SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________________
FORM
SB-2
REGISTRATION
STATEMENT
UNDER THE SECURITIES ACT OF 1933
____________________________
HEALTH
SCIENCES GROUP, INC.
(Exact
Name of Registrant as Specified in its Charter)
|
(State
or other jurisdiction of
incorporation
or organization)
|
(Primary
Standard Industrial
Classification
Code Number)
|
91-2079221
(I.R.S.
Employer
Identification
Number)
|
| |
|
|
Howard
Hughes Center
6080
Center Drive, 6th
Floor
(310)
242-6700
(Address
of Principal Executive Offices)
____________________________
Fred
E.
Tannous, Chief Financial Officer
Howard
Hughes Center
6080
Center Drive, 6th
Floor
(310)
242-6700
(Name,
address, including zip code, and telephone number, including area code, of
Agent
for Service)
____________________________
Copies
to
Leib
Orlanski, Esq.
Kirkpatrick
& Lockhart Nicholson Graham LLP
10100
Santa Monica Blvd., 7th Floor
Telephone
(310) 552-5000 Facsimile (310) 552-5001
____________________________
Approximate
date of commencement of proposed sale to the public:
From
time
to time after the effective date of this Registration Statement
If
any of
the securities being registered on this form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. x
If
this
form is filed to register additional securities for an offering pursuant
to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the
same
offering. o
If
this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement the same
offering. o
If
delivery of the prospectus is expected to be made pursuant to Rule 434, please
check the following box. o
CALCULATION
OF REGISTRATION FEE
|
Title
of each class of securities
to
be registered
|
|
Amount
to be
registered(8)
|
|
Proposed
Maximum
offering
price
per
share(7)
|
|
Proposed
Maximum
Aggregate
offering
price
|
|
Amount
of
registration
fee
|
|
|
Common
Stock, $.001 par value
|
|
|
1,655,764
(1
|
)
|
$
|
0.06
|
|
$
|
99,346
|
|
$
|
10.63
|
|
|
Common
Stock, $.001 par value
|
|
|
1,000,000
(2
|
)
|
$
|
0.06
|
|
$
|
60,000
|
|
$
|
6.42
|
|
|
Common
Stock, $.001 par value
|
|
|
812,269
(3
|
)
|
$
|
0.06
|
|
$
|
48,736
|
|
$
|
5.21
|
|
|
Common
Stock, $.001 par value
|
|
|
300,000
(4
|
)
|
$
|
0.06
|
|
$
|
18,000
|
|
$
|
1.93
|
|
|
Common
Stock, $.001 par value
|
|
|
236,764
(5
|
)
|
$
|
0.06
|
|
$
|
14,206
|
|
$
|
1.52
|
|
|
Common
Stock, $.001 par value
|
|
|
71,426
(6
|
)
|
$
|
0.06
|
|
$
|
4,286
|
|
$
|
.46
|
|
|
TOTAL
|
|
|
4,076,223
|
|
|
|
|
$
|
244,574
|
|
$
|
26.17
|
|
|
(1)
|
Represents
(i) 777,882 shares of common stock held by Vescap International,
Ltd.; and
(ii) 877,882 shares of common stock underlying warrants held by
Vescap
International, Ltd.
|
|
(2)
|
Represents
(i) 500,000 shares of common stock underlying the convertible debenture
held by Stranco Investments, Ltd.; and (ii) 500,000 shares of common
stock
underlying warrants issued in connection with the convertible debenture
held by Stranco Investments, Ltd.
|
|
(3)
|
Represents
(i) 518,151 shares of common stock held by Cedar Crescent Holdings,
Ltd.;
and (ii) 294,118 shares of common stock underlying warrants held
by Cedar
Crescent Holdings, Ltd.
|
|
(4)
|
Represents
(i) 150,000 shares of common stock held by MarketByte, LLC; and
(ii)
150,000 shares of common stock underlying warrants held by MarketByte,
LLC.
|
|
(5)
|
Represents
(i) 29,411 shares of common stock held by Vestcom, Ltd.; and (ii)
207,353
shares of common stock underlying warrants held by Vestcom,
Ltd.
|
|
(6)
|
Represents
71,426 shares of common stock underlying warrants held by FCIM
Corp.
|
|
(7)
|
Estimated
pursuant to Rule 457(c) of the Securities Act of 1933, based on
the
average of the high and low prices of the common stock, as reported
in the
Over the Counter Bulletin Board as of October 26, 2006, solely
for the
purpose of computing the registration fee.
|
|
(8)
|
In
accordance with Rule 416 of the Securities Act, the registration
also
covers such indeterminate amount of additional shares of common
stock as
may be issuable upon conversion of the convertible debentures to
prevent
dilution as a result of stock splits, stock dividends and the
anti-dilution provisions applicable to convertible
debentures.
|
_______________________________
The
registrant hereby amends this registration statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this registration statement
shall hereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to such Section
8(a),
may determine.
PROSPECTUS
Subject
to Completion, Dated November _____, 2006
4,076,223
Shares
HEALTH
SCIENCES GROUP, INC.
COMMON
STOCK
This
prospectus covers up to 4,076,223 shares of common stock of Health Science
Group, Inc. that may be sold from time to time by the selling shareholders
named
in this prospectus. The shares covered by this prospectus consist of (i)
777,882
shares of common stock and 877,882 shares of common stock underlying warrants
held by Vescap International, Ltd., (ii) 500,000 shares of common stock
underlying the convertible debenture and 500,000 shares of common stock
underlying warrants issued in connection with the convertible debenture held
by
Stranco Investments, Ltd., (iii) 518,151 shares of common stock and 294,118
shares of common stock underlying warrants held by Cedar Crescent Holdings,
Ltd., (iv) 29,411 shares of common stock and 207,353 shares of common stock
underlying warrants held by Vestcom, Ltd., and (v) 150,000 shares of common
stock and 150,000 shares of common stock underlying warrants held by Market
Byte, LLC, and (vi) 71,426 shares of common stock underlying warrants held
by
FCIM Corp. We will not receive any proceeds from the sales of the common
stock
by the selling shareholders; however, we may receive up to $100,000 upon
exercise of warrants.
____________________________
Our
common stock is traded on the Over-The-Counter Bulletin Board maintained
by the
National Association of Securities Dealers, Inc. under the symbol “HESG.OB.”
____________________________
The
securities offered by this prospectus involve a high degree of risk. See
“Risk
Factors” beginning on page 4.
____________________________
Neither
the Securities and Exchange Commission (the “SEC”) nor any state securities
commission has approved or disapproved of these securities or determined
if this
prospectus is truthful or complete. Any representation to the contrary is
a
criminal offense.
____________________________
The
date
of this prospectus is ______________, 2006
[Printed
on Left side panel] The
information in this prospectus is not complete and may be changed. We may
not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to
sell
these securities and we are not soliciting offers to buy these securities
in any
state where the offer or sale is not permitted.
INSIDE
FRONT COVER
TABLE
OF CONTENTS
| |
Page
|
| |
|
|
|
1
|
| |
|
|
|
4
|
| |
|
|
|
9
|
| |
|
|
|
10
|
| |
|
|
|
10
|
| |
|
|
|
12
|
| |
|
|
|
12
|
| |
|
|
|
14
|
| |
|
|
|
25
|
| |
|
|
|
31
|
| |
|
|
|
36
|
| |
|
|
|
37
|
| |
|
|
|
40
|
| |
|
|
|
40
|
| |
|
|
|
42
|
| |
|
|
|
43
|
| |
|
|
|
43
|
| |
|
|
|
44
|
WHERE
YOU CAN FIND MORE INFORMATION
We
file
annual and special reports and other information with the SEC. Certain of
our
SEC filings are available over the Internet at the SEC’s web site at
http://www.sec.gov. You may also read and copy any document we file with
the SEC
at its public reference facilities:
Public
Reference Room Office
450
Fifth
Street, N.W.
Room
1024
Washington,
D.C. 20549
You
may
also obtain copies of the documents at prescribed rates by writing to the
Public
Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549. Callers in the United States can also call 1-800-732-0330 for
further information on the operations of the public reference
facilities.
You
should read the following summary together with the more detailed information
regarding our company and the common stock being sold in this offering,
including “Risk Factors” and our consolidated financial statements and related
notes, included elsewhere in, or incorporated by reference into, this
prospectus.
Our
Company
We
are a
provider of innovative products and services in the nutraceutical and wellness
industries. The term “nutraceutical” means nutritional food supplements.
We offer value-added ingredients and proprietary technologies used in
nutritional supplements, functional foods and beverages, and skin care products.
“Nutritional supplements” means vitamins, minerals, herbs and chemical compounds
designed to supplement nutrients derived from food for the purpose of
maintaining the bodily requirements for proper health and nutrition. “Functional
foods” means nutritional supplements which provide some of the same material
elements as found in foods.
We
develop and sell high-margin products based on proprietary technologies to
customers who manufacture and distribute functional foods. We
also
developed a number of proprietary formulations which combine vitamins, herbs
and
other food supplements with traditional over-the-counter generic drugs.
Our
business strategy is to develop new customer relationships in our core business,
expand our marketing program by increasing existing product lines, marketing
through new outlets and securing new distribution relationships, and by so
doing
increase our revenues. We had net losses attributed to common shareholders
of $6,093,912, $10,959,108,
and $8,447,276 for our fiscal years ended in December 31, 2005, 2004, and
2003.
Our cumulative losses for the last three years amount to $28,675,821.
Our losses are substantial and increasing.
We
currently offer two products; Shugr | Zero-Calorie Sweetener, and Sequesterol
|
Advanced Cardio Formula. We also own the intellectual property rights for
five
patents which protect a proprietary
formulation which combines pharmaceutical and nutraceutical products (“CoCare”).
