for all business combinations initiated
after June 30, 2001 and separately identify recognized intangible assets that
meet the criteria and amortizes these assets over their determinable useful
lives.
23
Goodwill
Goodwill represents the excess of the aggregate price paid by us over the
value of the net equity acquired in an acquisition. In accordance with SFAS No.
142, "Goodwill and Other Intangible Assets," we are no longer required to
amortize goodwill, but are required to review goodwill for impairment at least
annually whenever events indicate that the carrying amount of the asset may not
be recoverable in accordance with SFAS No. 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets." As of December 31, 2004, events had occurred
that would indicate goodwill had been impaired and, accordingly, an impairment
loss was recorded.
Intangible assets
Our other intangible assets include trademarks, patents, formulations,
customer lists, and various marketing and license agreements. Intangible assets
are amortized on a straight-line basis over the lesser of the correlating
agreements or estimated useful lives ranging from two to 14 years.
Impairment of Long-lived assets
Long-lived assets and identifiable other intangible assets to be held and
used are reviewed for impairment at least annually whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. Goodwill
and other intangible assets arising from various acquisitions are evaluated for
impairment on at least an annual basis or when events occur that would indicate
that impairment had occurred. Impairment is measured by comparing the carrying
value of the long-lived asset to the estimated undiscounted future cash flows
expected to result from use of the assets and their eventual disposition.
Assumptions used include estimates of (1) market share penetration, (2)
timing of product rollouts for new products, (3) licensing royalty percentages,
(4) manufacturing costs, (5) selling prices, (6) volumes sold and (7) discount
rates. Any changes in assumptions applied in the cash flow model used to
evaluate goodwill and other intangibles for impairment may effect the outcome of
the analysis. Unfavorable changes in assumptions may result in further
impairments of goodwill and other intangibles.
As of December 31, 2004, events had occurred that would indicate goodwill
had been impaired; accordingly, an impairment loss was recorded.
Stock based compensation
We account for our stock option plans in accordance with the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation," as amended by SFAS No.
148 "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS
No. 123 permits entities to recognize as expense over the vesting period the
fair value of all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to apply the provisions of Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations and provide pro forma net income or loss and pro forma
earnings per share disclosures for employee stock option grants as if the
fair-value-based method defined in SFAS No. 123 had been applied.
We are subject to reporting requirements of FASB Financial Interpretation
No. ("FIN") 44, "Accounting for Certain Transactions Involving Stock
Compensation," which requires a non-cash charge to deferred compensation expense
if the price of our common stock on the last trading day of each reporting
period is greater than the exercise price of certain stock options. After the
first such adjustment is made, each subsequent period is adjusted upward or
downward to the extent that the trading price exceeds the exercise price of the
options.
We account for our stock option plans under the recognition and
measurement principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock issued to Employees," and related Interpretations. No
stock-based employee compensation (except that related to repriced warrants in
accordance with FIN No. 44) is reflected in net loss, as all options and
warrants granted had an exercise price equal to or below the market value of the
underlying common stock at the date of grant.
24
Recent accounting pronouncements
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150
clarifies the accounting for certain financial instruments with characteristics
of both liabilities and equity and requires that those instruments be classified
as liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after
September 15, 2003. The adoption of SFAS No. 150 did not have a material effect
on our company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after September
30, 2003. The adoption of SFAS No. 149 did not have a material effect on our
Company.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In general, a variable interest entity is a corporation,
partnership, trust, or any other legal entity used for business purposes that
either (a) does not have equity investors with voting rights or (b) has equity
investors that do not provide sufficient financial resources for the entity to
support its activities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors in the
entity 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
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation requirements apply to
older entities in the first fiscal year or interim period beginning after
September 15, 2003. Certain of the disclosure requirements apply to all
financial statements issued after January 31, 2003, regardless of when the
variable interest entity was established.
In December 2003, the FASB issued a revised Interpretation No. 46 ("FIN
46R"), "Consolidation of Variable Interest Entities." FIN 46R requires companies
to consider whether entities, in which they have financial interests, lack
sufficient equity at risk to permit that entity to finance its activities
without additional subordinated financial support and to consolidate those
entities where the company would absorb the majority of any losses. The
consolidation requirements are effective for interim and annual periods ending
after March 15, 2004. The adoption of FIN 46 and FIN 46R did not have a material
effect on our Company.
In December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
"Accounting for Stock-Based Compensation" requiring public entities to measure
the cost of employee services received in exchange for an award of equity
instruments based on grant date fair value. The cost will be recognized over the
period during which an employee is required to provide service in exchange for
the award -- usually the vesting period. The effective date for this statement
is as of the first interim period that begins after June 15, 2005. The Company
is evaluating the impact of this new pronouncement and has not yet estimated the
effect of implementation on the Company's financial statements.
Item 7. Financial Statements
See index to Financial Statements and Financial Statements Schedules
beginning on page F-1 of this Form 10-KSB.
Item 8A. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
Item 8B. Other Information
Not applicable.
25
PART III
Item 9. Directors and Executive Officers of the Registrant
The information required by this Item relating to directors of our company
is incorporated herein by reference to the definitive Proxy Statement to be
filed pursuant to Regulation 14A of the Securities Exchange Act of 1934 for our
2005 Annual Meeting of Stockholders.
Item 10. Executive Compensation
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference
to the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.
Item 13. Exhibits and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial statements filed as part of this Report:
Report of Epstein, Webber & Conover, P.C..................... F-1
Consolidated Balance Sheets as of December 31, 2004.......... F-2
Consolidated Statements of Operations
Years Ended December 31, 2004 and 2003..................... F-3
Consolidated Statements of Stockholders' Equity (Deficit)
Years Ended December 31, 2004 and 2003..................... F-6
Consolidated Statements of Cash Flows
Years Ended December 31, 2004 and 2003..................... F-4
Notes to Consolidated Financial Statements................... F-7
(2) Exhibits filed as part of this Report:
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Exhibit No. Description
----------- -----------
2.1 Acquisition Agreement and Plan of Merger, dated as of August 16, 2001, between Vital Living, Inc. and VCM
Technology Limited (1)
2.2 Certificate of Merger of Vital Living, Inc. and VCM Technology Limited (1)
3.1 Amended and Restated Articles of Incorporation for Vital Living, Inc. (1)
26
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Exhibit No. Description
----------- -----------
3.2 Amended and Restated Bylaws for Vital Living, Inc. (1)
4.1 Form of Series A Warrant (2)
4.2 Form of Series B Warrant (3)
4.3 Form of Series C Warrant (3)
4.4 Form of Series D Warrant (4)
4.5 Form of Series E Warrant (5)
4.6 Form of Series F Warrant (2)
4.7 Certificate of Designation of Preferences, Rights and Limitations of 10% Series A Preferred Stock (20)
4.8 Certificate of Designation, Preferences and Relative, Participating, Optional or Other Special Rights of
Series B Convertible Preferred Stock (20)
4.9 Certificate of Designation, Preferences and Relative, Participating, Optional or Other Special Rights of
Series C Convertible Preferred Stock (20)
4.10 Certificate of Designation, Preferences and Relative, Participating, Optional or Other Special Rights of
Series D Convertible Preferred Stock (5)
4.11 Stock Purchase Agreement, dated as of October 23, 2002, by and
among Vital Living, Inc., MAF BioNutritionals, LLC, William A.
Coppel (personally and as a representative of Kenneth Martin),
Phillip B.
Maffetone, Leslie C. Quick, III, Thomas C. Quick and Kenneth Glah (6)
4.12 Subscription Agreement for November 2002 private placement of units (3)
4.13 Form of Subscription Agreement for Series B Convertible Preferred Stock (4)
4.14 Form of Subscription Agreement for Series C Convertible Preferred Stock (7)
4.15 Form of Subscription Agreement for Series D Convertible Preferred Stock (5)
4.16 Registration Rights Agreement, dated as of November 20, 2002, between Vital Living, Inc. and those persons
listed on Exhibit A attached thereto (3)
4.17 Stockholders' Agreement, dated, by and among Vital Living, Inc., Bradley D. Edson, Stuart A. Benson,
Martin Gerst, Donald Hannah, William Coppel, Kenneth Martin, Phil Maffetone, Leslie C. Quick, III, and
Thomas C. Quick (3)
4.18 Stockholders' Agreement, dated August 20, 2003, by and between Vital Living, Inc., Bradley D. Edson,
Stuart A. Benson, Donald Hannah, SkyePharma PLC, Fifth Avenue Capital, Inc. and Stephen Morris (5)
4.19 Registration Rights Agreement, dated as of August 20, 2003, by and between Vital Living, Inc. and
SkyePharma PLC (5)
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Exhibit No. Description
----------- -----------
4.20 Lock Up Agreement, dated as of May 21, 2001, among Bradley D. Edson Martin Gerst, Donald Hannah and
Kenneth Lind (8)
4.21 Amendment No. 1 to Lock Up Agreement, dated as of May 21, 2001, among Bradley D. Edson Martin Gerst,
Donald Hannah and Kenneth Lind (8)
4.22 Form of Securities Purchase Agreement for December 2003 private offering (9)
4.23 Form of Senior Secured Convertible Note issued in December 2003 private offering (9)
4.24 Form of Warrant issued in December 2003 private offering (9)
4.25 Form of Warrant issued in 2003 offering of senior convertible promissory notes (9)
4.26 Form of Security Agreement for December 2003 private offering (9)
4.27 Form of Registration Rights Agreement for December 2003 private offering (9)
4.28 Form of Escrow Agreement for December 2003 private offering (9)
4.29 Form Purchase Agreement for March 2004 private offering (21)
4.30 Form of Securities Purchase Agreement for June 2004 private offering (21)
4.31 Form of Series G Warrant (21)
4.32 Form of Series H Warrant (21)
4.33 Form of Registration Rights Agreement for June 2004 private offering (21)
4.34 Asset Purchase Agreement, dated September 30, 2004, among Vital Living, Inc., MAF BioNutritional, LLC and
Radha Krishna Heartly Blessings, Inc.(22)
10.1 2001 Stock Option Plan (1)
10.2 Agreement, dated August 21, 2001, between Vital Living, Inc. and Arizona Heart Institute, Inc. (8)
10.3 Addendum, dated April 4, 2002, to Agreement between Vital Living, Inc. and Arizona Heart Institute, Inc.
(10)
10.4 Amendment No. 1, dated July 15, 2003, to Agreement Vital Living, Inc. and Arizona Heart Institute, Inc.
(11)
10.5 Distribution Agreement, dated August 21, 2001, between Vital Living, Inc. and Advanced Medical China, Ltd.
(8)
10.6 Amendment No. 1 to Distribution Agreement, dated February 26, 2002, between Vital Living, Inc. and
Advanced Medical China, Ltd. and AHI Management Hong Kong Ltd. (12)
10.7 Employment agreement, dated October 1, 2001, between Vital Living, Inc. and Bradley D. Edson (8)
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Exhibit No. Description
----------- -----------
10.8 Amendment No. 1, dated October 1, 2002, to Employment Agreement between Vital Living, Inc. and Bradley D.
Edson (3)
10.9 Consultant Agreement, dated October 1, 2001, between Vital Living, Inc. and Howard Wernick (8)
10.10 Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Leslie D. Michelson (13)
10.11 Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Brian C. Smith (13)
10.12 Consulting Agreement, dated March 20, 2002, between Vital Living, Inc. and Michael H. Davidson, M.D. (13)
10.13 Form of Clinical Trial Agreement, between Vital Living, Inc. and the City of Phoenix Fire Department (14)
10.14 Executive Services Agreement, dated as of November 20, 2002, between Vital Living, Inc. and Stuart A.
Benson (3)
10.15 Amendment No. 1 to Employment Agreement between Vital Living, Inc. and Stuart A. Benson (20)
10.16 Amendment No. 2 to Employment Agreement between Vital Living, Inc. and Stuart A. Benson (20)
10.17 Warrant Agreement, dated November 20, 2002, between Vital Living, Inc. and Stuart A. Benson (10)
10.18 Amendment No. 1 to Warrant Agreement between Vital Living, Inc. and Stuart A. Benson (4)
10.19 Amendment No. 2 to Warrant Agreement between Vital Living, Inc. and Stuart A. Benson (20)
10.20 Financial Advisor Services Agreement, dated July 29, 2002, between Vital Living, Inc. and Peck and
Grossman, LLC (14)
10.21 Agreement, dated February 3, 2003, between Vital Living, Inc. and CHG Allied Inc. (14)
10.22 Agreement, dated September 30, 2002, between Vital Living, Inc. and Medical Resource, LLC, National
Provider Network (14)
10.23 Consulting Agreement, dated as of October 8, 2002, between Vital Living, Inc. and Martin Wallace (14)
10.24 Management Agreement, dated as of April 17, 2003, between Vital Living, Inc. and Christopher's Original
Formulas, Inc. (4)
10.25 Consulting Agreement, dated May 19, 2002, between Vital Living, Inc. and Stephen Songsheng Chen (4)
10.26 Warrant Agreement, dated April 16, 2003, between Vital Living, Inc. and Stephen Songsheng Chen (4)
10.27 Scientific Advisory Board Agreement, dated May 15, 2002, between Vital Living, Inc. and Dr. Dennis
Sprecher (15)
10.28 Scientific Advisory Board Agreement, dated May 30, 2002, between Vital Living, Inc. and John A. Sutherland
(16)
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Exhibit No. Description
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10.29 Scientific Advisory Board Agreement, dated May 16, 2002, among Vital Living, Inc., Thomas Allison and the
Mayo Foundation for Medical Education and Research (15)
10.30 Scientific Advisory Board Agreement, dated June 17, 2002, between Vital Living, Inc. and Ronald M. Krauss
(17)
10.31 Scientific Advisory Board Agreement, dated May 7, 2002, between Vital Living, Inc. and Dr. David Maron (4)
10.32 Settlement and Release Agreement, dated June 25, 2003, between Vital Living, Inc. and William Coppel (18)
10.33 Asset Purchase Agreement, dated as of June 20, 2003, among Vital Living, Inc., Nature's Systems, Inc.,
Christopher's Original Formulas, Inc., Robert C. Scott and James R. Jeppson (18)
10.34 Form of Escrow Agreement, dated August 20, 2003, between Vital Living, Inc., E-Nutraceuticals, Inc.,
Stephen Morris and Mercantile National Bank - California, as escrow agent (5)
10.35 Development and License Agreement, dated as of December 28, 2001, between E-Nutraceuticals, Inc. and
SkyePharma PLC (5)
10.36 Amendment No. 1, dated as of August 20, 2003, to Development and License Agreement by and among Vital
Living, Inc., E-Nutraceuticals, Inc., Jagotec AG and SkyePharma PLC (5)
10.37 Stock Purchase Agreement, dated as of October 14, 2003, among Vital Living, Inc. and the shareholders set
forth on the signature page attached thereto (19)
10.38 Escrow Agreement, dated as of October 14, 2003, among Vital Living, Inc., the shareholders of Doctors For
Nutrition, Inc. and Mercantile National Bank - California (19)
10.39 Executive Services Agreement, dated as of October 14, 2003, between Doctors For Nutrition, Inc. and Bruce
Howe (19)
10.40 Strategic Advisor Agreement, dated October 14, 2003, between Vital Living, Inc. and Dr. Roger Howe (19)
10.41 Strategic Advisor Agreement, dated October 14, 2003, between Vital Living, Inc. and Dr. Maynard Howe (19)
10.42 Form of Indemnification Agreement between the Company and each of Bradley D. Edson, Stuart A. Benson,
Donald C. Hannah, Carson E. Beadle, Leslie C. Quick, Robert J. Eide, David Allen, Marcus Feder, Mitchel
Feinglas and Michael Ashton (2)
10.42.1 Schedule of Indemnification Agreements in the form of Exhibit 10.42, including material detail in which
such documents differ from Exhibit 10.42 (2)
10.43 Amendment No. 1, dated as of January 13, 2004, to Stockholders' Agreement, dated as of August 14, 2003,
between each of the Company, Bradley D. Edson, Stuart Benson, Donald Hannah, Stephen Morris, SkyePharma
PLC and Fifth Avenue Capital, Inc. (20)
10.44 Stock Option Agreement, dated as of April 19, 2004, between the Company and Nest Ventures, LLC (23)
30
· Enlarge/Download Table
Exhibit No. Description
----------- -----------
10.45 Settlement and Release Agreement, dated 9, 2004, between the Company, Natures System, Inc., Christopher's
Original Formulas, Inc., Christopher Enterprises, Inc., Robert Scott, James Jeppson, Norman Barala, Ruth
Christopher and Stuart Benson (21)
10.46 Employment Agreement between Vital Living, Inc. and Stuart Benson, dated January 1, 2005 effective as of
February 15, 2005 (24)
10.47 Employment Agreement between Vital Living, Inc. and Gregg Linn, dated January 1, 2005 effective as of
February 15, 2005 (24)
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed
Herewith)
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed
Herewith)
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed Herewith)
32.2 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Filed Herewith)
--------------------------------------------------------------------------------
(1) Incorporated by reference to current Report on Form 8-K dated August
17, 2001 and filed with the SEC on October 1, 2001
(2) Incorporated by reference to Registration Statement on Form SB-2
(333-111921) filed with the SEC on January 14, 2004
(3) Incorporated by reference to current Report on Form 8-K/A dated
November 20, 2002 and filed with the SEC on December 5, 2002
(4) Incorporated by reference to Amendment No. 2 to Registration
Statement on Form SB-2 (333-102106) filed on April 28, 2003
(5) Incorporated by reference to current Report on Form 8-K dated August
21, 2003 and filed with the SEC on September 8, 2003
(6) Incorporated by reference to current Report on Form 8-K dated
October 23, 2002 and filed with the SEC on November 4, 2002
(7) Incorporated by reference to Amendment No. 3 to Registration
Statement on Form SB-2 (333-102106) filed on June 18, 2003
(8) Incorporated by reference to current Report on Form 8-K dated August
17, 2001 and filed with the SEC on November 20, 2001
(9) Incorporated by reference to current Report on Form 8-K dated
December 15, 2003 and filed with the SEC on December 19, 2003
(10) Incorporated by reference to current Report on Form 8-K dated April
1, 2002 and filed with the SEC on April 16, 2002
(11) Incorporated by reference to Amendment No. 4 to Registration
Statement on Form SB-2 (333-102106) filed on July 23, 2003
(12) Incorporated by reference to current Report on Form 8-K dated
February 27, 2002 and filed with the SEC on February 28, 2002
(13) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001
(14) Incorporated by reference to Amendment No. 1 to Registration
Statement on Form SB-2 (333-102106) filed on March 7, 2003
31
(15) Incorporated by reference to current Report on Form 8-K dated May
15, 2002 and filed with the SEC on May 31, 2002
(16) Incorporated by reference to current Report on Form 8-K dated May
30, 2002 and filed with the SEC on June 13, 2002
(17) Incorporated by reference to current Report on Form 8-K dated June
17, 2002 and filed with the SEC on July 2, 2002
(18) Incorporated by reference to current Report on Form 8-K dated July
2, 2003 and filed with the SEC on July 16, 2003
(19) Incorporated by reference to current Report on Form 8-K/A dated
October 14, 2003 and filed with the SEC on December 5, 2003
(20) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2003
(21) Incorporated by reference to Registration Statement on Form SB-2
(333-102106) filed on August 3, 2004
(22) Incorporated by reference to current Report on Form 8-K dated
September 30, 2004 and filed with the SEC on October 20, 2004
(23) Amendment No. 1 to Registration Statement on Form SB-2 filed on May
12, 2004
(24) Incorporated by reference to current Report on Form 8-K dated
February 15, 2005 and filed with the SEC on February 18, 2005
32
(b) We filed the following reports on Form 8-K during the quarter ended
December 31, 2004.
(1) A Report on Form 8-K was filed with the Securities and Exchange
Commission on October 20, 2004 relating to a change in the
conversion and exercise price of the Secured Notes iin exchange for
allowing us to pay interest either cash or shares of our common
stock .
(2) A Report on Form 8-K was filed with the Securities and Exchange
Commission on November 4, 2004 relating to the dismissal of our
independent accountants.
(3) A Report on Form 8-K/A was filed with the Securities and Exchange
Commission on November 11, 2004 amending a Report on Form 8-K filed
November 4, 2004 relating to the dismissal of our independent
accountants..
(4) A Report on Form 8-K was filed with the Securities and Exchange
Commission on November 22, 2004 relating to a press release
discussing our financial results for the third quarter of 2004.
Item 14. Principal Accountants Fees and Services Index to Consolidated Financial
Statements
The information required by this Item 14 is incorporated by reference to
the definitive Proxy Statement to be filed pursuant to Regulation 14A of the
Securities Exchange Act of 1934 for our 2005 Annual Meeting of Stockholders.
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VITAL LIVING, INC.
/s/ STUART A. BENSON
----------------------------------------
Stuart A. Benson
President and Chief Executive Officer
Date: June 21, 2005
VITAL LIVING, INC
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Vital Living, Inc.
We have audited the accompanying consolidated balance sheet of Vital Living,
Inc. and subsidiaries as of December 31, 2004 and the related statements of
operations, stockholders' equity, and cash flows for the two years in the period
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Vital Living, Inc. and
subsidiaries as of December 31, 2004 and the results of their operations and
their cash flows for the two years in the period then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
has a working capital deficit, and is dependent on funding sources from other
than operations. Since inception, the Company has been required to raise
additional capital by the issuance of both equity and debt instruments. There
are no commitments from funding sources, debt or equity, in the event that cash
flows are not sufficient to fund ongoing operations or other cash commitments
when they come due. These factors raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ Epstein Weber & Conover PLC
Scottsdale, Arizona
April 8, 2005
F-1
VITAL LIVING, INC.
Consolidated Balance Sheets
December 31,
2004
------------
Assets
Current assets:
Cash and cash equivalents $ 466,000
Accounts receivable, trade; net of allowance
for doubtful accounts of $37,000 446,000
Inventory, net of reserve of $379,000 141,000
Marketable securities 173,000
Prepaid expenses and other current assets 71,000
------------
Total current assets 1,297,000
------------
Other assets
Deferred debt issuance costs, net of accumulated
amortization of $450,000 766,000
Property and equipment, net 70,000
Goodwill 3,226,000
License agreement - GEOMATRIX(R), net 20,784,000
Other intangible assets, net 15,000
Other non-current assets 13,000
------------
Total other assets 24,874,000
------------
Total assets $ 26,171,000
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, trade $ 1,981,000
Accrued and other current liabilities 1,728,000
Current portion of long-term debt 401,000
------------
Total current liabilities 4,110,000
------------
Long-term debt, net of unamortized debt discount
of $2,140,000 2,146,000
------------
Total liabilities 6,256,000
------------
Commitments and contingencies --
Stockholders' equity
Preferred stock, $0.001 par value, 50,000,000
shares authorized:
Preferred stock - Series C, $0.001 par value,
3,000,000 shares authorized; 500,000 shares
issued and outstanding --
Preferred stock - Series D, $0.001 par value,
1,000,000 shares authorized; 1,000,000 and
1,000,000 shares issued and outstanding,
respectively 1,000
Additional paid-in capital - preferred 304,000
Common stock, $0.001 par value, 150,000,000
shares authorized; 99,016,000 shares issued,
98,592,000 outstanding 99,000
Additional paid-in capital - common 86,733,000
Stock, options, and warrants - unamortized (214,000)
Treasury stock, 424,000 shares at cost (72,000)
Accumulated other comprehensive income (946,000)
Accumulated deficit (65,990,000)
------------
Total stockholders' equity 19,915,000
------------
Total liabilities and stockholders' equity $ 26,171,000
============
See accompanying notes to consolidated financial statements.
F-2
VITAL LIVING, INC.
Consolidated Statements of Operations
Year Ended December 31,
----------------------------
2004 2003
------------ ------------
Revenue $ 4,161,000 $ 498,000
Cost of goods sold 2,801,000 237,000
------------ ------------
Gross profit 1,360,000 261,000
------------ ------------
Administrative expenses
Salaries and benefits 992,000 11,449,000
Professional and consulting fees 1,676,000 3,203,000
Selling, general and administrative 1,937,000 1,275,000
Research and development 1,180,000 411,000
Depreciation and amortization 4,560,000 1,811,000
Impairment of goodwill and intangibles 14,976,000 6,777,000
------------ ------------
Total administrative expenses 25,321,000 24,926,000
------------ ------------
Net loss from operations (23,961,000) (24,665,000)
Other income (expense)
Other expense (2,036,000) (2,541,000)
------------ ------------
Net loss before discontinued operations (25,997,000) (27,206,000)
------------ ------------
Discontinued operations
Loss from operations (2,772,000) (729,000)
Gain (loss) on disposal 597,000
------------ ------------
Loss from discontinued operations (2,175,000) (729,000)
------------ ------------
Net loss (28,172,000) (27,935,000)
------------ ------------
Deemed dividend associated with beneficial
conversion of preferred stock (126,000) (1,643,000)
Preferred stock dividend (300,000) (585,000)
------------ ------------
Net loss available to common stockholders $(28,598,000) $(30,163,000)
============ ============
Basic and diluted loss per share before
discontinued operations ($ 0.40) ($ 0.85)
Gain (loss) from discontinued operations ($ 0.03) ($ 0.02)
Preferred stock dividend ($ 0.01) ($ 0.07)
------------ ------------
Basic and diluted loss per share available to
common stockholders ($ 0.44) ($ 0.94)
============ ============
Weighted average basic and diluted common stock
outstanding 64,878,000 31,992,000
============ ============
See accompanying notes to consolidated financial statements.
F-3
VITAL LIVING, INC.
Consolidated Statements of Cash Flows
· Enlarge/Download Table
Year Ended December 31,
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $(28,172,000) $(27,935,000)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,560,000 1,827,000
Impairment of goodwill 14,976,000 6,777,000
Warrants issued, beneficial conversion, and
amortization of costs associated with senior
convertible notes 765,000 2,050,000
Issuance of common stock for services 754,000 693,000
Issuance of common stock for shareholder penalty
interest 287,000 156,000
Issuance of common stock for compensation 581,000 1,781,000
Issuance of warrants for services -- 33,000
Issuance of warrants for compensation -- 6,800,000
Repricing of and modifications to warrants (1,624,000) 1,781,000
Amortization of restricted common stock, options
and warrants issued for services 941,000 970,000
Loss on discontinued operations 2,772,000 728,000
Gain on disposal of discontiunued operations (597,000) --
Allowance for bad debt 5,000 (54,000)
Inventory reserve 360,000 (172,000)
Loss on disposal of assets -- 44,000
Change in operating assets and liabilities:
Accounts receivable (197,000) 50,000
Inventory (454,000) 183,000
Prepaid expenses and other current assets 1,113,000 (851,000)
Accounts payable 446,000 (3,000)
Accrued and other current liabilities 697,000 1,169,000
------------ ------------
Cash used in continuing activities (2,787,000) (3,973,000)
Cash used by discontinued operations (763,000) (764,000)
------------ ------------
Net cash used in operating activities: (3,550,000) (4,737,000)
------------ ------------
Cash flows from investing activities:
Purchases of property, equipment and intangibles (51,000) (51,000)
Proceeds from sale of discontinued operations 50,000 --
Cost of acquisitions, net of cash acquired of
$291,000 and $78,000, respectively -- (416,000)
------------ ------------
Cash used in investing activities (1,000) (467,000)
------------ ------------
Cash flows from financing activities:
Payment on notes and payables to related
parties, net (31,000) (57,000)
Conversion of senior secured convertible to
common stock 393,000 --
Borrowings on long term debt, net -- 4,287,000
Debt issuance costs -- (751,000)
Purchase of treasury stock -- (72,000)
Proceeds from sale of common stock, options, and
warrants, net of offering costs 1,932,000 26,000
Proceeds from sale of preferred stock,
net of offering costs -- 2,127,000
------------ ------------
Cash provided by financing activities 2,294,000 5,560,000
------------ ------------
Effect of foreign exchange rates on cash (6,000) (43,000)
Net (decrease) increase in cash (1,263,000) 313,000
------------ ------------
Cash at beginning of period 1,729,000 1,416,000
------------ ------------
Cash at end of period $ 466,000 $ 1,729,000
============ ============
See accompanying notes to consolidated financial statements.
F-4
VITAL LIVING, INC.
Consolidated Statements of Cash Flows
(continued)
· Enlarge/Download Table
Year Ended December 31,
----------------- -----------------
2004 2003
----------------- -----------------
Supplemental cash flow information
Interest paid $ 190,000 $ 115,000
================= =================
Non cash investing activities
Common stock issued for acquisitions and acquisition costs $ -- $ 47,748,000
================= =================
Non cash financing activites
Issuance of common stock for services, settlements and interest $ 766,000 $ 1,716,000
================= =================
Issuance of common stock for compensation $ 581,000 $ 1,781,000
================= =================
Common stock for Series C Preferre stock offering costs $ -- $ 74,000
================= =================
Preferred stock for preferred stock dividend $ -- $ 380,000
================= =================
Issuance of common stock for marketable securities $ 1,070,000 $ --
================= =================
Issuance of common stock for intangibles $ 1,642,000 $ --
================= =================
Issuance of common stock for common stock offering costs $ 80,000 $ --
================= =================
Issuance of warrants and options for services $ 745,000 $ 460,000
================= =================
Issuance of warrants for common stock offering $ 625,000 $ --
================= =================
Issuance of warrants for compensation $ -- $ 6,800,000
================= =================
Warrants for preferred stock offerings $ -- $ 229,000
================= =================
Warrants for preferred stock offering costs $ -- $ 105,000
================= =================
Warrants for convertible debt offering $ -- $ 2,072,000
================= =================
Repricing of and amendments to options and warrants $ 1,624,000 $ 1,781,000
================= =================
Issuance of Series A preferred stock dividend $ 250,000 $ --
================= =================
Issuance of preferred stock for preferred stock dividend in arrears $ 204,000 $ --
================= =================
Conversion of preferred to common $ -- $ 1,304,000
================= =================
Conversion of Series A preferred stock to common stock $ 4,516,000 $ --
================= =================
Conversion of Series B preferred stock to common stock $ 1,250,000 $ --
================= =================
Conversion of senior notes and accrued interest $ -- $ 1,548,000
================= =================
Beneficial conversion of convertible debt $ -- $ 2,190,000
================= =================
Deemed dividend associated with beneficial conversion of preferred stock $ 127,000 $ 623,000
================= =================
See accompanying notes to consolidated financial statements
F-5
VITAL LIVING, INC.