We are exploring opportunities to license these patents to strategic partners.
To date, have not entered into any such alliances.
Summary
of Risk Factors
The
following summarizes the risk factors which are set forth below under heading,
“RISK FACTORS”, as follows:
|
|
Our
independent registered public accounting firm has provided a “going
concern” qualification to our consolidated financial
statements.
|
|
|
There
is a
risk that we will be unable to obtain additional funds as we need
them.
|
|
|
We
face significant competition.
|
|
|
There
is a risk that we may not be able to establish a marketing
organization.
|
|
|
There
may be insufficient consumer acceptance of integrative medicine
products.
|
|
|
We
may not be able to establish strategic alliances in order to market
our
products.
|
|
|
Government
regulation could adversely affect the vitamin and supplement
business.
|
|
|
We
may be unable to retain or acquire additional skilled
employees.
|
The
Offering
|
Common
stock offered by selling shareholders
|
4,076,223
shares
|
| |
|
|
Common
stock to be outstanding after the offering
|
46,736,694
shares
|
| |
|
|
Use
of proceeds
|
We
will not receive any proceeds from
the
sale of the common stock.
|
| |
|
|
OTC
Bulletin Board
|
HESG.OB
|
The
above
information is based on 44,135,915
shares of common stock outstanding as of September
30,
2006
which includes 1,475,444 shares being registered herein; assumes conversion
into
common stock of 500,000 shares of the convertible debenture; exercise of
500,000
warrants
by convertible debenture holders; 877,882 warrants held by Vestcap
International, Ltd.; 294,118 warrants held by Cedar Crescent Holdings, Ltd.;
207,353 warrants by Vestcom, Ltd.; 150,000 warrants held by MarketByte, LLC
and
exercise of 71,426 warrants held by the FCIM Corp. and excludes:
|
·
|
4,918,000
shares of common stock issuable upon exercise of outstanding vested
stock
options at exercise prices ranging from $0.25
to
$1.37
per share;
|
|
|
5,338,180
shares of common stock issuable upon exercise of outstanding warrants
at
exercise prices ranging from $0.25
to
$1.25
per share;
|
|
|
2,518,218
shares of common stock issuable upon exercise of warrants at $1.10
per
share held by stockholders of a Series A Convertible Preferred
Stock;
|
|
|
305,312
shares of common stock issuable upon exercise of warrants at $1.10
per
share and 470,588 shares of common stock issuable upon exercise
of
warrants at $0.85 per share held by the designees of Spencer Trask
Ventures, Inc., a placement agent, issued in connection with a
private
placement of a Series A Convertible Preferred Stock;
|
|
|
441,180
shares of common stock issuable upon exercise of warrants at $1.25
per
share and 441,180 shares of common stock issuable upon exercise
of
warrants at $1.50 per share held by stockholders of a Series B
Convertible
Preferred Stock;
|
|
|
44,118
shares of common stock issuable upon exercise of warrants at $1.25
per
share and 44,118 shares of common stock issuable upon exercise
of warrants
at $1.50 per share held by the designees of First Montauk Securities,
Inc., a placement agent, issued in connection with a private placement
of
a Series B Convertible Preferred Stock;
|
|
|
1,439,091
shares of common stock issuable upon exercise of warrants at $1.60
per
share held by stockholders of a Series C Convertible Preferred
Stock;
|
|
|
460,817
shares of common stock issuable upon exercise of warrants at $1.10
per
share and 230,409 shares of common stock issuable upon exercise
of
warrants at $1.60 per share held by the designees of H.C. Wainwright
&
Co., Inc., a placement agent, issued in connection with a private
placement of a Series C Convertible Preferred Stock;
|
|
·
|
1,397,224
shares of common stock issuable upon conversion of the Series A
Convertible Preferred Stock at the conversion price of $0.85 per
share;
|
|
|
647,059
shares of common stock issuable upon conversion of 22 shares of
Series B Preferred Stock at conversion price of $0.85 per
share;
|
|
|
2,878,188
shares of common stock issuable upon conversion of 3,166 shares
of Series
C Convertible preferred stock, at a conversion price of $1.10 per
share.
|
|
|
370,588
shares of common stock issuable upon conversion of $315,000 of
the 12%
Debentures;
|
Additional
Information
Our
executive offices are located at 6080 Center Drive, 6th
Floor,
Los Angeles, California 90045 and our telephone number is (310) 242-6700.
We are
a Delaware corporation.
In
this
prospectus, the terms “we,” “us,” and “our” refer to Health Sciences Group,
Inc., a Delaware corporation and its consolidated subsidiaries, as appropriate
in the context, and, unless the context otherwise requires, “common stock”
refers to the common stock, par value $0.001 per share, of Health Sciences
Group, Inc., to which we may also refer as “HESG”.
Summary
Consolidated Financial Data
| |
|
Six
Months Ended June 30,
|
|
Six
Months Ended June 30,
|
|
|
|
| |
|
|
|
2005
|
|
2005
|
|
2004**
|
|
|
Consolidated
Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
27,979
|
|
$
|
4,369
|
|
$
|
60,142
|
|
$
|
67,204
|
|
|
Cost
of sales
|
|
|
20,566
|
|
|
910
|
|
|
37,229
|
|
|
20,539
|
|
|
Operating
expenses
|
|
|
3,524,287
|
|
|
3,577,506
|
|
|
7,942,872
|
|
|
5,588,114
|
|
|
Operating
loss
|
|
|
(3,516,874
|
)
|
|
(3,574,047
|
)
|
|
(7,919,959
|
)
|
|
(5,541,449
|
)
|
| Loss
from discontinued operations |
|
|
- |
|
|
(161,045 |
) |
|
(174,220 |
) |
|
(5,008,183 |
) |
|
Other
income (expenses), net
|
|
|
683,478
|
|
|
23,445
|
|
|
2,343,820
|
|
|
97,916
|
|
|
Net
loss
|
|
|
(2,833,396
|
)
|
|
(3,711,647
|
)
|
|
(5,750,359
|
)
|
|
(10,451,716
|
)
|
|
Preferred
dividends
|
|
|
(182,925
|
)
|
|
(282,847
|
)
|
|
(343,553
|
)
|
|
(507,392
|
)
|
|
Net
loss attributable to common shareholders
|
|
$
|
(3,016,321
|
)
|
$
|
(3,994,494
|
)
|
$
|
(6,093,912
|
)
|
$
|
(10,959,108
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per common share
|
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
$
|
(0.25
|
)
|
$
|
(0.78
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares
outstanding
|
|
|
30,598,662
|
|
|
21,519,755
|
|
|
24,559,505
|
|
|
14,125,035
|
|
| |
|
|
|
|
|
|
|
|
Balance
Sheet Data:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
6,593
|
|
$
|
21,256
|
|
$
|
240,532
|
|
|
Working
capital
|
|
$
|
(4,885,940
|
)
|
$
|
(4,897,615
|
)
|
$
|
(5,340,035
|
)
|
|
Total
current assets
|
|
$
|
93,891
|
|
$
|
131,241
|
|
$
|
774,321
|
|
|
Total
assets
|
|
$
|
3,787,776
|
|
$
|
4,155,552
|
|
$
|
4,401,174
|
|
|
Total
current liabilities
|
|
$
|
4,979,831
|
|
$
|
5,028,856
|
|
$
|
6,114,356
|
|
|
Total
liabilities
|
|
$
|
8,274,726
|
|
$
|
9,066,679
|
|
$
|
10,521,726
|
|
|
Total
stockholders’ deficit
|
|
$
|
(4,486,950
|
)
|
$
|
(4,911,127
|
)
|
$
|
(6,120,552
|
)
|
**
The
table has been modified to reflect the discontinued operations of Quality
Botanical Ingredients and XCEL Medical Pharmacy.
This
offering and any investment in our common stock involve a high degree of
risk.
You should carefully consider the risks described below and all of the
information contained in this prospectus before deciding whether to purchase
our
common stock. If any of the following risks actually occur, our business,
financial condition and results of operations could be harmed. The trading
price
of our common stock could decline, and you may lose all or part of your
investment in our common stock.
The
report of our Independent Registered Public Accounting Firm contains a statement
that our accumulated deficit, working capital deficit and recurring operating
losses raise substantial doubt about our ability to continue as a going
concern.
Our
independent registered public accounting firm has stated in their report
in this
prospectus that we have an accumulated deficit, working capital deficit and
recurring operating losses that raise substantial doubt about our ability
to
continue as a going concern. We had net losses attributable to common
shareholders of $6,093,912, $10,959,108, and $8,447,276 for our fiscal years
ended in December 31, 2005, 2004 and 2003. Our cumulative losses
through December 31, 2005 amount to $28,675,821.
We hope to continue to fund operations through additional debt and equity
financing arrangements that we believe may be insufficient to fund our capital
expenditures, working capital, and other cash requirements for the year ending
December 31, 2006. The successful outcome of future financing activities
cannot be determined at this time and there are no assurances that if achieved,
we will have sufficient funds to execute our intended business plan or generate
positive operational results.
There
is a risk that we will be unable to obtain additional funds to expand or
grow
our business.
We
have
limited cash liquidity and capital resources. If we engage in acquisitions
or
seek to expand operations or grow our business, we will need to raise funds
in
amounts necessary to finance any such acquisitions, expansion or growth.
There
can be no assurance that we will be able to raise any such additional funds.
Moreover, if we obtain debt financing, there can be no assurance we will
be able
to service the debt.
We
may be liable for the entire balance of the secured debt obligation of our
discontinued wholly-owned subsidiary, Quality Botanical Ingredients,
Inc.