Consolidated Statements of Stockholders' Equity
· Enlarge/Download Table
------------------Preferred Stock--------------------- --------------Common Stock--------------
Additional Additional
Paid-In Paid-In
Shares Par Value Capital Discount Shares Par Value Capital
---------- ------------ ----------- ------------ ----------- ----------- ------------
Balance December 31, 2002 3,712,000 $ 4,000 $ 6,972,000 ($ 1,147,000) 17,843,000 $ 18,000 $ 8,021,00
---------- ------------ ----------- ------------ ----------- ----------- ------------
Series A Preferred stock
conversion (682,000) ($ 1,000) ($1,303,000) $ -- 682,000 $ 1,000 $ 1,303,000
Series A Preferred stock
dividend, 380,000 -- 380,000 -- -- -- --
Series B Preferred stock issued
for cash, 1,000,000 1,000 803,000 -- -- -- 70,000
Series C Preferred stock issued
for cash 500,000 -- 100,000 -- 62,000 -- 337,000
Series C Preferred stock
beneficial conversion feature -- 1,000 253,000 (253,000) -- -- --
Series D Preferred stock issued
for cash 1,000,000 1,000 814,000 -- -- -- --
Series D Preferred stock
beneficial conversion feature -- -- 370,000 (370,000) -- -- --
Amortization of preferred stock
beneficial conversion features -- -- -- 1,643,000 -- -- --
Common stock issued for services
and settlements -- -- -- -- 1,425,000 1,000 1,715,000
Common stock issued for
compensation -- -- -- -- 1,300,000 1,000 1,780,000
Common stock issued for
acquisition of COF -- -- -- -- 2,754,000 3,000 2,972,000
Common stock issued for
acquisition of ENI -- -- -- -- 32,398,000 32,000 42,340,000
Common stock issued for
acquisition of DFN -- -- -- -- 1,700,000 2,000 2,400,000
Convertible debt beneficial
conversion feature -- -- -- -- -- -- 2,190,000
Convertible debt detachable
warrants issued -- -- -- -- -- -- 2,072,000
Options and warrants exercised -- -- -- -- 105,000 -- 27,000
Options and warrants issued for
services -- -- -- -- -- -- 460,000
Options and warrants issued for
compensation -- -- -- -- -- -- 6,800,000
Warrants repriced for an
employee -- -- -- -- -- -- 1,526,000
Warrant modification for a
consultant -- -- -- -- -- -- 255,000
Amortization of restricted
common stock, options, and
warrants issued for services -- -- -- -- -- -- --
Treasury stock purchase,
424,000 shares at cost -- -- -- -- -- -- --
Comprehensive income: -- -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- -- -- -- -- --
Net loss -- -- -- -- -- -- --
Comprehensive Income -- -- -- -- -- -- --
---------- ------------ ----------- ------------ ----------- ----------- ------------
Balance December 31, 2003 5,910,000 $ 6,000 $ 8,389,000 ($ 127,000) 58,269,000 $ 58,000 $ 74,268,000
---------- ------------ ----------- ------------ ----------- ----------- ------------
Preferred stock conversion (4,615,000) (5,000) (8,289,000) -- 5,068,000 5,000 8,289,000
Beneficial conversion of
dividend payable 205,000 -- 204,000 -- -- -- --
Amortization of preferred stock
beneficial conversion features -- -- -- 127,000 -- -- --
Common stock issued for services
and settlements -- -- -- -- 653,000 2,000 752,000
Common stock issued for penalty
shares -- -- -- -- 357,000 -- 287,000
Commons stock issued for
marketable securities -- -- -- -- 5,000,000 5,000 1,065,000
Common stock issued for
acquisitions of intangibles -- -- -- -- 5,451,000 5,000 1,637,000
Common stock issued for
compensation -- -- -- -- 700,000 1,000 580,000
Common stock returned pursuant
to holdback agreement on
purchase of ENI -- -- -- -- (791,000) (1,000) (1,033,000)
Recovery of shares related to
COF acquisition -- -- -- -- (1,850,000) (2,000) (553,000)
Common stock issued as dividend
on Series C Preferred -- -- -- -- 250,000 -- 50,000
Common stock issued as dividend
on Series B preferred -- -- -- -- 250,000 -- 250,000
Common stock issued in exchange
for Senior Secured Convertible
Notes -- -- -- -- 1,205,000 1,000 300,000
Sale of common stock -- -- -- -- 4,095,000 4,000 893,000
Options and warrants exercised -- -- -- -- 19,753,000 20,000 1,015,000
Options and warrants issued for
services -- -- -- -- -- -- 245,000
Common stock issued for
amortiazble services -- -- -- -- 606,000 1,000 302,000
Amortization of restricted
common stock, options, and
warrants issued for services -- -- -- -- -- -- 154,000
Re-pricing of options -- -- -- -- -- -- (1,768,000)
Net loss --
Comprehensive income: -- -- -- -- -- -- --
Loss on marketable securities -- -- -- -- -- -- --
Change in cumulative translation
adjustment -- -- -- -- -- -- --
Other comprehensive gain/(loss) -- -- -- -- -- -- --
Total Comprehensive income: -- -- -- -- -- -- --
---------- ------------ ----------- ------------ ----------- ----------- ------------
Balance December 31, 2004 1,500,000 $ 1,000 $ 304,000 $ 0 99,016,000 $ 99,000 $ 86,733,000
========== ============ =========== ============ =========== =========== ============
VITAL LIVING, INC.
Consolidated Statements of Stockholders' Equity
(continued)
· Enlarge/Download Table
Stock, Accumulated
Options and Other
Warrants Treasury Comprehensive Retained Comprehensive Stockholders'
Unamortized Stock Income (Loss) Deficit Income Equity
----------- -------- ------------ ------------ ------------ ------------
Balance December 31, 2002 ($ 982,000) $ 0 $ -- ($ 7,228,000) -- $ 5,658,000
----------- -------- ------------ ------------ ------------ ------------
Series A Preferred stock
conversion $ -- $ -- $ -- $ -- -- $ 0
Series A Preferred stock
dividend, -- -- -- (585,000) -- ($ 205,000)
Series B Preferred stock issued
for cash, -- -- -- -- -- 874,000
Series C Preferred stock issued
for cash -- -- -- -- -- 437,000
Series C Preferred stock
beneficial conversion feature -- -- -- -- -- 1,000
Series D Preferred stock issued
for cash -- -- -- -- -- 815,000
Series D Preferred stock
beneficial conversion feature -- -- -- -- -- --
Amortization of preferred stock
beneficial conversion features -- -- -- (1,643,000) -- --
Common stock issued for services
and settlements (569,000) -- -- -- -- 1,147,000
Common stock issued for
compensation -- -- -- -- -- 1,781,000
Common stock issued for
acquisition of COF -- -- -- -- -- 2,975,000
Common stock issued for
acquisition of ENI -- -- -- -- -- 42,372,000
Common stock issued for
acquisition of DFN -- -- -- -- -- 2,402,000
Convertible debt beneficial
conversion feature -- -- -- -- -- 2,190,000
Convertible debt detachable
warrants issued -- -- -- -- -- 2,072,000
Options and warrants exercised -- -- -- -- -- 27,000
Options and warrants issued for
services (16,000) -- -- -- -- 444,000
Options and warrants issued for
compensation -- -- -- -- -- 6,800,000
Warrants repriced for an
employee -- -- -- -- -- 1,526,000
Warrant modification for a
consultant -- -- -- -- -- 255,000
Amortization of restricted
common stock, options, and
warrants issued for services 970,000 -- -- -- -- 970,000
Treasury stock purchase,
424,000 shares at cost -- (72,000) -- -- -- (72,000)
Comprehensive income: -- -- -- -- -- --
Change in cumulative
translation adjustment -- -- (43,000) -- -- (43,000)
Net loss -- -- -- (27,935,000) -- (27,935,000)
------------
Comprehensive Income -- -- -- -- -- (27,978,000)
----------- -------- ------------ ------------ ------------ ------------
Balance December 31, 2003 ($ 597,000) ($72,000) ($ 43,000) ($37,391,000) -- $ 44,491,000
----------- -------- ------------ ------------ ------------ ------------
Preferred stock conversion -- -- -- -- -- --
Beneficial conversion of
dividend payable -- -- -- -- -- 204,000
Amortization of preferred stock
beneficial conversion features -- -- -- (127,000) -- --
Common stock issued for services
and settlements -- -- -- -- -- 754,000
Common stock issued for penalty
shares -- -- -- -- -- 287,000
Commons stock issued for
marketable securities -- -- -- -- -- 1,070,000
Common stock issued for
acquisitions of intangibles -- -- -- -- -- 1,642,000
Common stock issued for
compensation -- -- -- -- -- 581,000
Common stock returned pursuant
to holdback agreement on
purchase of ENI -- -- -- -- -- (1,034,000)
Recovery of shares related to
COF acquisition -- -- -- -- -- (555,000)
Common stock issued as dividend
on Series C Preferred -- -- -- (50,000) -- --
Common stock issued as dividend
on Series B preferred -- -- -- (250,000) -- --
Common stock issued in exchange
for Senior Secured Convertible
Notes -- -- -- -- -- 301,000
Sale of common stock -- -- -- -- -- 897,000
Options and warrants exercised -- -- -- -- -- 1,035,000
Options and warrants issued for
services (245,000) -- -- -- -- --
Common stock issued for
amortiazble services (303,000) -- -- -- -- --
Amortization of restricted
common stock, options, and
warrants issued for services 787,000 -- -- -- -- 941,000
Re-pricing of options 144,000 -- -- -- -- (1,624,000)
Net loss -- -- -- (28,172,000) -- (28,172,000)
Comprehensive income: -- -- -- -- -- --
Loss on marketable securities -- -- (897,000) -- -- --
Change in cumulative translation
adjustment -- -- (6,000) -- -- --
------------
Other comprehensive gain/(loss) -- -- (903,000) (903,000) -- (903,000)
------------
Total Comprehensive income: -- -- -- (29,075,000) -- (29,075,000)
----------- -------- ------------ ------------ ------------ ------------
Balance December 31, 2004 ($ 214,000) ($72,000) ($ 946,000) ($65,990,000) -- $ 19,915,000
=========== ======== ============ ============ ============ ============
See accompanying notes to consolidated financial statements.
F-6
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Note 1 - Organization and Description of Business
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 May 7, 2001 and changed our name to Vital
Living, Inc. on May 20, 2001. We then merged with VCM Technology Limited,
a company reporting under the Securities Exchange Act of 1934, on August
16, 2001. As set forth in the terms of the merger agreement, we acquired
all of the outstanding shares of common stock of VCM from its sole
stockholder in exchange for 5,062 shares of restricted common stock.
Following the merger, we continued as the surviving corporation and
commenced reporting under the Securities and Exchange Act of 1934 by
assuming the reporting of 1934 by assuming the reporting status of VCM,
which in turn provided us with the ability to file for quotation on the
Over-the- Counter Bulleting Board under the symbol "VTLV".
Through a series of various acquisition and divestiture activities that
occurred during 2004 and 2003, as described further below, we develop and
market nutritional supplements, and nutraceuticals products for
distribution primarily through healthcare practitioners. 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).
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.
In November 2002, we acquired MAF BioNutritionals, LLC ("MAF"). MAF
formulates, markets, and distributes natural and organic food-based,
preventative nutraceuticals and therapeutic and functional food products
designed to support proactive human cell maintenance and rehabilitation,
essential in the prevention and treatment of disease, as well as overall
optimal body performance and metabolic function. As further described
below, we sold the primary assets of MAF and discontinued its operations
in September 2004.
In July 2003, we completed the acquisition of the assets and assumption of
certain liabilities of Christopher's Original Formulas, Inc. ("COF").
Through this acquisition, we gained the exclusive licensing and marketing
rights to Christopher's products, a line of over 300 herbal formulas and
products, consisting primarily of naturally occurring organic substances
sold to professionals and at retail locations throughout the United
States. As further described below, we sold certain assets and liabilities
of COF back to the previous owners and discontinued its operations in July
2004.
In August 2003, we completed the acquisition of E-Nutraceuticals, Inc.
("ENI"). In addition, through a collaborative partnership with SkyePharma,
PLC, ("Skye"), a UK pharmaceuticals company and a major shareholder of
ours, we are in the process of enhancing existing nutraceuticals via
FDA-approved, proprietary delivery systems. Pursuant to an amended
Development and License Agreement between the parties, we acquired
exclusive rights to Skye's drug delivery technology, GEOMATRIX(TM), and
marketing and royalty rights to pharmaceutical sales using GEOMATRIX(TM)
in the Peoples Republic of China, Taiwan, and Hong Kong.
In October 2003, we completed the acquisition of Doctors For Nutrition,
Inc. ("DFN"). 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. We currently distribute GreensFIRST(R) through health
practitioner offices throughout the United States.
F-7
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Note 2 - Summary of Significant Accounting Policies
The consolidated financial statements include Vital Living, Inc. and its
wholly owned domestic and foreign subsidiaries (collectively, "We","Vital
Living" or the "Company"). Consolidated financial statements are financial
statements of a parent company and its subsidiaries presented as if the
entities were a single economic unit. Although the assets, liabilities,
revenues, and expenses of all entities are combined to provide a single
set of financial statements, certain eliminations and adjustments are
made. These eliminations are necessary to ensure that only arm's-length
transactions between independent parties are reflected in the consolidated
statements; transactions between related parties are eliminated.
Going concern
The accompanying consolidated financial statements have been prepared
assuming we will continue on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. We have suffered recurring losses from operations,
have a working capital deficit, and depend on funding from sources other
than operations. Since inception, we have been required to raise
additional capital by the issuance of both equity and debt securities.
There are no commitments from funding sources, debt or equity, in the
event that cash flows are not sufficient to fund ongoing operations or
other cash commitments as they come due. These factors raise substantial
doubt about our ability to continue as a going concern. We will be
required to raise additional capital in the near term through offerings of
securities to fund our operations and will attempt to continue raising
capital resources if we do not begin to generate revenue sufficient to
maintain ourselves as a viable entity. No assurance can be given that such
financing will be available or, if available, that it will be available on
commercially favorable terms. Moreover, available financing may be
dilutive to current investors.
We are in the process of improving, acquiring, or developing products for
sale that would generate revenue to sustain our operations, as well as
consolidating our operations in order to gain cost synergies and
efficiencies. If successful, these actions will serve to mitigate the
factors that have raised doubt about our ability to continue as a going
concern and increase the availability of resources for funding of our
current operations and future market development. In addition, in March
2004, we entered into a purchase agreement with investors and sold 250,000
shares of our common stock at $1.00 per share with rights to receive a
portion of net revenues, as defined therein, from the sale of X-Fat(R).
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets or
liabilities that might be necessary should we be unable to continue as a
going concern.
Financial instruments
Our financial instruments consist of cash, receivables, payables, and
long-term debt. The carrying amount of cash, receivables, and payables
approximates fair value because of the short-term nature of these items.
The carrying amount of long-term debt as of December 31, 2004 approximates
fair value because interest rates and debt discounts are reflective of
market rates.
Concentrations of credit risk
Financial instruments that potentially subject us to concentrations of
credit risk consist principally of cash. At various times during the year,
our cash balances may be in excess of federally insured limits. We
maintain our cash, which consists primarily of demand deposits, with
high-quality financial institutions, which we believe limits this risk.
Acquisitions
We account for acquisitions in accordance with Statement of Financial
Accounting Standards, ("SFAS") No. 141 "Business Combinations" and
accordingly apply the purchase method of accounting for all business
combinations initiated after June 30, 2001 and separately identify
recognized intangible assets that meet the criteria and amortize these
assets over their determinable useful lives.
Cash and cash equivalents
Our cash equivalents consist primarily of any financial instrument with
maturities of three months or less and cash investments with high-quality
financial institutions. Our investment policy limits the amount of credit
exposure to any one financial institution.
F-8
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Investments in marketable securities
Investments in marketable securities consist of corporate equity
securities which are stated at market value. The Company currently
classifies all investment securities as available-for-sale. Unrealized
gains and losses on such securities, net of the related income tax effect,
are excluded from earnings and report as a separate component of
stockolders' equity until realized. Realized gains and losses are included
in earnings and are derived using the specific identification method for
determining the cost of the securities sold.
Investments in marketable securities consisted of the following at
December 31, 2004:
Fair
Cost Gains Losses Value
----------------------------------------------------------
Equity securities $ 1,070,000 $ -- $ (897,000) $173,000
During the year ended December 31, 2004, the Company invested in common
stock of Langely Park, an entity traded on the London stock exchange. The
Company acquired these shares by issuing 5,000,000 shares of its common
stock valued at eh $0.21 per share trading value on the date the Company
made the investment. On the basis of the trading value of Langely at
December 31, 2004 the Company has written down its investment to the
estimated fair value and the unrealized loss of $897,000 is recorded in
other comprehensive income.
Accounts Receivable
The Company determines any required allowance by considering numerous
factors including the length of time trade accounts receivable are past
due and the Company's previous loss history. Receivables are considered
past due when they are unpaid greater than 90 days. The Company records
and allowance for accounts when they become uncollectible, and payments
subsequently received on such accounts are reflected as a reduction of
that allowance. The allowance for doubtful accounts was $437,000 at
December 31, 2004.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method)
or market and consist of products available for sale or raw materials. At
December 31, 2004 inventories for resale were $141,000 net of a reserve of
$379,000. During the year ended December 31, 2004, the Company provided an
allowance of $325,000 for inventory related to its X-Fat product line.
Property and equipment
Property and equipment consists of office furniture, fixtures, and
equipment, including computer hardware and software and various leasehold
improvements. We record Property and equipment at cost. We provide for
Depreciation on a straight-line basis over the lesser of correlating lease
terms or estimated useful lives ranging from three to ten years.
Goodwill
Goodwill represents the excess of the aggregate price paid by us over the
value of the net equity acquired in an acquisition. In accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets," we no longer
required to amortize goodwill, but are required to review goodwill for
impairment at least annually whenever events indicate that the carrying
amount of the asset may not be recoverable in accordance with SFAS No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets." As of
December 31, 2004, events had occurred that would indicate goodwill had
been impaired and, accordingly, an impairment loss was recorded (see Note
5).
Intangible assets
Our other intangible assets include trademarks, patents, formulations,
customer lists, and various marketing and license agreements. We amortize
intangible assets on a straight-line basis over the lesser of the
correlating agreements or estimated useful lives ranging from two to 14
years.
F-9
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Long-lived assets
We review long-lived assets and identifiable other intangible assets to be
held and used for impairment at least annually or whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. We evaluate goodwill and other intangible assets arising from
various acquisitions for impairment on at least an annual basis or when
events occur that would indicate that impairment had occurred. We measure
impairment by comparing the carrying value of the long-lived assets to the
estimated undiscounted future cash flows expected to result from use of
the assets and their eventual disposition. As of December 31, 2004, events
had occurred that would indicate goodwill and other intangibles had been
impaired; accordingly, an impairment loss was recorded (see Note 5).
Deferred charges
We capitalize costs associated with the issuance of debt instruments. We
amortize these costs are amortized on a straight-line basis over the term
of the debt instruments. Amortization expense was $765,000 and $231,000
for the years ended for the year ended December 31, 2004 and 2003
respectively. These amounts are recorded as a component of interest
expense.
Accounting estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires us
to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Some of the more significant estimates required to be made us include the
valuation of inventory, intangible assets, and equity based transactions.
Actual results could differ from such estimates.
Income taxes
We account for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes." Under the asset and liability approach specified by
SFAS No. 109, a deferred tax asset or liability is determined based on the
difference between the financial statement and tax basis of assets and
liabilities as measured by the enacted rates that will be in effect when
these differences reverse. Deferred tax assets are recorded at their
likely realizable amounts.
Revenue recognition
We recognize revenue when products are shipped to customers. Our return
policy provides for an unconditional guarantee to our customers for a full
refund of any unused product, including product that has exceeded its
expiration date. All returns are subject to quality assurance reviews
before acceptance. We have determined that product returns are immaterial.
However, we provide an allowance for returned product as a reduction of
revenue based on estimates and historical experience with individual
customers. We offer, from time to time, volume and promotional discounts
on the products we sell. We record these discounts as a reduction of
revenue.
Comprehensive income
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
the reporting and display of comprehensive income and its components
within the financial statements. Other comprehensive income consists of
charges to stockholders' equity, other than contributions from or
distributions to stockholders, excluded from the determination of net
income. Our other comprehensive income consists of unrealized gains and
losses on available for sale securities and foreign currency translations.
We do not provide for U.S. income taxes on foreign currency translation
adjustments since we do not provide for such taxes on undistributed
earnings of foreign subsidiaries.
Foreign currency translation
Financial statements of our foreign subsidiary are prepared using the
local currency as the functional currency. Translation of these foreign
operations to U.S. dollars occurs using the current exchange rate for
balance sheet accounts and a weighted average exchange rate for results of
foreign operations. Translation gains or losses are recognized in
"accumulated other comprehensive income (loss)" as a component of
stockholders' equity in the accompanying consolidated balance sheets.
F-10
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Research and development
We expense research and development costs relating to both present and
future products when incurred. Research and development costs amounted to
$1,180,000 and $411,000 for the years ended December 31, 2004 and 2003,
respectively.
Net loss per share
We account for earnings per share ("EPS") in accordance with SFAS No. 128,
"Earnings Per Share," which establishes the requirements for presenting
EPS. SFAS No. 128 requires the presentation of "basic" and "diluted" EPS
on the face of the income statement. Basic earnings per share begins with
income (loss) applicable to common stockholders (net income (loss) less
preferred stock dividends) and is based on the weighted average number of
common shares outstanding during each period presented. Diluted EPS
assumes the exercise of all stock options and warrants having exercise
prices less than the average market price of the common stock using the
treasury stock method. For the purpose of diluted earnings per common
share, and only if such calculation results in dilution, preferred stock
dividends will not reduce earnings; however, the weighted average common
shares outstanding would increase representing the amount of common shares
into which such preferred stock is currently convertible. During the years
ended December 31, 2004 and 2003, we reported a net loss from operations;
thus the effects of dilutive securities were anti-dilutive, rendering
basic and diluted loss per share the same. Convertible preferred stock,
warrants, and options to purchase common stock are included as common
stock equivalents only when dilutive. Potentially dilutive securities
excluded from the loss per share calculation for the year ended December
31, 2004 are as follows:
Convertible preferred stock 619,000
Convertible debt 19,283,000
Warrants 815,000
Employee options 401,000
----------
21,118,000
==========
Stock based compensation
We account for our stock option plans in accordance with the provisions of
SFAS No. 123, "Accounting for Stock Based Compensation," as amended by
SFAS No. 148 "Accounting for Stock-Based Compensation-Transition and
Disclosure." SFAS No. 123 permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to apply the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations
and provide pro forma net income or loss and pro forma earnings per share
disclosures for employee stock option grants as if the fair-value-based
method defined in SFAS No. 123 had been applied.
We are subject to reporting requirements of FASB Financial Interpretation
No. ("FIN") 44, "Accounting for Certain Transactions Involving Stock
Compensation," which requires a non-cash charge to deferred compensation
expense if the price of our common stock on the last trading day of each
reporting period is greater than the exercise price of certain stock
options. After the first such adjustment is made, each subsequent period
is adjusted upward or downward to the extent that the trading price
exceeds the exercise price of the options.
We account for our incentive plans under the recognition and measurement
principles of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock issued to Employees," and related Interpretations.
No stock-based employee compensation (except that related to re-priced
warrants in accordance with FIN No. 44) is reflected in net loss, as all
options and warrants granted had an exercise price equal to or below the
market value of the underlying common stock at the date of grant.
The fair value of our stock-based awards to employees was estimated using
the Black-Scholes option-pricing model. The Black-Scholes model was
developed for use in estimating the fair value of traded options that have
no vesting restrictions and are fully transferable. In addition, the
Black-Scholes model requires the input of highly subjective assumptions,
including the expected stock price volatility. Because our stock-based
awards have characteristics significantly different from those of traded
options and because changes in the subjective input can materially affect
the fair value estimate, in our opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of our
stock-based awards to employees. The fair value of our stock-based awards
(including re-priced warrants discussed above) was estimated assuming no
expected dividends and the following weighted average assumptions for the
years ended December 31:
F-11
VITAL LIVING, INC
Notes to Consolidated Financial Statements
2004 2003
---- ----
Expected life in years 3.00 4.00
Expected stock price volatility 37% 33%
Risk-free interest rate 3.72% 3.14%
Average fair value per option/warrant $0.59 $0.68
For pro forma purposes, the estimated fair value of our stock-based awards
to employees is amortized over the respective vesting periods.
The following table illustrates the effect on net loss and net loss per
share if we had applied the fair value recognition provisions of Statement
of Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," to our stock-based employee compensation for the years
ended December 31:
· Enlarge/Download Table
2004 2003
------------ ------------
Net loss - as reported $(28,172,000) $(27,935,000)
Add:
Stock based compensation included
in determination of net loss 170,180 1,526,000
Deduct:
Stock based employee compensation
determined under fair value based
method for all awards, net of related
tax effects (54,083) (1,356,000)
------------ ------------
Net loss - pro forma (28,055,903) (27,765,000)
Deemed dividend associated with beneficial
conversion of preferred stock (126,000) (1,643,000)
Series A Preferred stock dividend (300,000) (585,000)
------------ ------------
Net loss available to common stockholders
- pro forma $(28,481,903) $(29,993,000)
------------ ------------
Basic and diluted loss per share - as reported
Basic and diluted loss per share - as reported $ (0.43) $ (0.87)
Basic and diluted loss per share available to
common stockholders - as reported $ (0.44) $ (0.94)
Basic and diluted loss per share - pro forma $ (0.44) $ (0.87)
Basic and diluted loss per share available to
common stockholders - pro forma $ (0.44) $ (0.94)
Weighted average basic and diluted common stock outstanding 64,878,000 31,992,000
============ ============
The Company granted warrants to its CEO in 2003. These warrants were
subsequently re-priced. As a result of this re-pricing, the award is now
accounted as a variable award. Due to a decline in the trading price of
the Company's common stock, there was a reduction in personnel costs of
$1,468,000 for the adjustments of the variable award.
Recent accounting pronouncements-
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity." SFAS No.
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were classified
as equity. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and otherwise is effective at the
beginning of the first interim period beginning after September 15, 2003.
The adoption of SFAS No. 150 did not have a material effect on our
company.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging
activities under SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement is effective for contracts entered
into or modified after September 30, 2003. The adoption of SFAS No. 149
did not have a material effect on our Company.
F-12
VITAL LIVING, INC
Notes to Consolidated Financial Statements
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." In general, a variable interest entity is a
corporation, partnership, trust, or any other legal entity used for
business purposes that either (a) does not have equity investors with
voting rights or (b) has equity investors that do not provide sufficient
financial resources for the entity to support its activities. FIN 46
requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the investors in the entity 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
consolidation requirements of FIN 46 apply immediately to variable
interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim
period beginning after September 15, 2003. Certain of the disclosure
requirements apply to all financial statements issued after January 31,
2003, regardless of when the variable interest entity was established.
In December 2003, the FASB issued a revised Interpretation No. 46 ("FIN
46R"), "Consolidation of Variable Interest Entities." FIN 46R requires
companies to consider whether entities, in which they have financial
interests, lack sufficient equity at risk to permit that entity to finance
its activities without additional subordinated financial support and to
consolidate those entities where the company would absorb the majority of
any losses. The consolidation requirements are effective for interim and
annual periods ending after March 15, 2004. The adoption of FIN 46 and FIN
46R did not have a material effect on our Company.
In December 2004 the FASB issued a revised Statement 123 (SFAS 123R),
"Accounting for Stock-Based Compensation" requiring public entities to
measure the cost of employee services received in exchange for an award of
equity instruments based on grant date fair value. The cost will be
recognized over the period during which an employee is required to provide
service in exchange for the award -- usually the vesting period. The
effective date for this statement is as of the first interim period that
begins after June 15, 2005. The Company is evaluating the impact of this
new pronouncement and has not yet estimated the effect of implementation
on the Company's financial statements.
Note 3 - Mergers and Acquisitions
During 2004 and 2003, we acquired three companies. In each transaction,
common stock was used as consideration and the excess of the purchase
consideration over the net assets or obligations assumed, after allocation
to respective identifiable intangible assets, was recorded as goodwill as
summarized below. A description of each business combination follows.
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ENI DFN WWS
------------ ------------ ------------
Purchase price paid $ 40,877,000 $ 2,651,000 $ 805,000
Less:
Working capital (assets) liabilities, net 405,000 (314,000) 0
Property and equipment, net (1,000) (7,000) 0
Intangibles, net (43,059,000) 0 0
Plus:
Debt obligations assumed 150,000 0 0
Acquisition costs 1,628,000 91,000 0
------------ ------------ ------------
Goodwill at purchase date 0 2,421,000 805,000
Less: Impairment at December 31, 2004 0
------------ ------------ ------------
Goodwill at December 31, 2004 $ -- $ 2,421,000 $ 805,000
------------ ------------ ------------
E-Nutraceuticals, Inc.
On August 20, 2003, we acquired 100% of the outstanding common stock of
ENI, a privately held Delaware corporation. The acquisition net purchase
price of $41.3 million consisted of 31,500,000 shares of our common stock.
Included in the purchase price was the cost of 251,000 options issued in
exchange for existing ENI options, which were estimated to have a fair
value of $254,000. Other acquisition costs include 1,150,000 shares of
common stock valued at $1.30 per share or $1,495,000 issued to financial
advisors and $133,000 of legal and other related costs paid to
professional advisors.
F-13
VITAL LIVING, INC
Notes to Consolidated Financial Statements
The total number of shares issued in this transaction, including the
issuance of the Series D Preferred Stock (see Note 8), was 40% of the
total number of shares outstanding on a fully diluted basis, which
contemplates that all warrants, options, and various classes of preferred
stock are converted to common stock.
The original recording of the ENI acquisition was based on a third-party
business valuation and purchase price allocation provided by a reputable,
independent, full-service investment bank. The primary assets of ENI
included the intangible value associated with the worldwide patent rights
to X-Fat(R), a dietary supplement used in weight loss; licensing rights to
GEOMATRIX(R), a time-released drug delivery technology; and marketing
rights to pharmaceutical sales using GEOMATRIX(R) in the Peoples Republic
of China, Taiwan, and Hong Kong. The purchase price allocation resulted in
$43,059,000 being assigned to the value of these three agreements. The
amortization period for these agreements was approximately 14 years for
the GEOMATRIX and X-fat agreements and approximately two years for the
marketing agreement.
During 2004, based our continually monitoring of the fair value of both
the goodwill and intangible assets recorded as a result of the ENI
acquisition, certain intangible asset impairment determinations were
concluded and during 2004, $15.0 million was deemed impaired.
Doctors For Nutrition, Inc.
On October 14, 2003, we acquired 100% of the outstanding common stock of
DFN, a privately held California corporation. The acquisition purchase
price of $2.7 million consisted of 3,100,000 shares of our common stock.
Included in the acquisition costs were 50,000 shares of common stock
issued to financial advisors. Goodwill recorded in this transaction is not
deductible for federal income tax purposes. During 2004 an additional
1,400,000 shares of our common stock were granted to the previous owners
of Doctors for Nutrition with a value of $308,000. This amount was
recorded as an addition to Goodwill.
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. As of December 31, 2004, WWS was owned equally by us
and WWI. The operating agreement gave us overall operating responsibility.
WWS is consolidated within the financial statements of the Company at
December 31, 2004. 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
strategies, which included Dream Protein(R). WWS has developed a unique
marketing strategy that channels products directly to health
practitioners. We paid WWI $805,000 for its 50% interest in WWS. The
purchase price consisted of 3,000,000 shares of our common stock along
with a $25,000 cash payment. Prior to forming WWS, WWI had no prior
operating history. During 2004, WWS had total revenue of $400,000.
Pursuant to the WWS operating agreement, we are responsible for all
operating loss incurred. Accordingly, we have not reported any minority
interest during 2004. During February 2005, we acquired 100% interest in
WWS by issuing an additional 1,000,000 shares of common stock. In
conjunction with the 100% acquisition of WWS and certain other marketing
and operation strategic productivity decisions, we have consolidated the
operations of WWS into DFN during the first quarter of 2005.
Acquisition pro formas
The unaudited pro forma consolidated results of operations for the years
ended December 31, 2004 and 2003 have been prepared assuming the
acquisitions of ENI, WWS and DFN and the corresponding issuance of
37,999,000 of common stock issued as consideration in these acquisitions
as if they, had occurred as of January 1, 2002. Thus, the unaudited pro
forma consolidated results of operations include the following periods of
operation:
o Vital Living, Inc. for the years ended December 31, 2004 and 2003.
o ENI for the period from April 1, 2003 through August 20, 2003 (date
of acquisition) and the year ended March 31, 2003.
o DFN for the period from January 1, 2003 through October 14, 2003
(date of acquisition) and the year ended December 31, 2002.