We
are a
co-guarantor of the secured credit facility issued to QBI by La Salle Business
Credit, LLC (“LaSalle”) pursuant to a Continuing Unconditional Corporate
Guaranty dated as of February 21, 2003. In
the
first quarter of 2005, QBI’s assets were liquidated, netting approximately
$308,000, with all proceeds applied to the balance due. It is expected that
land
owned by a separate co-guarantor will be sold with net proceeds also applied
to
the balance due. Proceeds
from the land sale are expected to reduce the balance due, however we may
be
liable for the entire balance if the sale of such assets is unsuccessful.
The
discontinuation of Quality Botanical Ingredients’ and XCEL HealthCare operations
will decrease our consolidated revenues and may have a material adverse affect
on our business.
In
October 2004, we discontinued operations of our wholly-owned subsidiary,
Quality
Botanical Ingredients, Inc., and in May 2005, we discontinued operations
of our
wholly owned subsidiary, XCEL Medical Pharmacy, Inc. If we are unable to
generate additional revenues through our other business operations, we will
realize a significant decrease in annual revenues ranging from $1 million
to $5
million per year which could have material adverse affect on our
business.
We
face significant competition.
The
market for health-related retail goods and services is characterized by intense
competition. Nearly all of our existing and potential competitors have longer
operating histories, greater experience, greater name recognition, larger
customer bases and significantly greater financial, technical and marketing
resources than we do. Because of their greater resources, our competitors
are
able to undertake more extensive marketing campaigns for their brands and
services, and make more attractive offers to potential employees, retail
affiliates, and others. We cannot assure you that we will be able to compete
successfully against our current or future competitors or that our business
and
financial results will not suffer from competition. Competition is based
upon,
price, timely delivery, product quality, safety, availability, product
innovation, marketing assistance and customer service. We believe that we
compare favorably in all of these categories, but do not contend that our
products or services have characteristics which are different from those
of our
competitors. Our new products will face strong competition from pharmaceutical
companies, healthcare companies, nutritional
and alternative medicine companies.
Our
Stockholders may be diluted as a result of future
financings.
Any
equity financings would result in dilution to our then-existing shareholders.
Furthermore, the possible sale of restricted shares issued and outstanding
may,
in the future, dilute the percentage of free-trading shares held by a
shareholder or subsequent purchaser of our securities in the market, and
may
have a depressive effect on the price of our securities. Further, such sales,
if
substantial, might also adversely affect our ability to raise additional
equity
capital in the future.
There
is no assurance we will be able to establish a marketing
organization.
Our
long
term business plan is to market the products which we develop, either through
the utilization of contract sales representatives or through the establishment
of our own sales force. If we do not establish a marketing organization,
we may
be hampered in the sale of our products. We have not yet begun to develop
such
marketing channels as to do so would require an investment of substantial
amounts of capital, approximately $2,500,000, which we currently do not possess
and which we may never be able to access. Accordingly, despite our plans,
we may
be unable to develop our own marketing channels and would therefore be relying
on marketing partnerships with other companies with whom we have not yet
established relationships or arrangements.
There
is no assurance that we will be able to develop or to acquire complimentary
products.
Although
we are presently focusing on the in-house development of products, we may
seek
to acquire products, technologies or companies with products, manufacturing
and
distribution capabilities consistent with our commercial objectives. We have
not
yet, however, at this stage identified such other products, technologies
or
other companies and there can be no assurance that we will be able to acquire
such products or companies. We presently do not have the capital to make
acquisitions. Accordingly, in the near term, any such acquisitions would
most
likely require that we issue stock in our Company to effect acquisitions
which
would result in dilution to our shareholders. If we do not acquire or develop
additional products, our growth will be constrained.
There
may be insufficient consumer acceptance of integrative medicine products
or our
new products.
While
we
have developed a number of proprietary formulations that integrate traditional
over-the-counter generic drugs with complimentary alternative medications
such
as vitamins, herbs and other nutraceutical supplements which we intend to
market
under the CoCare® brand name to address heart disease, cold and flu, arthritis,
migraine, allergy and other conditions, there can be no assurance that the
nascent field of integrative medicine will result in an established market
for
our products or that consumers will find our products, or our new products
more
beneficial than existing over-the-counter generic drugs or products offered
by
our competitors and already established in the marketplace.
There
can be no assurance we will be able to successfully brand our CoCare® products,
our Shugr™ product, or our Sequesterol™ product.
Creating
a new nationally recognized brand normally requires a significant investment
in
advertising and promotion which would be beyond the current resources of
our
Company. Without such financial and other resources, it would be extremely
difficult to establish CoCare®, Shugr™ or Sequesterol™ as nationally
recognizable brands, or other branded products.
Our
new Shugr™ product may be unable to compete against established sugar
substitutes such as Nutrasweet™.
While
we
have recently begun to market our Shugr™ product in The Vitamin Shoppe and
Meijer stores, a national and regional retail chain, respectively, we face
formidable obstacles in consumer acceptance of this product in the face of
established artificial sweeteners such as Nutrasweet™, Splenda™ and other such
products. We believe that in the near term it will be difficult to convince
food
and beverage manufacturers to utilize our product as an ingredient as a sugar
substitute due to the substantial marketing and branding and infrastructure
investment that they have made in promoting and utilizing such products as
Nutrasweet™, Splenda™ and other such sugar substitutes. We do expect that retail
consumers may find our product available for sale in such retail chains as
The
Vitamin Shoppe and Meijer. Nevertheless, although we intend to establish
promotional brochures and displays in such shops to create consumer awareness,
we realize that, as a result of the enormous amounts of branding investments
made by Nutrasweet™, Splenda™ and other such sugar substitutes, we may be unable
to attract consumers to our product. We therefore may be unsuccessful in
our
marketing effort, in which case we may not realize significant revenues from
the
Shugr™ product line or other products.
We
may not be able to establish strategic alliances in order to develop markets
for
our products.
Our
business strategy for the exploitation of our CoCare® family of proprietary
pharmaceutical and nutraceutical products require that we enter into strategic
alliances and partnerships with pharmaceutical, nutraceutical and/or
biotechnology
companies in order to market and distribute such products. We have explored
such
potential relationships with several such companies but to date have not
entered
into any such alliances and there can be no assurance that we will be able
to
enter into such alliances or agreements. Failure to do so poses the risk
that it
may be difficult or impossible for us to realize our business plan objectives
to
develop or market our proprietary pharmaceutical and nutraceutical products.
Moreover,
if we do enter into such agreements for alliances with pharmaceutical,
nutraceutical and/or biotechnology companies, there can be no assurance that
such agreements or alliances will be entered into upon terms which generate
significant revenues or enable us to achieve profitability. Furthermore,
our
plan is to retain exclusive or co-marketing co-promotion rights in the United
States to our products, while out-licensing rights for other uses to our
strategic partners and alliances. There can be no assurance that we will
be able
to negotiate agreements which enable us to retain such rights.
We
may be unable to protect our proprietary rights.
Although
we have developed a number of proprietary formulations to integrate
over-the-counter generic drugs with complimentary alternative medications
for
which we have patents, there can be no assurance that our formulations do
not
infringe on other parties patents or proprietary rights. Furthermore, there
can
be no assurance that we will be able to defend such patents against competitors
with larger financial resources. We have to date not encountered any litigation
or threats in regard to proprietary rights.
There
is a risk that we will be unable to retain or acquire skilled employees to
execute our growth plans.
Our
potential for success depends significantly on our Chief Executive Officer,
Stuart Avery Gold and our Chief Financial Officer, Fred E. Tannous. We do
not
carry key-man life insurance on either executive. Given the early stage of
our
development and our plans for rapid expansion, the loss of the services of
any
one of these executive or the services of any other key employees we may
hire in
the future would have a substantial, adverse effect on our business. We believe
that our future success will depend in large part on our ability to attract
and
retain highly skilled technical, marketing and management personnel. If we
are
unable to hire the necessary personnel, the development of our business would
likely be delayed or prevented. Competition for these highly-skilled employees
is intense. As a result, we cannot assure you that we will be successful
in
retaining our key personnel or in attracting and retaining the personnel
we
require for expansion.
We
have
an employment agreement with Mr. Stuart Gold that commenced June 1, 2006
and
ends May 31, 2009. The base salary under this employment contract is $200,000
per year, subject to annual increases of not less than 10% tied to the
achievement of annual sales milestones. To date, Mr. Gold has agreed to defer
and accrue his salary. This contract provides for a performance bonus calculated
as the greater of (i) 10% of the earnings before interest, taxes, depreciation
and amortization for said fiscal year or (ii) 50% of the salary, provided,
however,
that the
Company has generated a minimum of $1 million EBITDA during the fiscal year
and
the annual bonus may not exceed 150% of the base salary at the time. Also,
Mr.
Gold received an option grant for the purchase of up to 6% of Company common
stock, after the completion of the contemplated equity financing, exercisable
at
a price equal to the offering share price. The first 3% of the option shares
shall vest equally on each anniversary date over the term of his agreement.
The
second 3% of the option shares shall vest as follows; one-third of the total
option shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $1 million, another
one-third of
the
total option shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $2 million; and the
final one-third of
the
total option shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $3
million.
If this
employment contract is terminated by us without good cause, or if we are
in
breach of the agreement, or if we assign the executive without his consent
to a
lesser responsibility status than his current position, then we are required
to
pay Mr. Gold the lesser of (i) his salary for the remainder of the term of
the
agreement or (ii) one year’s salary and accrued benefits prorated through the
date of termination.
We
also
have an employment agreement with Mr. Fred E. Tannous that commenced July
1,
2005 and ends June 30, 2008. The base salary under this employment contract
is
$250,000 per year. This contract provides for a performance bonus in an amount
equal to of 5 % of the Adjusted EBITDA for each fiscal year and an option
grant
for the purchase of up to 500,000 shares of Company common stock exerciseable
at
a price equal to $0.65 per share. The option shall be exercisiable on a monthly
pro rata basis over the term of the agreement. If
the
Company shall merge, sell a controlling interest, or sell a majority of its
assets; or if there is a transaction (or series of transactions) in which
the
Company’s shareholders sell a majority of outstanding shares of Company capital
stock, then we shall pay Mr. Tannous the greater of the remainder of his
salary
or two hundred fifty thousand dollars. Further, at the date of any such merger
or sale is consummated, all unvested options shall be immediately accelerated
and as to any unexercised options to purchases shares in the Company which
are
held by Mr. Tannous, the Company shall pay Mr. Tannous cash in the amount
equal
to the difference between the consideration paid to the Company on a per
share
basis less the exercise price of the option, the value of which is multiplied
to
the number of options which Mr. Tannous holds. If
this
employment contract is terminated by us without good cause, or if we are
in
breach of the agreement, or if we assign the executive without his consent
to a
lesser responsibility status than his current position, or require the executive
to be based elsewhere other than our principal executive office, then we
are
required to Mr. Tannous the lesser of (i) his salary for the remainder of
the
term of the agreement or (ii) one year’s salary and accrued benefits prorated
through the date of termination.
RISKS
RELATED TO THE INDUSTRY
Government
regulation could adversely affect viability of selling vitamins, supplements
and
minerals.
In
the
United States, extensive federal government regulations may restrict the
way
dietary supplement products are sold, resulting in restrictions on these
products and content which may result in significant additional expenses
to us.
Also, numerous U.S. governmental agencies may regulate the manufacture,
packaging, labeling, advertising, promotion, distribution and sale of dietary
supplement products. The primary regulatory agency in the United States for
these products is the Food and Drug Administration (FDA). The laws, regulations
and enforcement policies governing dietary supplement products are relatively
new and still evolving, and we cannot predict what enforcement positions
the FDA
or other governmental agencies may take with respect to our products. In
general, the dietary supplement industry has adopted different interpretations
of these laws than have the relevant regulatory agencies. We can not at this
time determine the extent to which FDA regulation will impact our
business.
Next,
U.S. federal, state and local government regulations may restrict the products
which we manufacture. The U.S. FDA regulates vitamin, supplements and other
health care products under the Federal Food, Drug and Cosmetic Act and
regulations promulgated thereunder. These products are also subject to
regulation by, among other regulatory entities, the Consumer Product Safety
Commission, the U.S. Department of Agriculture, and the Environmental Protection
Agency. Additionally, the U.S. Federal Trade Commission regulates advertising
and other forms of promotion and methods of marketing of these products under
the Federal Trade Commission Act. Also, various state and local agencies
may
also regulate the manufacture, labeling and advertising of these products.
We
cannot
be certain that we comply with all laws and regulations in this area.
Enforcement actions by any of these regulatory agencies can result in civil
and
criminal penalties, an injunction to stop or modify certain selling methods,
seizure of products, adverse publicity or voluntary recalls and labeling
changes. If any governmental agency were to undertake an enforcement action
against us, this could cause an immediate decrease in our revenues, cause
us to
incur significant additional expenses and result in a decrease in our stock
price.
There
is a risk that the nutraceutical industry may become
saturated.
We
are
part of the nutraceutical industry which has experienced the entry of new
participants and suppliers on an ever increasing basis. If this trend continues,
the industry may reach a saturation point at which none of the suppliers
will be
able to sell their products at a profit. Should that occur, our company would
be
adversely affected.
RISKS
RELATED TO THE OFFERING
We
are listed on the NASD OTC Electronic Bulletin Board, which can be a volatile
market.
Our
common stock is quoted on the OTC Electronic Bulletin Board (“OTCBB”). It is a
more limited trading market than the NASDAQ SmallCap Market, and timely,
accurate quotations of the price of our common stock may not always be
available. You may expect trading volume to be low in such a market.
Consequently, the activity of only a few shares may affect the market and
may
result in wide swings in price and in volume.
In
2001,
our stock price ranged from a high of $4.90 to a low of $0.07; in 2002, our
stock price ranged from a high of $4.20 to a low of $0.55; in 2003, our stock
price ranged from a high of $1.80 to a low of $0.65; in 2004, our stock price
ranged from a high of $1.50 to a low of $0.45; and from January 1, through
December 31, 2005, our stock price ranged from a high of $1.54 to a low of
$0.45. During
the first six months of 2006, our stock price ranged from a high of $0.44
to a
low of $0.03 per share.
The
stock
market has experienced significant price and volume fluctuations, and the
market
prices of nutraceutical companies, particularly small capitalization companies
such as HESG, have been highly volatile. Investors may not be able to sell
their
shares at or above the then current, OTCBB price. Recent changes in the rules
of
the OTCBB may make it difficult for small companies such as ours to continue
to
be quoted on the OTCBB. In addition, our results of operations during future
fiscal periods might fail to meet the expectations of stock market analysts
and
investors. This failure could lead the market price of our common stock to
decline.
The
market price of our common stock could also fluctuate substantially due to:
|
|
quarterly
fluctuations in operating results;
|
|
|
announcements
of new products or product enhancements by us or our
competitors;
|
|
|
technological
innovations by us or our competitors;
|
|
|
general
market conditions or market conditions specific to our or our customers’
industries; or
|
|
|
changes
in earnings estimates or recommendations by analysts.
|
In
the
past, following periods of volatility in the market price of a company’s
securities, securities class action litigation has at times been instituted
against that company. If we become subject to securities litigation, we could
incur substantial costs and experience a diversion of management’s attention and
resources.
The
market for our stock may be adversely affected by the penny stock
rule.
Our
common stock is subject to the requirements of Rule 15(g)9, promulgated under
the Securities Exchange Act as long as the price of our common stock is below
$5.00 per share. Under such rule, broker-dealers who recommend low-priced
securities to persons other than established customers and accredited investors
must satisfy special sales practice requirements, including a requirement
that
they make an individualized written suitability determination for the purchaser
and receive the purchaser’s consent prior to the transaction. The Securities
Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional
disclosure in connection with any trades involving a stock defined as a penny
stock. Generally, the Commission defines a penny stock as any equity security
not traded on an exchange or quoted on NASDAQ that has a market price of
less
than $5.00 per share. The required penny stock disclosures include the delivery,
prior to any transaction, of a disclosure schedule explaining the penny stock
market and the risks associated with it. Such requirements could severely
limit
the market liquidity of the securities and the ability of purchasers to sell
their securities in the secondary market.
Future
issuances of our common stock could dilute current shareholders and adversely
affect the market.
We
have
the authority to issue up to 80,000,000 shares of common stock and to issue
options and warrants to purchase shares of our common stock and preferred
stock
without stockholder approval. These future issuances could be at values
substantially below the price paid for our common stock by our current
shareholders
Future
sales of our common stock could adversely affect the market.
Future
sales of our common stock into the market, including sales by our officers,
directors and principal shareholders, may also depress the market price of
our
common stock. Sales of these shares of our common stock or the market’s
perception that these sales could occur may cause the market price of our
common
stock to fall. These sales also might make it more difficult for us to sell
equity or equity related securities in the future at a time and price that
we
deem appropriate or to use equity as consideration for future acquisitions.
The
conversion of the Series A Preferred Stock and exercise of outstanding option
and warrants will dilute our common stockholders and may depress the price
of
our common stock.
Future
sales of preferred stock could also adversely affect the rights of our common
stock and have an anti-takeover effect.
We
have
the authority to issue up to 20,000,000 shares of preferred stock without
shareholder approval. The issuance of preferred stock by our Board of Directors
could adversely affect the rights of the holders of our common stock. An
issuance of preferred stock could result in a class of outstanding securities
that would have preferences with respect to voting rights and dividends and
in
liquidation over the common stock and could, upon conversion or otherwise,
have
all of the rights of our common stock. Our Board of Directors’ authority to
issue preferred stock could discourage potential takeover attempts or could
delay or prevent a change in control through merger, tender offer, proxy
contest
or otherwise by making these attempts more difficult or costly to
achieve.
READ
CAREFULLY
Please
read this prospectus carefully. It describes our business, our financial
condition and results of operations. We have prepared this prospectus so
that
you will have the information necessary to make an informed investment
decision.
You
should rely on the information contained in this prospectus. We have not
authorized anyone to provide you with information different from that contained
in this prospectus. The selling shareholders are offering to sell shares
of our
common stock and seeking offers to buy shares of our common stock only in
jurisdictions where offers and sales are permitted. The information contained
in
this prospectus is accurate only as of the date of the prospectus, regardless
of
the time the prospectus is delivered or the common stock is sold.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
In
addition to historical information, this prospectus contains statements relating
to our future business and/or results, including, without limitation, the
statements under the captions “Summary,” “Risk Factors,” “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” and
“Business.” These statements include certain projections and business trends
that are “forward-looking” within the meaning of the United States Private
Securities Litigation Reform Act of 1995. You can identify these statements
by
the use of words like “may,” “could,” “should,” “project,” “believe,”
“anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,”
“continue” and variations of these words or comparable words. Forward-looking
statements do not guarantee future performance and involve risks and
uncertainties. Actual results will differ, and may differ materially, from
projected results as a result of certain risks and uncertainties. These risks
and uncertainties include, without limitation, those described under “Risk
Factors” and those detailed from time to time in our filings with the SEC, and
include, among others, the following:
|
|
our
limited operating history;
|
|
|
continuing
depletion of our assets as a result of having no
income;
|
|
|
our
ability to obtain additional funds to maintain our operations;
and
|
|
|
other
factors referenced or incorporated by reference in this prospectus
and
other filings with the Securities and Exchange
Commission.
|
These
risks are not exhaustive. See “Risk Factors” above. Moreover, new risk factors
emerge from time to time and it is not possible for our management to predict
all risk factors, nor can we assess the impact of all factors on our business
or
to the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
These forward-looking statements are made only as of the date of this
prospectus. Except for our ongoing obligation to disclose material information
as required by federal securities laws, we do not intend to update you
concerning any future revisions to any forward-looking statements to reflect
events or circumstances occurring after the date of this
prospectus.