Presented below are the unaudited pro forma consolidated results of
operations for the years ended:
F-14
VITAL LIVING, INC
Notes to Consolidated Financial Statements
December 31,
----------------------------
2004 2003
------------ ------------
Revenue $ 4,162,000 $ 1,679,000
Cost of goods sold 2,802,000 931,000
------------ ------------
Gross Profit 1,360,000 748,000
Operating expenses and other 27,357,000 28,247,000
------------ ------------
Net loss (25,997,000) (27,499,000)
Basic and diluted loss per share available to (0.40) (0.85)
common stockholders
NOTE 4 - PROPERTY AND EQUIPMENT-
Property and equipment consists of the following at December 31:
2004
---------
Computer hardware and software $ 132,000
Office Furniture and fixtures 39,000
Machinery and equipment 32,000
Leasehold improvements 0
---------
Gross property and equipment 203,000
Less accumulated depreciation (133,000)
---------
Net property and equipment $ 70,000
---------
Depreciation expense was $37,000 for 2004.
F-15
VITAL LIVING, INC
Notes to Consolidated Financial Statements
NOTE 5 - INTANGIBLE ASSETS-
Intangible assets consisted of the following at December 31:
2004
-----------------------------------------
Gross Carrying
Amount Accumulated
(net of impairment) Amortization
------------------- -------------------
License agreement - Geomatrix $ 24,082,000 $ (3,298,000)
Marketing agreement 2,577,000 (2,577,000)
Trademarks and patents 20,000 (5,000)
------------------- -------------------
Total amortizable intangible assets $ 26,679,000 $ (5,880,000)
------------------- -------------------
Unamortizable intangible assets
Goodwill $ 3,226,000
Estimated Accumulated
Amortization Amortization
Expense Expense
------------------- -------------------
For the year ended December 31, 2005 $ 2,429,000 $ 8,309,000
For the year ended December 31, 2006 2,429,000 10,738,000
For the year ended December 31, 2007 2,429,000 13,167,000
For the year ended December 31, 2008 2,429,000 15,596,000
For the year ended December 31, 2009 2,429,000 18,025,000
For the year ended December 31, 2010 2,429,000 20,454,000
For the year ended December 31, 2011 2,429,000 22,883,000
For the year ended December 31, 2012 2,429,000 25,312,000
For the year ended December 31, 2013 1,367,000 26,679,000
------------------- -------------------
Totals $ 20,799,000 $ 26,679,000
------------------- -------------------
Impairment Analysis
As required by SFAS No. 142, we continually test goodwill or other
intangibles created by each acquisition for impairment. These assets are
tested for impairment at least annually, or upon occurrence of such events
that may indicate impairment exists. We revised the earnings forecast for
the next five years and evaluated the change in fair value of each
component of goodwill using the expected present value of future cash
flows. Impairment was due to a combination of factors, including
acquisition price, increased market competition, and operating
performance. As result of this process, during 2004, we determined that
certain intangible assets were impaired. Accordingly, during 2004, we
recorded impairment charges totaling $14,976,000 in 2004. The individual
charges of $9,545,000, $1,727,000 and $3,704,000 are related to the
Geomatrix licensing agreement, the ENI China marketing agreement and the
X-Fat marketing agreement, respectively.
As a result of our review, the remaining goodwill was deemed to be fairly
stated at December 31, 2004. The goodwill of $3,226,000 is attributable to
previous acquisitions as follows:
F-16
VITAL LIVING, INC
Notes to Consolidated Financial Statements
DFN $2,421,000
WWS 805,000
----------
Total $3,226,000
==========
Our primary intangibles, other than goodwill discussed above, with a gross
inttangible value of $26,679,000 at December 31, 2004, were obtained in
the 2003 acquisition of ENI and consist of a licensing agreement for the
licensing of the GEOMATRIX(R) technology and certain marketing rights to
pharmaceutical sales using GEOMATRIX(R) in the Peoples Republic of China,
Taiwan, and Hong Kong.
In order to test for impairment of these long-lived assets, fair value was
determined based on a valuation study performed by an independent third
party that considered primarily the discounted cash flow and guideline
company method. As a result of this review, none of the remaining assets
are deemed to be impaired.
NOTE 6 - LONG-TERM DEBT
Between October and December 2003, we borrowed an aggregate principal
amount of $1.5 million in the form of Senior Convertible Notes (the
"Bridge Notes"), due April 28, 2004, in a private placement, subject to
certain registration rights, generating cash proceeds of approximately
$1,300,000, net of cash debt issue costs of $213,600. Principal and
interest at a rate of 10% per annum is payable in a single installment on
the maturity date in cash or shares of common stock, at our discretion, at
a price equal to $1.00 per share. As part of the transactions, Bridge Note
holders received 3,060,000 and 1,530,000 warrants to purchase our common
stock at exercise prices of $1.00 and $1.50 per share, respectively. The
fair value of these warrants of $988,000 has been recorded by us and
charged immediately to interest expense as the warrants were fully vested
and the related notes fully convertible at the date of issuance. In
accordance with the terms of these Bridge Notes, because we consummated a
debt financing before the maturity date, the entire principal amount of
the notes plus accrued interest totaling $1,548,000 has been converted
into the debt securities offered in the December 2003 Secured Notes.
Debt issue costs related to this transaction of $655,000, including cash
fees of $214,000, common stock issued valued at $298,000, and the fair
value associated with warrants issued of $144,000 as discussed in Note 9,
was recorded in deferred debt issuance costs, net of amounts charged to
interest expense during the year ended December 31, 2004 totaling $766,000
before refinancing. The market value of our common stock on the dates the
Bridge Notes were issued ranged from $1.28 - $1.52 per share. In
accordance with EITF 98-5, as amended by EITF 00-27, because the
convertible debt was sold at a price less than market value, a beneficial
conversion to holders of the Bridge Notes occurred. Accordingly, a
beneficial conversion amount of $542,000 was recorded to additional
paid-in-capital and a corresponding amount recorded as a debt discount and
subsequently recorded as interest expense when converted as described
above.
In December 2003, we borrowed an aggregate principal amount of
approximately $4.58 million in the form of Senior Secured Convertible
Notes (the "Secured Notes"), due December 17, 2008, in a private
placement, subject to certain registration rights, thereby converting the
Bridge Notes as described above, generating cash proceeds of $2.5 million,
net of cash debt issue costs of $538,000. At time of issuance the Secured
Notes bore interest at a rate of 12% per annum, 8% of which is payable
semi-annually in cash each June and December, while 4% per annum could be
paid, at our discretion, in cash or our common stock at a price equal to
the ten-day average trading price of our common stock five business days
prior to the relevant interest payment date. A total of $550,000, or an
amount equal to the first two semi-annual interest payments at 12%, was
placed in an interest bearing escrow account at December 31, 2003 and was
recorded in Prepaid Expenses and Other Current Assets. In October 2004, we
agreed with the holders of the Secured Notes and warrants to reduce the
conversion price and exercise price of those securities to $0.25 per
share. Two noteholders converted their notes as of December 31, 2004.
There was no expense recorded relative to the reduction in the conversion
price. The reduction of the conversion price is permanent and there was no
time limit placed on the reduced conversion price, therefore it was
determined not to be a an inducement to convert as that term is defined in
Statement of Financial Accounting Standards No. 84 Induced Conversions of
Convertible Debt . In exchange for this reduction:
We agreed to include the additional shares of common stock that are now
issuable upon conversion of the outstanding Secured Notes as a result of
the reduction in the conversion price in the next registration statement
we file with the Securities and Exchange Commission ("New Registration
Statement"). The shares of common stock originally convertible under the
Secured Notes are registered for resale under our Registration Statement
on Form SB-2 (SEC File No. 333-111921) ("Registration Statement"), which
was declared effective by the SEC on August 13, 2004; We are now entitled
to pay all 12% interest due on the Secured Notes in either cash or shares
of our common stock, at our sole option, commencing with the interest
payment due in December 2004. We were originally required to pay the 12%
interest on the senior convertible promissory notes at the rate of 8% per
annum in cash and had the option to pay the remaining interest at the rate
of 4% per annum in cash or shares of common stock. The shares of common
stock representing the 4% interest payments are registered for resale
under the Registration Statement. We have agreed to include the additional
shares of common stock representing the 8% interest payments in the New
Registration Statement; and
F-17
VITAL LIVING, INC
Notes to Consolidated Financial Statements
o All penalties that we were required to pay as a result of our
failure to have the Registration Statement declared effective by
April 15, 2004 will be payable by our in shares of common stock
("Penalty Stock") at a price equal to $0.258. Such shares will be
included on the New Registration Statement.
We may redeem the Secured Notes commencing December 15, 2004, provided the
ten-day average trading price of our common stock prior to the redemption
is at least $3.00 per share. The Secured Notes are collateralized by our
assets, have priority in right of payment over all our indebtedness, and
include certain provisions related to change in control, reorganization,
recapitalization, and other adjustments. In addition, Secured Note holders
received 4,588,000 warrants to purchase shares of common stock at an
exercise price of $1.00 per share. The fair value of these warrants of
$1,084,000 was recorded and previously charged immediately to interest
expense as the warrants were fully vested and the related notes fully
convertible at the date of issuance. As discussed in Note 2, we have
restated our financial results as of December 31, 2003 to record a debt
discount of $1,066,000, net of accumulated accretion of $18,000 of
interest expense, in accordance with EITF 00-27 and will amortize the
remaining discount over the life of the Secured Notes.
Debt issue costs related to the Secured Notes of $741,000, including cash
fees of $330,000 and the value associated with warrants issued of $167,000
as discussed in Note 9, is recorded in deferred debt issuance costs.
Amounts charged to interest expense during the year ended December 31,
2004 totals $255,000 and includes $244,000 of cash and the fair value of
warrants issued in conjunction with the refinancing of the Bridge Notes
charged to expense in the period incurred. The market value of our common
stock on the date the Secured Notes were issued ranged from $1.15 - $1.23
per share. In accordance with EITF 98-5, as amended by EITF 00-27, because
the convertible debt was sold at a price less than market value, a
beneficial conversion to holders of the Secured Notes occurred.
Accordingly, a beneficial conversion amount of $1,648,000 was recorded and
additional paid-in-capital and a corresponding amount was previously
recorded by us to interest expense, as the debt is immediately convertible
at the option of the debt holder. As discussed in Note 2, we have restated
our financial results as of December 31, 2003 to record a debt discount of
$1,620,000, net of accumulated accretion of interest expense of $27,000,
in accordance with EITF 00-27 and will amortize the remaining discount
over the life of the Secured Notes.
In connection with our acquisitions, we assumed certain of the acquired
companies' long-term debt , the terms of which are described further
below. Long-term debt consists of the following at December 31:
Secured Notes
$4,286,000 Secured Notes; maturity December 2008;
interest at 12% per annum (may be paid in cash or
common stock); principal due at December 17, 2008 $4,286,000
Small Business Administration Loan
$650,000 note payable to bank; maturity December 14,
2008; variable interest at prime plus 1.5% (6.75% at
December 31, 2004); monthly principal and interest
payments of $10,000; secured by assets of the company 401,000
----------
Total 4,687,000
Less current portion 401,000
Less unamortized debt discount 2,140,000
----------
Net long-term debt $2,146,000
----------
F-18
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Aggregate maturities of long-term debt for the subsequent five years
ending December 31 are as follows:
2005 $ 401,000
2006 --
2007 --
2008 4,286,000
----------
Total $4,687,000
----------
NOTE 7 - COMMITMENTS AND CONTINGENCIES
From time to time, we are party to a variety of legal proceedings arising
out of the normal course of business, including cases in which damages may
be sought. We believe we have a valid defense and are vigorously defending
any pending litigation. While the results of litigation cannot be
predicted with certainty, we do not believe that the outcome of these
proceedings will have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
We lease office space under non-cancellable operating leases that expire
through 2007. Future minimum lease payments under non-cancellable
operating leases for the subsequent five years ending December 31 are
approximately as follows:
2005 $ 82,000
2006 82,000
2007 27,000
2008
2009
--------
--------
Total $191,000
========
Total rent expense was $126,000 and $161,000 for the years ended December
31, 2004 and 2003, respectively.
In connection with the ENI Acquisition, we became party to a Development
and License Agreement and subsequent Amendment (collectively, the "ENI
Agreements") with SkyePharma, PLC ("Skye"). The ENI Agreements provide for
certain product identification and license exclusivity rights on
nutraceutical products utilizing Skye's patented drug-delivery
technologies, GEOMATRIX(R), in exchange for various commitments as
follows:
o In consideration for the ENI Agreement and development services
through 2004 and contingent on additional debt or equity financing
of $3.0 million, we are obligated to pay Skye $1.0 million in four
equal installments beginning January 1, 2004 and each first day of
each calendar quarter thereafter.
o We may retain our right to identify new product candidates and
license them exclusively through the later of December 31, 2017 or
the expiration of Skye's corresponding patents, provided at least
four such product candidates are identified us and approved by Skye,
or Skye receives $1.0 million in product development fees, per
calendar year beginning January 1, 2005.
o We are obligated to pay Skye royalties equal to 10% of net sales
generated from the products, as defined, quarterly in arrears.
Should we fail to meet the above commitments, product selection and
license exclusivity rights will terminate at the end of the respective
calendar year without effect on rights attained in prior years. As of
December 31, 2004, we had failed to make payments to Skye totaling
$750,000 related to the ENI Agreement. We are in process of renegotiating
the related terms and payments in order to maintain our rights under the
ENI Agreements despite the default. These amounts are included in accrued
and other liabilities.
The ENI Agreements also appointed us as Skye's exclusive marketing partner
to pharmaceutical companies for licensing of all of Skye's technology in
the Chinese Territories, as defined therein. We are eligible to receive 5%
of all gross revenues resulting directly from our marketing efforts.
Receipt of such royalties is contingent, however, on such revenues
reaching or exceeding $1.0 million, or in aggregate $2.0 million, by
August 2004 and 2005, respectively. Should these revenue goals not be
achieved, our exclusive marketing rights and Skye's royalty obligation on
newly established sales will terminate, except, that royalties on on-going
gross revenues resulting directly from our marketing efforts prior to the
loss of such rights will continue to be due and payable.
F-19
VITAL LIVING, INC
Notes to Consolidated Financial Statements
In connection with the ENI Acquisition, we became party to a Licensing
Agreement, granting us an exclusive, worldwide, perpetual license to
dietary supplements containing chitosan, gor X-Fat(R) (the "X-Fat
License"). The X-Fat License requires us to pay royalties equal to 10% of
the first $1.0 million of net product sales and 5% of such net product
sales in excess of $1.0 million, up to a maximum royalty of $1,250,000 per
fiscal year. We are required to pay advanced royalties of $15,000 per
quarter to be credited against future royalty payments. At December 31,
2004, we prepaid royalties of $307,000.
NOTE 8 - CAPITAL STOCK
In December 2003, the board of directors and a majority of stockholders
approved an amendment to our Articles of Incorporation to increase the
number of authorized shares of common stock from 100,000,000 to
150,000,000, par value $.001 per share. We are currently authorized to
issue up to 50,000,000 shares of preferred stock, par value $.001 per
share. At December 31, 2004, our capital stock consisted of the following:
Issued &
Capital Stock Par Value Authorized Outstanding
------------- --------- ---------- -----------
Common Stock $ 0.001 150,000,000 99,016,000
Preferred Stock $ 0.001 3,000,000 1,500,000
Common Stock
Each holder of common stock is entitled to one vote per share of held on
all matters submitted to a vote of our stockholders. Holders of our common
stock have no preemptive rights and have no rights to convert their common
stock into any other securities. In the event of dissolution or
liquidation or the winding-up of our company, holders of our common stock
will be entitled to share ratably in all assets remaining after payment of
all liabilities, subject to any preferential payments to the holders of
any Secured Notes and preferred stock then outstanding. Although we are
restricted from paying cash dividends under the terms of the Secured
Notes, holders of common stock are entitled to receive ratably such
dividends as may be declared by our board of directors out of funds
legally available therefore. All of our outstanding common shares are
fully paid and non-assessable.
During 2004, 791,000 shares were retuned to us as required by the term of
the ENI acquisition agreement. Additionally, the Company received
1,850,000 shares valued at $555,000 that were returned in connection with
the agreement to unwind the COF acquisition.
Common Stock Issued to an Employee
During the 2004 and 2003 we issued 700,000 and 1,300,000 shares of common
stock to a former employee valued at $581,000 and $6,000,000 million as
consideration for early termination of an employment contract during 2004
and compensation related to the closing for various 2003 acquisitions,
respectively.
Common Stock Issued for Services and Settlements
In order to fund operating activities, we, from time to time, issue common
stock in lieu of cash in exchange for goods or services.
During the years ended December 31, 2004 and 2003, we issued 653,000 and
1,425,000 shares of restricted common stock with a value of $754,000 and
$1,716,000 respectively, in consideration for consulting, investment
banking, or other services rendered, compensation, release of debt, and
various other claims that parties may have had against the Company.
Additionally, during 2004, we issued 357,000 shares of our common stock
valued at 287,000 related to penalties for not having an effective
registration statement as required for the December 2003 private
placement.
During the years ended December 31, 2004 and 2003, 160,000 and 395,000
shares of common stock with a value of $47,000 and $514,000, respectively,
were issued to directors for director services and to various consultants
for various consultations and advisory services to be provided over a
period ranging from 12 months to three years. These shares were originally
capitalized as a component of equity and amortized to expense over the
vesting periods. For the years ended December 31, 2004 and 2003, $587,000
and $428,000 was amortized to expense, respectively. The value of
unamortized restricted common stock issued for services as of December 31,
2004 and 2003 was $93,000 and $390,000, respectively.
F-20
VITAL LIVING, INC
Notes to Consolidated Financial Statements
During the 2003, a total of 1,400,000 shares of common stock with an
aggregate value of $1.7 million were issued for financial advisory
services related to our various acquisitions. During 2003, 1,150,000
shares of common stock with a market value of $1.5 million were issued to
financial advisors in the ENI Acquisition, 154,000 shares of common stock
with a market value of $166,000 were issued to financial advisors in the
COF Acquisition, and 50,000 shares of common stock with a market value of
$59,000 were issued to a financial advisor in the DFN Acquisition.
During the year ended December 31, 2003, 266,000 shares of common stock
with a value of $372,000 were issued for investment banking and other
services related to private placements of both senior convertible debt and
the Series C Preferred stock. The value of the shares were capitalized as
a component of equity if associated with Series C Preferred stock private
placement ($74,000), or as deferred loan costs if associated with Senior
Convertible Debt private placements ($298,000).
Pursuant to a registration rights agreement related to a November 2002
private placement of 1,368,000 shares of common stock, we were required to
file and have declared effective a registration statement to register the
shares of common stock issued and shares that might be issued upon
exercise of the Series B Warrants and Series C Warrants from the private
placement prior to March 20, 2003. We failed to have the registration
statement declared effective by the deadline; as a result, we owed the
investors liquidated damages equal to 2% per month of the purchase price
of these securities, calculated on a pro rata basis to the date on which
the registration statement was ultimately declared effective. During 2003,
we reached an agreement with some of the investors to pay such damages in
328,000 shares of our common stock, valued at approximately $367,000.
During 2004 we issued an additional 357,000 shares valued at approximately
$287,000.
Treasury Stock
As part of a resignation agreement executed in July 2003, in which all
severance payments under a prior employment agreement were waived, 280,000
shares of restricted common stock were returned at no cost and 144,000
shares were repurchased by us at $0.50 per share from William Coppel,
former President, for total payments of $72,000 during 2003. These shares
have been returned to and recorded as treasury stock as of December 31,
2003. The 280,000 shares of common stock returned by Mr. Coppel were
recorded at par value, or $280, with a corresponding adjustment to
additional paid-in capital.
Preferred Stock
Preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by our board of directors,
without further action by stockholders, and may include voting rights
(including the right to vote as a series on particular matters),
preferences as to dividends and liquidation, conversion rights, redemption
rights and sinking fund provisions. The issuance of shares of preferred
stock could adversely affect the rights of the holders of common stock and
therefore, reduce the value of the common stock.
Series A Preferred Stock
Between February and June 2002, we sold 3,712,000 shares of 10% Series A
Preferred Stock at $1.00 per share, generating cash proceeds of
approximately $3.6 million, net of cash offering costs of $118,000.
Holders may convert their shares into a like amount of common stock at any
time after the first anniversary date of issuance and the shares will
convert by their terms after 18 months. Upon conversion, holders of Series
A Preferred Stock will receive one Series A Warrant per five preferred
shares converted to purchase one share of common stock at an exercise
price of $2.00 per share, exercisable one year from the date of issuance.
If all Series A Preferred Stock were to convert, it would require that we
issue 742,000 Series A Warrants, excluding those to be issued upon
conversion of Series A Preferred Stock issued as dividends.
Holders of Series A Preferred Stock have no voting rights, but are
entitled to various rights, preferences, and restrictions that include, a
10% cumulative dividend payable in additional shares of Series A Preferred
Stock at $1.00 per share; a preference upon a liquidation, dissolution, or
winding up of our company; and privileges upon redemption during the first
twelve months from the date of issuance equal to $1.50 per share.
The market value of our common stock on the dates Series A Preferred Stock
was sold ranged between $1.25 - $3.40 per common share. In accordance with
EITF 98-5, as amended by EITF 00-27, because the Series A Preferred Stock
was sold at a price less than market value of the underlying components of
the security, a beneficial conversion to holders of the Series A Preferred
Stock occurred. Accordingly, during 2002, we recorded a discount of $3.4
million within stockholders' equity and a corresponding amount to
preferred stock additional paid-in-capital. The Series A Preferred Stock
is convertible into common stock at the option of the holder at any time
after the first anniversary date of its issuance, thus the beneficial
conversion is amortized over a one-year period. A total of $1.1 million of
the Series A Preferred Stock discount was amortized during 2003. At
December 31, 2003, the entire amount of the Series A Preferred discount
had been amortized.
F-21
VITAL LIVING, INC
Notes to Consolidated Financial Statements
During 2003, holders of 682,000 shares of Series A Preferred Stock
converted such shares into 682,000 shares of common stock. As a condition
to conversion, we granted 136,000 warrants with an exercise price of $2.00
per share. The value of the converted Series A Preferred Stock was $1.3
million and the value of the warrants was $55,000 using the Black-Scholes
option-pricing model. Dividends are cumulative and are to be paid every
six months from the date of issuance for a total of 18 months with no
obligation to pay dividends thereafter. During June 2003, 380,000
additional shares of Series A Preferred Stock valued at $380,000 were
issued in satisfaction of dividends owed to holders of Series A Preferred
Stock and at December 31, 2003, declared and unpaid dividends of $204,000
were accrued and will be paid by the issuance of Series A Preferred Stock
for a total dividend of $585,000 (or $0.02 per share). At December 31,
2003, 3,400,000 shares of Series A Preferred Stock remained outstanding
pending the issuance of a like amount of common stock.
During 2004, the holders of the 3.4 million shares of Series A Preferred
Stock converted such shares into a like amount of shares of common stock.
As a condition of conversion, we granted 859,000 series A warrants with an
exercise price of $2.00 per share. The value of the converted Series A
Preferred Stock was $6.5 million and the value of the warrants was
$385,000 using the Black-Scholes option-pricing model. Dividends on the
Series A Preferred Stock issued in September 2002 are cumulative and are
to be paid every six months from the date of issuance for a total of 18
months with no obligation to pay dividends thereafter. During February
2004, 205,000 additional shares of Series A Preferred Stock valued at
$205,000 were issued in satisfaction of all dividends owed to holders of
Series A Preferred Stock for a cumulative dividend of $585,000.
The market value our common stock on the dates Series A Preferred Stock
was sold ranged between $1.25 - $3.40 per share. In accordance with EITF
98-5, as amended by EITF 00-27, because the Series A Preferred Stock was
sold at a price less than market value of the underlying components of the
security, a beneficial conversion to holders of the Series A Preferred
Stock occurred. Accordingly, during 2002, we recorded a discount of $3.4
million within stockholders' equity and a corresponding amount to
preferred stock additional paid-in-capital. The Series A Preferred Stock
was convertible into common stock at the option of the holder at any time
after the first anniversary date of its issuance, thus, the beneficial
conversion was amortized over a one-year period and fully amortized by
December 31, 2003. In conjunction with the conversion of the Series A
Preferred shares during 2004, $2.2 million of previously amortized
beneficial conversion was reclassified from preferred stock additional
paid-in-capital to common stock additional paid-in capital.
Series B Preferred Stock
On April 16, 2003, we sold to one investor 10 units, each consisting of
100,000 shares of non-voting 25% Series B Preferred Stock, 100,000 Series
D Warrants, and 100,000 Series E Warrants, convertible into 1,000,000
shares of Series B Preferred Stock at $1.00 per share, 1,000,000 Series D
Warrants at an exercise price of $1.30 per share, and 1,000,000 Series E
Warrants at an exercise price of $1.60 per share, generating cash proceeds
of $875,000, net of cash offering costs of $125,000. The combined fair
value at the date of grant of the Series D and Series E Warrants using the
Black-Scholes option-pricing model was $62,000.
The holder of the Series B Preferred Stock is entitled to a one-time a
dividend at a rate of 25% per annum, payable in cash or common stock on
the one-year anniversary of the issuance date with no obligation to pay
dividends thereafter. Unpaid and/or undeclared dividends are cumulative.
The total amount of dividends not declared at December 31, 2003 was
$177,000 (or $0.01 per common share) and would total $250,000 on an annual
basis (or $0.01 per common share). Each share of Series B Preferred Stock
is convertible into one share of common stock at the option of the holder
at any time after the first anniversary of the date of issuance. In
connection with this offering, 200,000 Series D Warrants with an exercise
price of $1.30 per share (fair value of $8,086) and a cash commission
equal to 12.5% of the proceeds (or $125,000) were paid to the stockholder
to facilitate the transaction, thus increasing the total offering costs to
$133,086. The Series B Preferred Stock has no voting rights, liquidation
preferences, or protective provisions.
In April 2004, 250,000 additional shares of Series B Preferred Stock
valued at $250,000 were issued in satisfaction of dividends owed to the
holder of the Series B Preferred Stock. Simultaneously, all 1,250,000
shares of Series B Preferred Stock were converted into 1,250,000 shares of
common stock.
F-22
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Series C Preferred Stock
On July 9, 2003, we sold to one investor five units, each consisting of
100,000 shares of non-voting 50% Series C Preferred Stock, 100,000 Series
D Warrants, and 100,000 Series E Warrants, aggregating 500,000 shares of
Series C Preferred Stock at $1.00 per share, 500,000 Series D Warrants at
an exercise price of $1.30 per share, and 500,000 Series E Warrants at an
exercise price of $1.60 per share, generating cash proceeds of $438,000,
net of cash offering cost of $63,000. The combined fair value at the date
of grant of the Series D and Series E Warrants using the Black-Scholes
option-pricing model was $242,000.
The holder of the Series C Preferred Stock is entitled to a two-time
dividend at the rate of 50% per annum, payable in cash or common stock on
the first and second anniversary of the issuance date with no obligation
to pay dividends thereafter. Unpaid and/or undeclared dividends are
cumulative. The total amount of dividends not declared at December 31,
2004 was $370,000... Each share of Series C Preferred Stock is convertible
into one share of common stock at the option of the holder at any time
after the first anniversary of the date of issuance.
In connection with this offering, 250,000 Series D Warrants with an
exercise price of $1.30 per share (fair value of $72,000), a cash
commission equal to 12.5% of the proceeds (or $63,000), 63,000 shares of
common stock (fair value of $74,000, or $1.18 per share), and an option to
acquire 63,000 shares of common stock exercisable at $1.00 per share (fair
value of $26,000) were granted, paid, or issued to a stockholder to
facilitate the transaction, thus increasing the total offering costs to
$234,000. The Series C Preferred Stock has no voting rights, liquidation
preferences, or protective provisions.
The market value of our common stock on the date the Series C Preferred
Stock was sold was $1.18 per share. In accordance with EITF 98-5, as
amended by EITF 00-27, because the Series C Preferred Stock was sold at a
price less than market value of the underlying components of the security,
a beneficial conversion to holders of the Series C Preferred Stock
occurred. Accordingly, during 2003, we recorded a discount of $253,000
within stockholders' equity and a corresponding amount to preferred stock
additional paid-in-capital. The Series C Preferred Stock is convertible
into common stock at the option of the holder at any time after the first
anniversary date of its issuance, thus the beneficial conversion is
amortized over a one-year period. The entire $253,000 balance was
amortized during 2004 and 2003.
Series D Preferred Stock
On August 20, 2003, concurrent with the ENI Acquisition, we sold to a
single investor 1,000,000 shares of Series D Preferred Stock at $1.00 per
share, generating cash proceeds of $815,000, net of cash offering costs of
$185,000. Each share of Series D Preferred Stock is convertible into one
share of common stock at the option of the holder at any time.
The market value of our common stock on the date the Series D Preferred
Stock was sold was $1.37 per common share. In accordance with EITF 98-5,
as amended by EITF 00-27, because the Series D Preferred Stock was sold at
a price less than market value of the underlying components of the
security, a beneficial conversion to holders of the Series D Preferred
Stock occurred. Accordingly, during 2003 we recorded a discount of
$370,000 within stockholders' equity and a corresponding amount to
preferred stock additional paid-in-capital. The Series D Preferred Stock
is convertible into common stock at the option of the holder at any time,
thus the beneficial conversion was recorded as a dividend upon issuance.
The holder of the Series D Preferred Stock is entitled to various rights,
preferences, and restrictions that include, but are not limited to:
1. Voting. The Series D Preferred Stock votes on an as-converted basis
with the common stock.
2. Dividends. The holders of the Series D Preferred Stock are entitled
to a like dividend or distribution, pro rata, should there be a cash
or property dividend or distribution to any class of common stock or
preferred stock other than the Series A Preferred Stock, determined
on an as converted basis. This does not include any dividends paid
in shares of common stock to the holders of Series B Preferred Stock
and Series C Preferred Stock outstanding as of the date of issuance.
3. Liquidation Preference. The Series D Preferred Stock is senior to
the Series B Preferred Stock and Series C Preferred Stock and the
common stock upon liquidation and is entitled to an amount equal to
the original $1.00 per share issue price plus any declared and
unpaid dividends (as adjusted for stock dividends, combinations,
splits, recapitalization, and the like with respect to such shares).
4. Redemption. We have no rights to redeem the Series D Preferred
Stock.
F-23
VITAL LIVING, INC
Notes to Consolidated Financial Statements
5. Conversion. The holders of Series D Preferred Stock have the right
to convert into common stock, at any time. Each share of Series D
Preferred Stock is convertible into one share of common stock
subject to adjustment for declared and unpaid dividends, stock
dividends, combinations, splits, recapitalization, and the like with
respect to such shares. The conversion price is initially set at
$1.00. The conversion price may be decreased at the end of two years
if the common stock is trading at a price below the conversion price
then in effect. The floor for such adjustment is $0.25 per share.
The conversion price of the Series D Preferred Stock may also be
reduced in certain situations if we issue additional options,
warrants, or rights to purchase common stock at a price below the
conversion price of the Series D Preferred Stock. In such event, the
conversion price will be decreased by multiplying the conversion
price then in effect by a fraction of which (i) the numerator will
be the number of outstanding shares of common stock on the date of
issuance of the rights plus the number of shares of common stock
which could be purchased at the then conversion price from the
aggregate offering price of the rights and (ii) the denominator will
be the shares of common stock outstanding on the date of issuance of
the rights plus the number of shares of common stock so offered for
subscription or purchase pursuant to such rights.