The
following table presents the actual capitalization of our Company at June
30,
2006. You should read this table in conjunction with our financial statements
and the related notes thereto, and the other financial information included
elsewhere in this prospectus.
| |
|
|
|
| |
|
|
|
|
Warrant
liability
|
|
$
|
208,796
|
|
Series
A Preferred stock, par value $0.001 per share; $0.001 par value,
5,000,000 shares authorized,
1,350,169 shares issued and outstanding;
|
|
$
|
1,147,640
|
|
|
Series
B Preferred stock, par value $0.001 per share, net of
unamortized discount
of $98,023; $0.001 par value, 130 shares authorized,
9 shares issued and outstanding, 264,708 shares, on an as if converted
basis
|
|
$
|
126,978
|
|
|
Series
C Preferred stock, par value $0.001 per share, net of unamortized
discount
of $1,354,519;
$0.001 par value, 5,000 shares authorized, 3,166 shares issued
and
outstanding, 2,877,894 shares, on an as if converted basis
|
|
$
|
1,811,481
|
|
|
Long-term
liability
|
|
$
|
3,294,895
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
Common
stock, par value $0.001 per share, 80,000,000 shares authorized,
36,813,747 shares issued and outstanding
|
|
$
|
36,818
|
|
|
Additional
paid-in capital
|
|
$
|
26,985,449
|
|
| |
|
|
|
|
|
Accumulated
deficit
|
|
$
|
(31,509,217
|
)
|
|
Total
stockholders’ deficit
|
|
$
|
(4,486,950
|
)
|
|
Total
capitalization
|
|
$
|
(1,192,055
|
) |
We
will
not receive any proceeds from the sale of the shares of common stock by the
selling shareholders.
Our
common stock began trading in the OTC Bulletin Board on August 3, 2001 and
currently trades under the symbol “HESG.OB”. The following table sets forth the
high and low bid price per share quotations as reported on the OTC Bulletin
Board of the common stock for the periods indicated. These quotations reflect
inter-dealer prices, without retail mark up, mark down or commission and
may not
necessarily represent actual transactions. Actual prices may vary.
| |
|
High
|
|
Low
|
|
| |
|
|
|
|
|
|
|
|
$
|
0.44
|
|
$
|
0.23
|
|
|
|
|
$
|
0.28
|
|
$
|
0.03
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
|
|
|
|
|
$
|
1.54
|
|
$
|
0.65
|
|
|
|
|
$
|
1.35
|
|
$
|
0.70
|
|
|
|
|
$
|
1.20
|
|
$
|
0.69
|
|
|
|
|
$
|
0.99
|
|
$
|
0.45
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
$
|
1.50
|
|
$
|
1.13
|
|
|
|
|
$
|
1.29
|
|
$
|
0.54
|
|
|
|
|
$
|
1.01
|
|
$
|
0.49
|
|
|
|
|
$
|
0.99
|
|
$
|
0.45
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
$
|
1.25
|
|
$
|
0.65
|
|
|
|
|
$
|
1.29
|
|
$
|
0.71
|
|
|
|
|
$
|
1.21
|
|
$
|
0.80
|
|
|
|
|
$
|
1.80
|
|
$
|
0.90
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
$
|
4.20
|
|
$
|
2.70
|
|
|
|
|
$
|
3.35
|
|
$
|
1.30
|
|
|
|
|
$
|
2.00
|
|
$
|
0.80
|
|
|
|
|
$
|
1.05
|
|
$
|
0.55
|
|
At
September 30, 2006, we had 190 holders of record of our common stock; we
estimate that the Company has approximately 4,900 additional beneficial holders
of our common stock held in names of brokers and securities depositories,
amounting to approximately 5,100 shareholders.
We
currently intend to retain future earnings, if any, to finance the expansion
of
our business, and we do not expect to pay any cash dividends in the foreseeable
future. The decision whether to pay cash dividends on our common stock will
be
made by our board of directors, in their discretion, and will depend on our
financial condition, operating results, capital requirements and other factors
that the board of directors considers significant. We are required to pay
a
dividend of 8% per annum on our Series A Convertible Preferred Stock which
we
may pay in cash or in shares of common stock, which are registered. We are
required to pay a dividend of 6% per annum on our Series B Convertible Preferred
Stock, payable in cash or in shares of common stock. We are required to pay
a
dividend of 8% per annum on our Series C Convertible Preferred Stock, payable
in
cash or in shares of our common stock.
The
following table presents summary historical consolidated financial information
for the years ended December 31, 2005 and 2004, and for the six months
ended June 30, 2006 and 2005. The information for the years ended December
31,
2005 and 2004 is derived from our audited consolidated financial statements
included elsewhere in this prospectus. The summary historical consolidated
financial information does not purport to indicate results of operations
as of
any future date or for any future period. In our opinion, all necessary
adjustments, consisting only of normal recurring adjustments, have been included
to present fairly the financial position and results of operations for the
period presented in our unaudited consolidated financial information for
the six
months ended June 30, 2006. The summary historical consolidated financial
information has been derived from and should be read in conjunction with
“Management’s Discussion and Analysis of Results of Operations and Financial
Condition,” of our consolidated financial statements and notes thereto, which
are included elsewhere in this prospectus.
Summary
Consolidated Financial Data
| |
|
Year
Ended December 31,
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
2004
|
|
2006
|
|
2005
|
|
|
Net
sales
|
|
$
|
60,142
|
|
$
|
67,204
|
|
$
|
27,979
|
|
$
|
4,369
|
|
|
Gross
profit
|
|
$
|
22,913
|
|
$
|
46,665
|
|
$
|
7,413
|
|
$
|
3,459
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
$
|
(7,505,132
|
)
|
$
|
(4,593,856
|
)
|
$
|
(3,524,287
|
)
|
$
|
(1,917,259
|
)
|
|
Impairment
of intangible assets
|
|
$
|
(437,740
|
)
|
$
|
(994,258
|
)
|
|
-
|
|
|
-
|
|
|
Other
income (expense)
|
|
$
|
2,343,820
|
|
$
|
97,916
|
|
$
|
683,478
|
|
$
|
(2,246,102
|
)
|
|
Loss
from discontinued operations
|
|
$
|
(174,220
|
)
|
$
|
(5,008,183
|
)
|
$
|
-
|
|
$
|
(78,949
|
)
|
|
Net
income (loss)
|
|
$
|
(5,750,359
|
)
|
$
|
(10,451,716
|
)
|
$
|
(2,833,396
|
)
|
$
|
(4,238,851
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to common shareholders
|
|
$
|
(6,093,912
|
)
|
$
|
(10,959,108
|
)
|
$
|
(3,016,321
|
)
|
$
|
(4,294,616
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share available to common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
$
|
(0.25
|
)
|
$
|
(0.78
|
)
|
$
|
(0.10
|
)
|
$
|
(0.21
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
|
|
24,559,505
|
|
|
14,125,035
|
|
|
30,598,662
|
|
|
20,040,199
|
|
Balance
Sheet Data
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
30,103
|
|
$
|
21,256
|
|
$
|
240,532
|
|
|
Working
capital
|
|
$
|
(4,723,677
|
)
|
$
|
(4,897,615
|
)
|
$
|
(5,340,035
|
)
|
|
Total
current assets
|
|
$
|
123,405
|
|
$
|
131,241
|
|
$
|
774,321
|
|
|
Total
assets
|
|
$
|
4,082,098
|
|
$
|
4,155,552
|
|
$
|
4,401,174
|
|
|
Total
current liabilities
|
|
$
|
4,847,082
|
|
$
|
5,028,856
|
|
$
|
6,114,356
|
|
|
Total
liabilities
|
|
$
|
8,485,342
|
|
$
|
9,066,679
|
|
$
|
10,521,726
|
|
|
Total
stockholders’ equity
|
|
$
|
(4,403,244
|
)
|
$
|
(4,911,127
|
)
|
$
|
(6,120,552
|
)
|
This
report contains forward-looking statements within the meaning of Section
27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. The Company's actual results could differ
materially from those set forth as a result of general economic conditions
and
changes in the assumptions used in making such forward-looking statements.
The
following discussion and analysis of our financial condition and results
of
operations should be read in conjunction with the audited financial statements
for the years ended December 31, 2005 and 2004 and the unaudited condensed
consolidated financial statements for the three and six months ended June
30,
2006 and 2005 and accompanying notes therein.
Critical
Accounting Policies
Our
discussion and analysis of results of operations and financial condition
are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with Accounting Principles Generally Accepted in the
United States of America (“GAAP”). The preparation of these consolidated
financial statements requires us to make estimates and judgments that affect
the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. We evaluate our estimates
on an
on-going basis, including those related to provisions for uncollectible
accounts, inventories, goodwill, intangible assets, and contingencies and
litigation. We base our estimates on historical experience and on various
other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions
or
conditions.
Note
2 of
the "Notes to Consolidated Financial Statements" includes a summary of the
significant accounting policies and methods used in the preparation of our
consolidated financial statements. The following is a brief description of
the
more significant accounting policies and methods we use.