6. Protective Provisions. So long as any shares of Series D Preferred
Stock are outstanding, we may not, without the prior affirmative
consent or vote of the holders of at least two thirds of the
outstanding shares of the Series D Preferred Stock:
a. authorize, create, designate, establish or issue shares of,
any class or series of capital stock ranking senior to or on
parity with the Series D Preferred Stock or reclassify any
shares of common stock into shares having any preference or
priority as to dividends or assets superior to any such
preference or priority of Series D Preferred Stock; or
b. amend, alter or repeal, whether by merger, consolidation or
otherwise, our amended and restated articles of incorporation
or bylaws or the resolutions contained in the certificate of
designation of the Series D Preferred Stock and the powers,
preferences, privileges, relative, participating, optional and
other special rights and qualifications, limitations and
restrictions thereof, which would adversely affect any right,
preference, privilege or voting power of the Series D
Preferred Stock, or which would increase the amount of
authorized shares of the Series D Preferred Stock or of any
other series of preferred stock ranking senior to the Series D
Preferred Stock, with respect to the payment of dividends
(whether or not such series of preferred stock is cumulative
or non-cumulative as to payment of dividends) or liquidation.
NOTE 9 - DISCONTINUED OPERATIONS
In order to resolve certain disputes with a former employee of the COF
subsidiary, on July 9, 2004, we settled all matters via an execution of a
Settlement and Release Agreement (the "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 will 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 of COF
will assume certain liabilities of NSI as of the effective date, the
previous owners of COF will sublease the Company's facilities located in
Spanish Fork, Utah for a period of one year from the effective date, and
executive employment agreements with Robert Scott and James Jeppson
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 the $150,000 required payments under the
Agreement. As of November 15, 2004, we has not received the 2.6 million
shares of common stock back from the previous owners of COF, accordingly
we are seeking specific remedies. In September 2004, we were served with a
final demand notice from the Internal Revenue Service ("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 for us to avoid any future 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.
On September 30, 2004, MAF entered into an agreement to sell all
properties, rights and assets used or useful in connection with its
product line, Boulder Bar. This was the primary asset in MAF. MAF received
a $50,000 cash payment, a $50,000 promissory note and the purchaser has
agreed to continue serving the debt obligation of approximately $435,000,
which is secured by the aforementioned asset. As a result of this
transaction, during 2004, the Company recorded an impairment charge
related to the remaining $104,000 of intangible assets related to the MAF
acquisition and a charge of $38,000 related to other MAF assets deemed to
be of no remaining value.
As of December 31, 2004, COF and MAF total net asset were ($916,000) and
$189,000, respectively. For 2004 total revenues for COF and MAF were
$1,060,000 and $543,000 respectively. For 2003, COF and MAF total revenues
were $987,000 and $1,370,000, respectively.
F-24
VITAL LIVING, INC
Notes to Consolidated Financial Statements
NOTE 10 - STOCK OPTIONS AND WARRANTS
Series A Warrants
Series A Warrants were issued in connection with the June 2002 Series A
Preferred Stock private placement. Upon conversion of every five shares of
Series A Preferred Stock into common stock, we will grant one Series A
Warrant to purchase one share of our common stock, exercisable after one
year from the date of grant at an exercise price of $2.00 per share and
expiring on the second anniversary of the date of grant. The exercise
price of the warrants is subject to adjustment for stock splits,
dividends, reclassifications, and other adjustments.
Upon conversion of the 3,712,000 shares of Series A Preferred Stock and
corresponding stock dividends, we will ultimately issue 859,420 Series A
Warrants. During 2004, pursuant to the warrant offering in November and
December 2004, one holder of the Series A warrants exercised 278,000
warrants at $0.10 per warrant resulting in gross proceeds of approximately
$28,000. As of December 31, 2004, there were 582,000 Series A Warrants
outstanding.
Series B and Series C Warrants
Series B and Series C Warrants were issued in connection with the November
2002 common stock private placement, concurrent with the MAF Acquisition.
The Series B and Series C Warrants have exercise prices of $1.65 and
$2.14, respectively, and may be exercised at the option of the holder at
any time for a period of five years from the date of issuance. The
exercise prices are subject to adjustment for stock splits, dividends,
reclassifications, and other typical corporate actions. If we issue
additional shares of common stock at a price less than $1.00 per share,
the exercise prices of the warrants upon each such issuance will be
adjusted and reset to such issuance price; however, this reset feature
does not apply to the following:
1. any stock splits, dividends, reclassifications, or similar actions,
or
2. any issuance of shares of common stock (or shares of common stock
issuable upon the exercise of securities convertible into shares of
common stock with an exercise price or a conversion price less than
$1.00) if such securities were issued to consultants, employees,
service providers, or to a third party to satisfy amounts owed;
provided that we may not issue to such individuals, in any rolling
12-month period, more than 1,600,000 shares of common stock or 10%
of the actual number of shares of common stock issued and
outstanding (assuming the conversion of the Series A Preferred
Stock) and may not issue to any one individual more than 500,000
shares of common stock.
As long as a registration statement covering the shares underlying the
warrants is effective, we may redeem any or all of the warrants, at any
time, at $0.05 per warrant if:
1. the closing price for our common stock on any 20 trading days within
a period of 30 consecutive trading days ending on the date of the
notice of the call has been in excess of 150% of the then effective
exercise price, and
2. no less than four of such 20 days occur during the last five trading
days ending on the date of the notice of the redemption.
As of December 31, 2004, there were 1,368,000 Series B Warrants and
1,368,000 Series C Warrants outstanding.
Series D and Series E Warrants
Series D and Series E Warrants were issued in connection with the April
2003 Series B Preferred Stock and July 2003 Series C Preferred Stock
private placements. The Series D and Series E Warrants have exercise
prices of $1.30 and $1.60, respectively, and may be exercised at the
option of the holder at any time for a period of five years from the date
of issuance. The exercise prices are subject to adjustment for stock
splits, dividends, reclassifications, and other typical corporate actions.
As of December 31, 2004, there were 1,950,000 Series D Warrants and
1,500,000 Series E Warrants outstanding.
Series F Warrants
Series F Warrants were issued in connection with the July 2003 amendment
of one of our strategic consulting agreements. The Series F Warrants have
an exercise price of $1.00 per share and may be exercised at the option of
the holder at any time for a period of five years from the date of
issuance. The exercise price is subject to adjustment for stock splits,
dividends, reclassifications, and other typical corporate actions. As of
December 31, 2004, there were 125,000 Series F Warrants outstanding.
F-25
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Series G and H Warrants
Series G and H Warrants were issued in connection with the sale of our
common stock in June and July 2004. We sold units, each unit consisting of
one share of common stock, three Series G Warrants, and one Series H
Warrant, aggregating 3,900,000 shares of common stock at $0.25 per share,
11,700,000 Series G Warrants at an exercise price of $0.25 per share, and
3,900,000 Series H Warrants at an exercise price of $0.25 per share,
generating cash proceeds of $772,000, net of cash offering costs of
$125,000. In addition, 265,000 shares of common stock and 1,950,000
warrants, with a combined fair market value at the date of issuance of
$549,000 were issued to financial advisors to facilitate the transaction,
thus increasing the total offering costs to $599,000.
In December 2004, the holders of the G warrants exercised their right to
convert the warrant in 5.8 million shares of our common stock. As of
December 31, 2004, no G warrants and 3.9 million H warrants were
outstanding. We received no consideration related to the G warrant
conversion into our common stock.
Other Warrants
In connection with the Bridge Notes and Senior Secured Notes (see Note 6)
during 2003, we granted note holders an aggregate of 9,706,000 warrants at
original exercise prices that ranged from $1.00 to $1.50 per share. The
warrants may be exercised immediately, expire on the fifth anniversary of
the date of issuance, and the exercise price is subject to adjustment for
stock splits, dividends, reclassifications, and other typical corporate
actions.
Additionally, we granted 174,000 warrants to financial advisors associated
with the issuance of the Bridge Notes. Financial advisors associated with
the Secured Notes were granted 558,000 warrants.
In conjunction with warrant exercises in November and December of 2004,
6,560,000 of these warrants were exercised at $0.10 per warrant generating
gross cash proceeds of $660,000. The holders of each exercised warrant
will receive a new warrant with an exercise price of $0.10. In conjunction
with this offering, we paid to financial advisors to help facilitate the
transaction $64,000 in cash consideration and will issue 656,000 new
warrants with an exercise price of $0.10. Effectively, we sold common
stock for $0.10 per share and extend the terms of the warrants.
In aggregate, as of December 31, 2004, there were 11,210,000 of these
warrants outstanding.
Stock Option Plans
On August 1, 2001, the Board of Directors adopted our 2001 Stock Option
Plan pursuant to which incentive stock options or non-statutory stock
options to purchase up to 2,500,000 shares of common stock can be granted
to employees, officers, directors, consultants, and independent
contractors and other service providers.
On May 3, 2002, the Board of Directors adopted our 2002 Stock Option Plan
pursuant to which incentive stock options or non-statutory stock options
to purchase up to 2,000,000 shares of common stock can be granted to
employees, officers, directors, consultants, independent contractors, and
other service providers.
On a combined basis, the plans had 437,000 and 3,831,000 options
outstanding at December 31, 2004 and 2003, respectively, with exercise
prices ranging from $0.65 to $1.00. At December 31, 2003, there were an
aggregate of 3,600,000,517 options available under the plans for future
grant.
Options and Warrants Issued for Services
In order to fund operating activities, we, from time to time, grant
options or warrants to purchase common stock in lieu of cash in
consideration for consulting, investment banking, or other services
rendered, compensation, release of debt, and various other claims that
parties may have against us. We granted options and warrants to purchase
common stock during the years ended December 31, as follows:
2004 2003
--------------------------------- ----------------------------
Number Fair Exercise Number Fair Exercise
Granted Value Price Granted Value Price
------- ------- ----------- ------- ------- -----
Options 150,000 $ 88,500 $ 0.65 40,000 $ 16,000 $1.40
Warrants 300,000 181,000 $0.25-$1.30 743,000 444,000 $1.00
------------------- ----------- ------- ------- -----
450,000 $269,500 783,000 $460,000
------------------- ------------------
F-26
VITAL LIVING, INC
Notes to Consolidated Financial Statements
The fair value of certain of these options and warrants are being
amortized over their respective vesting periods, which range from zero to
36 months. For the years ended December 31, 2004 and 2003, $185,000 and
$708,000 was amortized to expense, respectively. The fair value of
unamortized options and warrants issued for services at December 31, 2004
and 2003 was $122.000 and $207,000, respectively.
During June and July 2004 in connection with the common stock offering, we
granted an aggregate of 2,000,000 warrants to acquire common stock to
investment advisors with an exercise price of $1.25 per share.
Additionally, during 2004, we issued 300,000 warrants to acquire common
stock with exercise prices that ranged from $0.89 to $1.30 per share to
various advisors.
In 2004, we granted 150,000 options to an advisor to purchase common stock
at an exercise price of $0.65 per share.
Per FIN No. 44, "Accounting for Certain Transactions Involving Stock
Compensation," a non-cash charge to 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. The
requirements of FIN No. 44 may also result in a credit to expense to the
extent that the trading price declines from the trading price as of the
end of the previous reporting period, provided however 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 No. 44, we adjust
expense upward or downward on a monthly basis based on the trading price
at the end of each period. As a result, we recorded expense of $255,000
during the year ended December 31, 2003, which represents the fair value
of the effective re-pricing of the options using the Black-Scholes
option-pricing model at the date of the amendments. Due to a decline in
the trading price of the Company's common stock, there was a reduction in
personnel costs of $1,755,000 for the adjustments of the variable award in
the year ended December 31, 2004.
Options and Warrants Issued to Employees
During 2004, we granted 80,000 warrants with an exercise price of $0.54
per share to several employees
In accordance with FIN No. 44, we adjust expense upward or downward on a
monthly basis based on the trading price at the end of each period. As a
result, we recorded a net credit to compensation expense of approximately
$1,755,000 during the year ended December 31, 2004.
During August 2003, concurrent with the ENI Acquisition and the Series D
Preferred Stock private placement, we executed a second amendment to the
Officer Warrants that provided for the granting of an additional 5,000,000
warrants with an exercise price of $0.01 per share and eliminated the
full-ratchet dilution provision, as defined. The new warrants were 100%
vested on the date of grant and had a fair value of $6.8 million, which
was charged to compensation expense during the year ended December 31,
2003.
In July 2002, we granted 30,000 options to an employee with an exercise
price of $2.40, vesting quarterly over a three-year period commencing
October 17, 2002. The options were cancelled in 2002.
In January 2002, we issued 125,000 options to an employee under our 2001
Stock Option Plan. The options have an exercise price of $1.00 per share,
expire in four years, and vest quarterly, 40,000 in the first year, 45,000
in the second year, and 40,000 in the third year. The fair value of the
options using the Black-Scholes option-pricing model was determined to be
zero.
Summary of Options and Warrants
A summary of stock option activity for the years ended December 31 is as
follows:
F-27
VITAL LIVING, INC
Notes to Consolidated Financial Statements
· Download Table
2004 2003
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------- -------- --------- --------
Outstanding at beginning of period 3,039,000 $ 0.93 3,385,000 $ 0.87
Granted 375,000 $ 0.59 654,000 $ 1.21
Cancelled (2,750,000) $ 0.91 -- --
Exercised (263,000) $ 0.10 (1,000,000) $ 0.35
--------- -------- --------- --------
Outstanding at end of period 401,000 $ 0.87 3,039,000 $ 0.93
--------- -------- --------- --------
Exercisable at end of period 339,000 $ 0.77 1,764,000 $ 1.10
========= ======== ========== ========
Information about stock options outstanding at December 31, 2004 is as
follows:
· Enlarge/Download Table
Options Outstanding Options Exercisable
----------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Exercise Shares Contractual Exercise Shares Exercise
Prices Outstanding Life Price Exercisable Price
------------- ----------- ----------- ----------- ----------- -----------
$0.35 - $1.00 401,000 3.9 $ 0.87 339,000 $ 0.91
$1.40 - $1.50 -- -- -- -- --
$2.00 - $3.00 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
401,000 339,000
----------- -----------
A summary of warrant activity for the years ended December 31 is as follows:
· Enlarge/Download Table
2004 2003
---------------------------- ----------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning of period 26,475,000 $ 0.91 7,775,000 $ 1.32
Granted 25,196,000 $ 0.22 18,730,000 $ 0.87
Cancelled -- -- -- --
Exercised (19,856,000) $ 0.10 (30,000) $ 0.01
----------- -----------
Outstanding at end of period 31,815,000 $ 0.46 26,475,000 $ 0.91
----------- -----------
Exercisable at end of period 31,815,000 $ 0.46 25,538,000 $ 0.91
----------- -----------
F-28
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Information about warrants outstanding at December 31, 2004 is as follows:
Warrants Outstanding & Exercisable
----------------------------------
Weighted Weighted
Average Average Weighted
Range of Remaining Average
Exercise Shares Contractual Exercise
Prices Outstanding Life Price
------------- -------------- -------------- --------------
$0.01 - $0.35 26,218,000 4.10 $ 0.13
$0.54 - $1.00 1,015,000 2.98 $ 0.95
$1.30 - $1.65 4,000,000 3.52 $ 1.43
$ 2.00 582,000 2.42 $ 1.43
--------------
31,815,000 4.00 $ 0.35
NOTE 11 - INCOME TAXES
Components of the deferred tax asset (liabilities) as of December 31 are
as follows:
2004 2003
------------ ------------
Net operating loss carryforwards $ 10,140,000 $ 6,362,000
Deferred compensation 3,297,000 3,108,000
Prepaids 161,000 0
Inventories 130,000 0
Amortizable intangibles 8,024,000 1,079,000
Other temporary differences 58,000 61,000
------------ ------------
21,810,000 10,610,000
Less valuation allowance (21,810,000) (10,610,000)
------------ ------------
$ -- $ --
============ ============
Net operating loss carry forwards are available to reduce future taxable
income. However, a change in ownership, as defined by federal income tax
regulations, could significantly limit our ability to utilize our U.S. net
operating loss carry forwards. Additionally, because federal tax laws
limit the time during which the net operating loss carry forwards may be
applied against future taxes, if we fail to generate taxable income prior
to the expiration dates, we may not be able to fully utilize the net
operating loss carry forwards to reduce future income taxes.
As we have had cumulative losses and there is no assurance of future
taxable income, valuation allowances have been recorded to fully offset
the deferred tax asset at December 31, 2004 and 2003. During the year
ended December 31, 2004, a current income tax benefit of $3,778,000 was
offset by an equal deferred income tax provision primarily related to the
increase in the valuation allowance. The valuation allowance increased
$11,200,000 during 2004 due to our current period net loss. Due to this
increase in the valuation allowance, the effective tax rate has been
reduced to 0% for the years ended December 31, 2004 and 2003. As of
December 31, 2004, we had net operating loss carry forwards for federal
income tax reporting purposes of approximately $28,158,000 which expire
through 2024. The utilization of such operating losses may be limited.
A reconciliation of statutory to effective income tax rates is as follows
for years ended December 31:
2004 2003
---------------------- -----------------------
Federal statutory rates -34% $ (9,578,000) -34% $ (9,498,000)
State -6% (1,690,000) -6% (1,676,000)
Valuation allowance 40% 67,000 40% 11,174,000
Other -- 11,201,000 --
---------------------- -----------------------
Effective rate 0% $ -- 0% $ --
====================== =======================
F-29
VITAL LIVING, INC
Notes to Consolidated Financial Statements
NOTE 12 - RELATED PARTY TRANSACTIONS
From time to time, we engage our directors, shareholders, or other related
parties for consulting services related to investment, acquisition, or
other activities in the normal course of business. We believe that all of
these transactions are conducted at an "arms-length." Fair market value of
securities issued in these transactions, including stock, options, and
warrants, is listed below where applicable and calculated using the
Black-Scholes Pricing Model as of the date of issuance or grant.
Officers and Directors
During 2004, we issued 165,000 and 75,000 shares of restricted common
stock to Michael Cardamone and D. Clay Coffeen, respectively, in exchange
for director services for a combined fair market value of $47,000.
During 2004, $35,000 was either paid directly or amounts paid on behalf of
Mr. Hannah, our Chairman. These amounts were paid for services requested
by management that were deemed outside the scope of his role as Chairman.
In connection with the departure of the former Chairman and Chief
Executive Officer in January 2004, we executed a severance agreement that
provides for cash payments of $244,000 ($119,000 due within eight days of
execution, $20,000 due on each first day of July, August, and September
2004, and $22,000 due on each first day of October, November, and December
2004) and 600,000 shares of the Company's common stock, valued at
$498,000, due within eleven days of execution and included in a pending
Registration Statement initially filed January 14, 2004. In addition, we
agreed to continue to pay Mr. Edson's medical benefits until the earlier
of (i) July 31, 2005, or (ii) the date he becomes eligible to be covered
under another program. However, due to certain differences between the
parties, in August 2004, the parties agreed that we would issue 100,000
shares of our common stock in exchange for complete settlement of the
severance agreement. As of September 30, 2004, we had no further
obligations to Mr. Edson.
In March and April 2004, we transacted a common stock private placement
(see Note 6) for which finder's fees of 8% in cash and 8% in common stock
were authorized to various parties to facilitate the transaction. We paid
$21,000 in cash and issued 20,800 shares of common stock, valued at
$17,000, to a company whose principal is our former Chief Executive
Officer and Chairman for such services. In addition, 110,000 of the
510,000 common shares issued to investors in this private placement,
valued at $110,000, were family members of our former Chief Executive
Officer and Chairman.
Shareholders
We are party to two voting agreements as follows:
MAF Voting Agreement. In connection with our November 2002 MAF
Acquisition, we entered into a stockholders' agreement with Stuart A.
Benson, Donald C. Hannah, Bradley D. Edson, Martin Gerst, William Coppel,
Phil Maffetone, Kenneth Martin, Leslie C. Quick, III, and Thomas C. Quick
(the "MAF Voting Agreement"). Pursuant to the MAF Voting Agreement:
o for so long as Messrs. Edson, Benson, Hannah and Gerst beneficially
own an aggregate of at least 65% of the shares of common stock held
by them on the date of the agreement, they will be entitled to
nominate and have elected four directors acceptable to them in their
sole discretion; and
o for so long as Messrs. Coppel, Maffetone, Quick and Quick
beneficially own an aggregate of at least 65% of the shares of
common stock held by them on the date of the agreement, they will be
entitled to nominate and have elected three Directors.
Each of the parties to the MAF Voting Agreement has agreed to vote the
shares of common stock beneficially owned by them on the date of the
agreement in favor of the other group's nominees. Each of the parties have
further agreed that they will vote in favor of the other parties' nominee
or nominees, and will not take any action, or cause us to take any action,
to remove, with or without cause, a Director nominated by any of the
parties. Because Messrs. Coppel, Maffetone, Quick, and Quick do not still
beneficially own the required 65%, they no longer have the right to
nominate and have elected any Directors.
ENI Voting Agreement. In connection with our August 2003 ENI Acquisition,
we entered into a stockholders' agreement with Stuart A. Benson, Donald C.
Hannah, SkyePharma PLC, Stephen Morris, and Fifth Avenue Capital, Inc.
(the "ENI Voting Agreement"). Pursuant to the ENI Voting Agreement, as
amended:
F-30
VITAL LIVING, INC
Notes to Consolidated Financial Statements
o for so long as Messrs. Benson and Hannah (the "Founders")
beneficially own an aggregate of at least 65% of the shares of
common stock owned by them on the date of the agreement, they will
be entitled to nominate three directors;
o for so long as Stephen Morris and Fifth Avenue Capital beneficially
own an aggregate of at least 65% of the shares of common stock owned
by them on the date of the agreement, they will be entitled to
nominate one director; and
o for so long as SkyePharma beneficially owns an aggregate of at least
65% of the shares of common stock owned by it on the date of the
agreement, it is entitled to nominate one director.
Each of the parties to the ENI Voting Agreement has agreed to vote the
shares of common stock beneficially owned by them on the date of the
agreement in favor of the other group's nominees. Each of the parties have
further agreed that they will vote in favor of the other parties' nominee
or nominees, and will not take any action, or cause us to take any action,
to remove, with or without cause, a Director nominated by any of the
parties.
We have a consulting arrangement with Stephen Chen, Chairman and Chief
Executive Officer of Strong International, Inc., the sole shareholder of
the outstanding Series C Preferred Stock, to assist in creating strategic
alliances in China. During 2004, we paid Mr. Chen $19,000 related to such
matters. In 2004, 250,000 additional shares of Series B Preferred Stock
valued at $250,000 were issued in satisfaction of dividends owed to the
holder of the Series B Preferred Stock. Simultaneously, all 1,250,000
shares of Series B Preferred Stock converted into 1,250,000 shares of
common stock. Additionally, Mr. Chen participated in the November and
December warrant offering and exercised 612,000 warrants to purchase our
common stock at an exercise price of $0.10 per warrant.
We have several agreements with HCFP/Brenner Securities, LLC ("Brenner"),
a stockholder, to provide consulting, investment, or financial services.
During 2004, the following amounts were paid to Brenner in exchange for
such services:
· Enlarge/Download Table
Options & Warrants
-------------------------------
Fair Market
Value of
Matter Cash Stock Number Exercise Price Securities
------------------- -------------- -------------- -------------- -------------- --------------
Consulting Services $ -- 300,000 -- N/A $ 135,000
Investment Services $ 19,000 -- 2,141,000 $0.10 - $0.25 $ 266,000
We have several agreements with Atlas Capital Services, LLC ("Atlas") to
provide consulting, investment, or financial services, including the
valuation related to the ENI Acquisition.
We have several agreements with Sloan Securities Corp ("Sloan") to provide
consulting, investment, or financial services. During 2004, the following
amounts were paid to Sloan (or its designees) in exchange for such
services:
Options & Warrants
---------------------
Fair Market
Exercise Value of
Matter Cash Stock Number Price Securities
-------------------- --------- --------- --------- --------- ---------
Investment Services $ 45,338 -- 453,000 $ 0.10 $ 59,000
NOTE 13 - SUBSEQUENT EVENTS
Executive Management
On February 15, 2005, Vital Living, Inc. (the "Company") entered into an
employment agreement dated as of January 1, 2005 with Stuart Benson
providing for the employment of Mr. Benson as the Company's President and
Chief Executive Officer. On February 15, 2005, the Company entered into an
employment agreement dated as of January 1, 2005 with Gregg A. Linn
providing for the employment of Mr. Linn as the Company's Chief Financial
Officer. The employment agreements have initial terms of three years each,
and are both subject to automatic renewal for successive one-year periods.
F-31
VITAL LIVING, INC
Notes to Consolidated Financial Statements
Mr. Benson's employment agreement provides for Mr. Benson to receive an
annual base salary of $220,000 from January 1, 2005 through December 31,
2005; $250,000 from January 1, 2006 through December 31, 2006; and
$280,000 commencing on January 1, 2007. Mr. Linn's employment agreement
provides for Mr. Linn to receive an annual base salary of $160,000 from
January 1, 2005 through December 31, 2005; $180,000 from January 1, 2006
through December 31, 2006; and $200,000 commencing on January 1, 2007.
Both executives will also be eligible to receive annual bonuses pursuant
to the employment agreements in amounts to be determined by the Board of
Directors of the Company.
As part of their compensation packages, the Company granted to Mr. Benson
and Mr. Linn, subject to the approval of the Company's stockholders at its
2005 Annual Meeting of Stockholders, options to purchase 3,000,000 shares
and 2,000,000 shares, respectively, of the Company's common stock at an
exercise price equal to the closing price of the Company's common stock on
the date of execution of the agreements. The options vest one third on
each of the first three annual anniversaries following the date of grant.
F-32
Dates Referenced Herein and Documents Incorporated By Reference
| Referenced-On Page |
|---|
| This 10KSB/A Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 10/15/94 | | 8 |
| | 9/23/97 | | 8 |
| | 1/22/01 | | 3 | | 40 |
| | 5/7/01 | | 3 | | 40 |
| | 5/20/01 | | 3 | | 40 |
| | 5/21/01 | | 27 |
| | 6/30/01 | | 22 | | 41 |
| | 8/1/01 | | 59 |
| | 8/16/01 | | 3 | | 40 |
| | 8/17/01 | | 30 | | | | | 8-K12G3, 8-K12G3/A |
| | 8/21/01 | | 27 |
| | 10/1/01 | | 27 | | 30 | | | 8-K12G3 |
| | 11/20/01 | | 30 | | | | | 8-K12G3/A |
| | 12/28/01 | | 29 |
| | 12/31/01 | | 30 | | | | | 10KSB |
| | 1/1/02 | | 47 |
| | 2/26/02 | | 27 |
| | 2/27/02 | | 30 | | | | | 8-K |
| | 2/28/02 | | 30 | | | | | 8-K |
| | 3/20/02 | | 28 |
| | 3/28/02 | | 15 | | 16 |
| | 4/1/02 | | 30 | | | | | 10KSB, 8-K |
| | 4/4/02 | | 27 |
| | 4/16/02 | | 30 | | | | | 8-K |
| | 5/3/02 | | 59 |
| | 5/7/02 | | 29 |
| | 5/15/02 | | 28 | | 31 | | | 10QSB, 8-K |
| | 5/16/02 | | 29 |
| | 5/19/02 | | 28 |
| | 5/30/02 | | 28 | | 31 | | | 8-K |
| | 5/31/02 | | 31 | | | | | 8-K |
| | 6/13/02 | | 31 | | | | | 8-K |
| | 6/17/02 | | 29 | | 31 | | | 8-K |
| | 7/2/02 | | 31 | | | | | 8-K |
| | 7/29/02 | | 28 |
| | 9/30/02 | | 28 | | | | | 10QSB, 10QSB/A, 8-K, 8-K/A |
| | 10/1/02 | | 28 |
| | 10/8/02 | | 28 |
| | 10/17/02 | | 60 |
| | 10/23/02 | | 26 | | 30 | | | 8-K |
| | 11/4/02 | | 30 | | | | | 8-K |
| | 11/20/02 | | 26 | | 30 | | | 8-K/A |
| | 12/5/02 | | 30 | | | | | 8-K/A |
| | 12/31/02 | | 17 | | 47 | | | 10KSB, 10KSB/A |
| | 1/1/03 | | 47 |
| | 1/31/03 | | 24 | | 46 |
| | 2/3/03 | | 28 |
| | 3/7/03 | | 30 | | | | | SB-2/A |
| | 3/20/03 | | 54 |
| | 3/31/03 | | 47 | | | | | 10KSB, 10QSB, 10QSB/A |
| | 4/1/03 | | 47 |
| | 4/16/03 | | 28 | | 55 |
| | 4/17/03 | | 28 |
| | 4/28/03 | | 30 | | | | | SB-2/A |
| | 5/31/03 | | 24 | | 45 |
| | 6/18/03 | | 30 | | | | | SB-2/A |
| | 6/20/03 | | 29 |
| | 6/25/03 | | 29 | | | | | 8-K |
| | 7/2/03 | | 31 | | | | | 8-K |
| | 7/9/03 | | 56 |
| | 7/15/03 | | 27 |
| | 7/16/03 | | 31 | | | | | 8-K |
| | 7/23/03 | | 30 | | | | | 4, SB-2/A |
| | 8/14/03 | | 29 | | | | | 10KSB/A, 10QSB, 10QSB/A |
| | 8/20/03 | | 6 | | 56 | | | 3 |
| | 8/21/03 | | 30 | | | | | 8-K, 8-K/A |
| | 9/8/03 | | 30 | | | | | 8-K |
| | 9/15/03 | | 24 | | 46 |
| | 9/30/03 | | 24 | | 45 | | | 10QSB, 10QSB/A, NT 10-Q |
| | 10/14/03 | | 6 | | 47 | | | 4, 8-K, 8-K/A |
| | 12/5/03 | | 31 | | | | | 8-K/A |
| | 12/15/03 | | 30 | | | | | 8-K |
| | 12/19/03 | | 30 | | | | | 4, 8-K, SC 13D/A |
| | 12/31/03 | | 6 | | 62 | | | 10KSB, 10KSB/A |
| | 1/1/04 | | 52 |
| | 1/13/04 | | 29 |
| | 1/14/04 | | 30 | | 63 | | | SB-2 |
| | 3/15/04 | | 24 | | 46 |
| | 4/6/04 | | 11 | | 20 |
| | 4/15/04 | | 51 |
| | 4/19/04 | | 29 |
| | 4/28/04 | | 50 |
| | 5/12/04 | | 31 | | | | | SB-2/A |
| | 7/9/04 | | 19 | | 57 |
| | 8/3/04 | | 31 | | | | | SB-2/A |
| | 8/13/04 | | 50 | | | | | 8-K/A |
| | 8/17/04 | | 6 | | 47 |
| | 9/30/04 | | 19 | | 63 | | | 10QSB, 10QSB/A, 424B3, 8-K, 8-K/A, NT 10-Q |
| | 10/20/04 | | 31 | | 32 |
| | 11/4/04 | | 32 |
| | 11/11/04 | | 32 |
| | 11/15/04 | | 57 |
| | 11/22/04 | | 32 | | | | | 10QSB, 8-K |
| | 12/15/04 | | 51 |
| For The Period Ended | | 12/31/04 | | 1 | | 62 | | | 10KSB, 10KSB/A, NT 10-K |
| | 1/1/05 | | 30 | | 65 |
| | 2/15/05 | | 30 | | 64 | | | 8-K |
| | 2/18/05 | | 31 | | | | | 8-K |
| | 3/16/05 | | 9 |
| | 3/17/05 | | 1 | | 17 |
| | 4/8/05 | | 34 |
| | 6/15/05 | | 24 | | 46 | | | 4 |
| | 6/21/05 | | 33 |
| Filed On / Filed As Of | | 6/22/05 |
| | 7/31/05 | | 63 |
| | 12/31/05 | | 49 | | 65 |
| | 1/1/06 | | 65 |
| | 12/31/06 | | 65 |
| | 1/1/07 | | 65 |
| | 12/14/08 | | 51 |
| | 12/17/08 | | 50 | | 51 |
| | 12/31/17 | | 52 |
| |
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