Impairment
of Long-lived Assets.
Long-lived assets such as excess of fair value of net assets acquired, patents,
license agreements and formulas could become impaired and require a write-down
if circumstances warrant. Conditions that could cause an asset to become
impaired include lower-than-forecasted revenues, changes in our business
plans
or a significant adverse change in the business climate. The amount of an
impairment charge would be based on estimates of an asset’s fair value as
compared with its book value. In accordance with Financial Accounting Standards
Board’s (“FASB”) Statement of Financial Accounting Standards (“SFAS”) Nos. 142
and 144, we perform a valuation, at least annually for goodwill and whenever
other circumstances arise for other long-lived assets, of our intangible
long-lived assets to determine if any impairment exists.
Issuance
of Stock for Non-cash Consideration. All
issuances of the Company's common stock for non-cash consideration have been
assigned a dollar amount equaling either the market value of the shares issued
or the value of consideration received whichever is more readily determinable.
The majority of the non-cash consideration received pertains to services
rendered by consultants and others and has been valued at the market value
of
the shares issued. In certain issuances, the Company may discount the value
assigned to the stock issued for illiquidity and restrictions on resale.
Warrant
Liability.
In
conjunction with raising capital through the sale of equity, the Company
has
issued various warrants that have registration rights for the underlying
shares.
As the contracts must be settled by the delivery of registered shares and
the
delivery of the registered shares is not controlled by the Company, pursuant
to
EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company’s Own Stock”, the fair value of the warrants
at the date of issuance is recorded as a warrant liability on the balance
sheet
and the change in fair value is included in other (expense) income.
Accounting
for Stock-Based Incentive Programs. On January 1, 2006, we adopted Statement
of
Financial Accounting Standards No. 123 (revised 2004), "Share-Based
Payment,"
("SFAS
123(R)") which requires the measurement and recognition of compensation expense
for all share-based payment awards made to our employees and directors based
on
estimated fair values. We adopted SFAS 123(R) using the modified prospective
transaction method, which requires the application of the accounting standard
as
of January 1, 2006, the first day of our fiscal year 2006. Our financial
statements as of and for the three and six months ended June 30, 2006 reflect
the impact of SFAS 123(R). In accordance with the modified prospective
transition method, our financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). The value
of
the portion of the award that is ultimately expected to vest is recognized
as an
expense over the requisite service periods in our statement of operations.
Prior
to the adoption of SFAS 123(R), we accounted for stock-based awards to employees
and directors using the intrinsic value method in accordance with APB 25
as
allowed under Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation
(SFAS
123). As stock-based compensation expense recognized in the statement of
operations for the first quarter of fiscal 2006 is based on awards ultimately
expected to vest, it has been reduced for estimated forfeitures. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from those
estimated. We estimated forfeitures to be 10%.
Stock-based
compensation expense recognized as operating expense under SFAS 123(R) for
the
six months ended June 30, 2006 was approximately $567,000, determined by
the
Black-Scholes valuation model, and consisting of stock-based compensation
expense related to employee stock options. See Note 2 - Summary of Significant
Accounting Policies to the unaudited consolidated financial statements for
additional information.
In
accordance with SFAS 123R, in our first quarter of fiscal year 2006 we started
to recognize compensation expense related to stock options and restricted
stock
purchase rights, which are equivalent to options granted to employees based
on:
(a) compensation cost for all share-based payments granted prior to, but
not yet
vested as of December 31, 2005, based on the grant date fair value estimated
in
accordance with SFAS No 123, " Accounting for
Stock-Based Compensation
,"
("SFAS 123"), adjusted for an estimated future forfeiture rate, and (b)
compensation cost for all share-based payments granted subsequent to December
31, 2005, based on the grant date fair value estimated in accordance with
the
provisions of SFAS 123R.
Effective
October 2004 and May 2005 the Company discontinued operations of its wholly
owned subsidiaries Quality Botanical Ingredients, Inc and XCEL Medical Pharmacy,
Inc., respectively. Results described herein reflect the consolidated operations
of the Company and its two wholly-owned subsidiaries with continuing operations,
Swiss Research, Inc. and BioSelect Innovations, Inc. for the three months
ended
June 30, 2006 as compared to the three months ended June 30, 2005.
Selected
Statement of Operations Information
| |
|
|
|
| |
|
|
|
2005
|
|
|
Net
sales
|
|
$
|
7,608
|
|
$
|
-
|
|
|
Gross
profit
|
|
$
|
2,064
|
|
$
|
-
|
|
|
Net
(loss) income
|
|
$
|
(1,167,951
|
)
|
$
|
527,204
|
|
| |
|
|
|
|
|
|
|
|
Net
(loss) income attributable to common shareholders
|
|
$
|
(1,257,347
|
)
|
$
|
244,357
|
|
| |
|
|
|
|
|
|
|
|
Net
loss per share available to common shareholders
|
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
Net
Sales.
Our
consolidated net sales for the three months ended June 30, 2006 and 2005
are as
follows:
Our
consolidated net sales from continuing operations for the three months ended
June 30, 2006 and 2005 totaled approximately $8,000 and $0, respectively.
The
revenues for each period are generated from the sales of distinct product
lines.
Revenues in 2006 are from both Shugr and Sequesterol. In 2005, BioSelect
completed its final transaction of offering topically applied base creams
wholesale to distributors that sold the product to individual pharmacies.
The
Company discontinued base cream sales in January 2005.
Cost
of Goods Sold Cost
of
goods sold for the three months ended June 30, 2006 and 2005 totaled
approximately $6,000 and $0, or 73% and 0% of net sales, respectively. This
resulted in gross profits totaling approximately $2,000 and $0, or 27% and
0% of
net sales for the three months ended June 30, 2006 and 2005, respectively.
The
variance in year over year cost of goods sold is attributable to selling
different products, base creams, Shugr and Sequesterol, each exclusively
sold in
only one period.
Selling,
General and Administrative.
Total
consolidated operating expenses from continuing operations for the three
months
ended June 30, 2006 and 2005 totaled approximately $1,504,000 or 19,768%
of net
sales, and approximately $1,660,000, respectively. Our operating expenses
include the following amounts:
| |
|
|
|
| |
|
|
|
2005
|
|
|
|
|
|
|
Expense
|
|
$
Amount
|
|
%
Sales
|
|
$
Amount
|
|
%
Sales
|
|
|
Advertising
and marketing
|
|
$
|
128,412
|
|
|
1,688
|
%
|
$
|
345,712
|
|
|
-
|
%
|
|
Salary
expenses
|
|
$
|
(143,945
|
)
|
|
(1,892
|
)%
|
$
|
123,048
|
|
|
-
|
%
|
|
SFAS
123R expense
|
|
$
|
167,870
|
|
|
2,206
|
%
|
$
|
-
|
|
|
-
|
%
|
Professional,
legal and accounting fees
|
|
$
|
923,420
|
|
|
12,137
|
%
|
$
|
659,305
|
|
|
-
|
%
|
|
Depreciation
and amortization
|
|
$
|
166,216
|
|
|
2,185
|
%
|
$
|
180,135
|
|
|
-
|
%
|
|
Penalties
|
|
$
|
-
|
|
|
-
|
%
|
$
|
228,620
|
|
|
-
|
%
|
Other
selling, general and administrative expenses
|
|
$
|
261,957
|
|
|
3,443
|
%
|
$
|
123,427
|
|
|
|
|
| |
|
$
|
1,503,930
|
|
|
19,768
|
%
|
$
|
1,660,247
|
|
|
|
|
Advertising
and marketing expenses in 2006 were attributable to expenditures promoting
the
Company’s new products Shugr and Sequesterol as well as the commencement of a
national infomercial as compared to the expenses in 2005, sans Sequesterol
promotion, that included expenditures for a non-recurring national corporate
exposure campaign.
The
Company’ s salary expense for the three month’s ended June 30, 2006 is entirely
non-cash disbursements paid in shares of common stock, offset by the
cancellation of shares previously issued to a former employee.
For
the
three months ended June 30, 2006, the Company recognized non-cash compensation
cost of approximately $168,000 as a result of the adoption of SFAS 123(R).
Under
SFAS 123(R), the Company will continue to utilize the Black-Scholes model
to
estimate the fair value of options granted after January 1, 2006. The Company’s
assessment of the estimated compensation charges is affected by its stock
price
as well as assumptions regarding a number of complex and subjective variables
and the related tax impact. These variables include, but are not limited
to, the
Company’s stock price volatility and employee stock option exercise
behaviors.
Professional,
legal and accounting fees include cash and non-cash consideration paid to
consultants for services including business development, financial communication
programs, and fees paid for accounting and legal services. Approximately
$892,000 and $512,000 or 97% and 78% of the professional, legal and accounting
expense for the three months ended June 30, 2006 and 2005 respectively were
non-cash expenses paid with the Company’s common stock or options and warrants
to purchase shares of the Company’s common stock.
Penalties
are due to the holders of the Company’s Convertible Preferred Stock for damages
pursuant to the filing of registration statements for the shares underlying
the
offering. Approximately all of the total expense for the three months ended
June
30, 2005 are non-cash expenses that will be paid with the Company’s common stock
or options and warrants to purchase shares of the Company’s common stock.
The
requisite registration statement was declared effective in February of 2006,
effectively limiting the Company’s future penalty expense.
Other
selling, general and administrative expenses include such items as automobile
expenses, delivery and freight costs, office supplies and services, rent,
travel, and utilities. The period over period increase is attributable to
approximately $138,000 of expense recognized for impairments to intangible
assets.
Other
expenses.
Interest
expense, net, totaled approximately $136,000 and $454,000 for the three months
ended June 30, 2006 and 2005, respectively and includes interest paid on
lines
of credit, notes payable and amortization of discount on the sale of convertible
debentures and the issuance of convertible preferred stock. Amortization
of
discounts on debentures and preferred stock represent the interest cost
associated with issuing the convertible debentures and preferred stock with
warrants totaled approximately $127,000 and $410,000 for the three months
ended
June 30, 2006 and 2005, respectively, and are non-cash expenditures. The
period
versus period decrease is attributable to the complete amortization of discounts
related to the Company’s debentures and Series A preferred stock.
The
change in fair value of warrant liability for the three months ended June
30,
2006 and 2005, respectively, totaled approximately $470,000 and $2,723,000,
and
represents the change in fair value of warrants issued with registration
rights
to various professionals and the purchasers of our common and preferred stock.
The variance between periods is attributable to decreases in the Company’s
closing stock price on June 30, 2006 versus June 30, 2005.
Net
(Loss) Income.
Net
(loss) income for the three months ended June 30, 2006 and 2005 totaled
approximately ($1,168,000) and approximately $527,000 of net sales,
respectively. Net (loss) income per share of common stock was ($0.04) and
$0.01
for the three months ended June 30, 2006 and 2005, respectively. Net loss
from
continuing operations for the three months ended June 30, 2006 and 2005 for
the
subsidiary company operations totaled approximately ($70,000) and ($38,000),
respectively. Net loss from discontinued operations for the three months
ended
June 30, 2006 and 2005 for the subsidiary company operations totaled
approximately $0 and ($82,000), respectively. There can be no assurance that
we
will ever achieve profitability or that a stream of revenue can be generated
and
sustained in the future. Income recognized during the three months ended
June
30, 2005 was entirely attributable to reductions in the Company’s warrant
liability that are recognized as other income.
| |
|
Selected
Statement of Operations
Information
|
|
| |
|
|
|
| |
|
|
|
2005
|
|
|
Net
sales
|
|
$
|
27,979
|
|
$
|
4,369
|
|
|
Gross
profit
|
|
$
|
7,413
|
|
$
|
3,459
|
|
|
Net
loss
|
|
$
|
(2,833,396
|
)
|
$
|
(3,711,647
|
)
|
| |
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(3,016,321
|
)
|
$
|
(3,994,494
|
)
|
| |
|
|
|
|
|
|
|
|
Net
loss per share available to common shareholders
|
|
$
|
(0.10
|
)
|
$
|
(0.19
|
)
|
Net
Sales.
Our
consolidated net sales for the six months ended June 30, 2006 and 2005 are
as
follows:
The
Company discontinued its sales of base creams attributable to 2005 revenues
to
focus on its core strategy of building the Swiss Research brands and product
portfolio, including Shugr and Sequestrol. Our
consolidated net sales from continuing operations for the six months ended
June
30, 2006 and 2005 totaled approximately $28,000 and $4,000, respectively.
The
revenues for each period are generated from the sales of distinct product
lines.
Revenues in 2006 are from both Shugr and Sequesterol.
Cost
of Goods Sold Cost
of
goods sold for the six months ended June 30, 2006 and 2005 totaled approximately
$21,000 and $1,000, or 89% and 21% of net sales, respectively. This resulted
in
gross profits totaling approximately $7,000 and $3,000, or 26% and 79% of
net
sales for the six months ended June 30, 2006 and 2005, respectively. Cost
of
goods sold and gross profit were reduced to near zero for the six months
ended
June 30, 2005 due to the discontinued operations of XCEL Medical
Pharmacy.
Selling,
General and Administrative.
Total
consolidated operating expenses for the six months ended June 30, 2006 and
2005
totaled approximately $3,524,000 or 12,596% of net sales, and approximately
$3,578,000, or 81,884% of net sales, respectively. Our operating expenses
include the following amounts:
| |
|
|
|
| |
|
|
|
2005
|
|
|
|
|
|
|
Expense
|
|
$
Amount
|
|
%
Sales
|
|
$
Amount
|
|
%
Sales
|
|
|
Advertising
and marketing
|
|
$
|
128,412
|
|
|
459
|
%
|
$
|
1,263,896
|
|
|
28,929
|
%
|
|
Salary
expenses
|
|
$
|
97,861
|
|
|
350
|
%
|
$
|
236,990
|
|
|
5,424
|
%
|
|
SFAS
123R expense
|
|
$
|
567,432
|
|
|
2,028
|
%
|
$
|
-
|
|
|
-
|
%
|
Professional,
legal and accounting fees
|
|
$
|
2,003,032
|
|
|
7,159
|
%
|
$
|
1,133,147
|
|
|
25,936
|
%
|
|
Depreciation
and amortization
|
|
$
|
334,950
|
|
|
1,197
|
%
|
$
|
347,356
|
|
|
7,951
|
%
|
|
Penalties
|
|
$
|
40,000
|
|
|
143
|
%
|
$
|
369,920
|
|
|
8,467
|
%
|
Other
selling, general and administrative expenses
|
|
$
|
352,600
|
|
|
1,245
|
%
|
$
|
226,197
|
|
|
5,177
|
%
|
| |
|
$
|
3,524,287
|
|
|
12,581
|
%
|
$
|
3,577,506
|
|
|
81,884
|
%
|
Advertising
and marketing expenses during the six months ended June 30, 2006 have decreased
versus the six months ended June 30, 2005. During the six months ended June 30,
2005 the Company completed a national corporate awareness campaign. Current
period expenditures are to promote the Company’s new products Shugr and
Sequesterol.
The
Company’ s salary expense for the six month’s ended June 30, 2006 is entirely
non-cash disbursements paid in shares of common stock, offset by the
cancellation of shares previously issued to a former employee.
For
the
six months ended June 30, 2006, the Company recognized non-cash compensation
cost of approximately $567,000 as a result of the adoption of SFAS 123(R).
Under
SFAS 123(R), the Company will continue to utilize the Black-Scholes model
to
estimate the fair value of options granted after January 1, 2006. The Company’s
assessment of the estimated compensation charges is affected by its stock
price
as well as assumptions regarding a number of complex and subjective variables
and the related tax impact. These variables include, but are not limited
to, the
Company’s stock price volatility and employee stock option exercise
behaviors.
Professional,
legal and accounting include fees paid to consultants for services including
business development, financial communication programs, and fees paid for
accounting and legal services. Approximately $1,914,000 and $910,000 or 96%
and
83% of the professional, legal and accounting fee expense for the quarters
ended
June 30, 2006 and 2005 respectively were non-cash expenses paid with the
Company’s common stock or options and warrants to purchase shares of the
Company’s common stock. The period over period increase is significantly
attributable to an increase in legal expense paid in shares of the Company’s
common stock.
Penalties
are due to the holders of the Company’s Convertible Preferred Stock for damages
pursuant to the filing of registration statements for the shares underlying
the
offering. The total expense for the six months ended June 30, 2006 and 2005
respectively is a non-cash expense that will be paid with the Company’s common
stock or options and warrants to purchase shares of the Company’s common stock.
In February 2006, the requisite registration statements were declared effective
and the Company stopped incurring significant penalty charges.
Other
selling, general and administrative expenses include such items as automobile
expenses, delivery and freight costs, office supplies and services, rent,
travel, and utilities.
Other
expenses.
Interest
expense totaled approximately $319,000 and $623,000 for the six months ended
June 30, 2006 and 2005, respectively and includes interest paid on lines
of
credit, notes payable and amortization of discount on the sale of convertible
debentures and the issuance of convertible preferred stock. Amortization
of
discounts on debentures and preferred stock represent the interest cost
associated with issuing the convertible debentures and preferred stock with
warrants totaled approximately $319,000 and $623,000 for the six months ended
June 30, 2006 and 2005, respectively, and are non-cash
expenditures.
The
change in fair value of warrant liability totaled approximately $1,002,000
and
$646,000 and represents the change in fair value of warrants issued with
registration rights to various professionals and the purchasers of our common
and preferred stock for the six months ended June 30, 2006 and 2005,
respectively. The variance between periods is attributable to decreases in
the
Company’s closing stock price on June 30, 2006 versus June 30,
2005.
Net
Loss.
Net loss
for the six months ended June 30, 2006 and 2005 totaled approximately $2,833,000
or 10,127% of net sales, and approximately $3,712,000 or 84,954% of net sales,
respectively. Net loss per share of common stock was $0.10 and $0.19 and
for the
six months ended June 30, 2006 and 2005, respectively. Net loss for the six
months ended June 30, 2006 and 2005 for the subsidiary company operations
totaled approximately $130,000 and $68,000 or 464% and 1,556% of net sales,
respectively. There can be no assurance that we will ever achieve profitability
or that a stream of revenue can be generated and sustained in the
future.
Capital
Resources and Liquidity
Assets.
Our
current assets totaled approximately $94,000 at June 30, 2006. Total assets
were
approximately $3,788,000 at June 30, 2006. At June 30, 2006, assets consisted
primarily of inventory of $71,000, net intangibles totaling $3,694,000, net
accounts receivable totaling $4,000, and cash on hand of $7,000, all
approximate.
Liabilities
and Working Capital.
Our
current liabilities totaled approximately $4,980,000 at June 30, 2006. This
resulted in a working capital deficit totaling approximately $4,886,000 at
June
30, 2006. Total liabilities were approximately $8,275,000 at June 30, 2006.
At
June 30, 2006 liabilities consisted primarily of accounts payable and accrued
expenses totaling approximately $982,000. Loans payable to shareholders totaled
approximately $50,000 at June 30, 2006. Warrant liability totaled approximately
$315,000 at June 30, 2006. Liabilities of discontinued operations held for
sale
totaled approximately $3,328,000 at June 30, 2006.
As
reflected in the accompanying consolidated financial statements, the Company
has
realized financial losses, negative cash flows from operations and negative
working capital. These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
In
view
of the matters described in the preceding paragraph, recoverability of a
major
portion of the recorded asset amounts shown in the accompanying consolidated
balance sheet is dependent upon continued operations of the Company, which,
in
turn, is dependent upon the Company's ability to continue to raise capital
and
generate positive cash flows from operations. The consolidated financial
statements do not include any adjustments relating to the recoverability
and
classification of recorded asset amounts or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue
its
existence.
Cash
Requirements and Additional Funding
We
generated financial growth primarily through cash flows provided by financing
activities. Cash flows provided by financing activities totaled approximately
$130,000 and $3,768,000 for the six months ended June 30, 2006 and 2005,
respectively. Funds totaling approximately $100,000 were received during
the six
months ended June 30, 2006 and derived from the exercise of options. In 2005,
funds totaling approximately $2,820,000 were received from the issuance of
Series C Preferred Stock; funds totaling approximately $240,000 were received
from the sale of common stock; funds totaling approximately $763,000 were
received from the exercise of options and warrants. For the six months ended
June 30, 2006, we used cash flows for operations totaling approximately $145,000
as compared to the six months ended June 30, 2005, we used cash flows for
operations totaling approximately $2,862,000. Cash flows provided by investing
activities were approximately $0 for the six months ended June 30, 2006 versus
$200,000 for the six months ended June 30, 2005.
In
August, 2006,
the
Company sold $15,000 of convertible debentures pursuant to a Securities Purchase
Agreement to the Company’s Co-Chairman. Additionally, the Company issued 500,000
of common stock purchase warrants to the debenture holders. Each warrant
entitles the holder to purchase one share of common stock at an exercise
price
of $0.05. The debentures accrue interest at 10% per annum. The warrants expire
in August 2011. Additionally, the Company issued a convertible debenture
in the
amount of $30,000 outstanding liability to the Co-Chairman in a convertible
debenture under the same terms.
In
August, 2006,
the
Company sold $25,000 of convertible debentures pursuant to a Securities Purchase
Agreement. Additionally, the Company issued 500,000 of common stock purchase
warrants to the debenture holders. Each warrant entitles the holder to purchase
one share of common stock at an exercise price of $0.05. The debentures accrue
interest at 10% per annum. The warrants expire in August 2011.
In
October, 2006,
the
Company received proceeds of $20,000 upon the sale of 400,000 shares of
restricted common stock pursuant to a Securities Purchase Agreement.
Additionally, the Company issued 400,000 of common stock purchase warrants
to
the debenture holders. Each warrant entitles the holder to purchase one share
of
common stock at an exercise price of $0.05. The warrants expire in October
2016.
We
believe that cash on hand will be insufficient to meet our anticipated needs
for
working capital, capital expenditures and business development for the next
twelve months. In order to expand our operations, we will need to raise
additional financing. If we are unable to raise additional funds, we may
be
forced to curtail or cease operations.
Even
if
we are able to continue our operations, the failure to obtain debt or equity
financing could have a substantial adverse effect on our business and financial
results, and we may need to delay purchases of additional companies. Although
we
have historically relied upon financing provided by our officers and directors
to supplement operations, they are not legally obligated to provide
the Company
with any additional funding in the future.
In
the
future, we may be required to seek additional capital by selling debt or
equity
securities, selling assets, or otherwise be required to bring cash flows
in
balance when it approaches a condition of cash insufficiency. The sale of
additional equity securities, if accomplished, may result in dilution to
our
shareholders. We cannot assure shareholders, however, that financing will
be
available in amounts or on terms acceptable to us, or at all.
As
of
June 30, 2006, our principal commitments consisted of agreements with various
consultants who will provide with business development, public and financial
relations, and raising additional debt or equity financing in exchange for
stock
of the Company or a portion of proceeds from the sale of stock.
Subsequent
Events
Subsequent
to the period ended June 30, 2006, Sid L. Anderson, a member of the Company’s
board of directors, notified the Company that he was recently elected Chairman
of the Board of Directors of another company. Due to the potential conflict
of
interest, he submitted his resignation from the board of Health Sciences
Group,
effective August 14, 2006.
Effective
October 2004 and May 2005 the Company discontinued operations of its wholly
owned subsidiaries Quality Botanical Ingredients, Inc and XCEL Medical Pharmacy,
Inc., respectively. Results described herein reflect the consolidated operations
of the Company and its two wholly-owned subsidiaries with continuing operations,
Swiss Research, Inc. and BioSelect Innovations, Inc. for the year ended December
31, 2005 as compared to the year ended December 31, 2004. The data presented
for
the year ended December 31, 2004 has been adjusted from its original year-end
presentation to reflect the subsequently discontinued operations of both
Quality
Botanical Ingredients and XCEL Medical Pharmacy.
| |
|
Selected
Statement of Operations
Information
|
|
| |
|
|
|
| |
|
|
|
| |
|
|
|
2004
|
|
|
Net
sales
|
|
$
|
60,000
|
|
$
|
67,000
|
|
|
Gross
profit
|
|
$
|
23,000
|
|
$
|
47,000
|
|
Selling,
general and administrative expenses
|
|
$
|
7,505,000
|
|
$
|
4,594,000
|
|
|
Intangible
asset impairment
|
|
$
|
437,740
|
|
$
|
994,258
|
|
|
Other
(income) expense
|
|
$
|
(2,344,000
|
)
|
$
|
(98,000
|
)
|
|
Contingent
loss of disc ops
|
|
$
|
-
|
|
$
|
2,077,000
|
|
|
Loss
from disc. ops
|
|
$
|
174,000
|
|
$
|
2,931,000
|
|
|
Net
loss
|
|
$
|
5,750,000
|
|
$
|
10,451,000
|
|
| |
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
6,094,000
|
|
$
|
10,959,000
|
|
| |
|
|
|
|
|
|
|
|
Net
loss per share available to common shareholders
|
|
$
|
(0.25
|
)
|
$
|
(0.78
|
)
|
Net
Sales.
Our
consolidated net sales from continuing operations for the years ended December
31, 2005 and 2004 totaled approximately $60,000 and $67,000, respectively.
The
revenues for each period are generated from the sales of two distinct product
lines. In 2004, BioSelect sold base creams wholesale to distributors that
sold
the product to individual pharmacies. The Company discontinued base cream
sales
in January 2005. Significantly all revenues in 2005 are from Shugr, via the
acquisition of Swiss Research, and are reported starting August 2005.
In
2005,
the Company completed development of Shugr, the zero-calorie sweetener that
tastes and bakes like cane sugar, and successfully placed the product in
nearly
2,000 retail outlets. The Company expects to expand Shugr’s retail distribution
in 2006.
Cost
of Goods Sold.
Cost of
goods sold for the years ended December 31, 2005 and 2004 totaled $37,000
and
$21,000, or 62% and 31% of net sales, respectively. This resulted in gross
profits totaling $23,000 and $47,000, or 38% and 69% of net sales for the
years
ended December 31, 2005 and 2004, respectively. The variance in year over
year
cost of goods sold is attributable to selling two different products, base
creams and Shugr, each exclusively sold in only one period.
Selling,
General and Administrative.
Total
selling, general and administrative expenses for the years ended December
31,
2005 and 2004 totaled approximately $7,505,000 and $4,594,000, or 12,479%
and
6,836% of net sales, respectively.
| |
|
|
|
| |
|
|
|
2004
|
|
|
|
|
|
| |
|
Amount
|
|
%
Sales
|
|
Amount
|
|
%
Sales
|
|
|
Salary
and payroll expense
|
|
$
|
685,000
|
|
|
1,141
|
%
|
$
|
627,000
|
|
|
933
|
%
|
|
Marketing
and advertising
|
|
|
1,633,000
|
|
|
2,715
|
%
|
|
3,000
|
|
|
5
|
%
|
|
Professional
fees
|
|
|
3,422,000
|
|
|
5,689
|
%
|
|
2,748,000
|
|
|
4,089
|
%
|
|
Depreciation
and amortization
|
|
|
279,000
|
|
|
464
|
%
|
|
196,000
|
|
|
291
|
%
|
|
Penalties
|
|
|
789,000
|
|
|
1,311
|
%
|
|
611,000
|
|
|
910
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
selling, general and administrative expenses
|
|
|
697,000
|
|
|
1,159
|
%
|
|
409,000
|
|
|
607
|
%
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
selling, general and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
expenses
|
|
$
|
7,505,000
|
|
|
12,479
|
%
|
$
|
4,594,000
|
|
|
6,836
|
%
|
Salary
and payroll expense includes salaries, taxes, vacation earnings and bonuses
for
the years ended December 31, 2005 and 2004. In 2005 and 2004, approximately
$430,000 and $228,000, respectively, of total salary expense was paid by
the
issuance of our common stock and therefore did not affect cash flows.
Professional
fees increased to 5,689% of net sales or $3,422,000 in 2005 and include fees
paid to consultants for investor relations services including providing
financial communication programs, increasing general market awareness, educating
retail brokers and institutional networks, assisting management with the
development of strategic approaches to accessing the equity and debt markets,
and identifying and reviewing potential acquisition candidates and fees paid
for
legal services provided. Consulting expenses also include fees paid to
consultants relating to the business development of Health Sciences Group
and
our subsidiary companies, Swiss Research and BioSelect. These services include
developing corporate strategies, planning for our anticipated commercialization
of new products, formulating and evaluating potential corporate options,
and
expanding subsidiary company operations through an integrated process of
analysis. Approximately $2,795,000 and $1,932,000 were non-cash charges incurred
for professional services through the issuance of common stock, common stock
options and common stock warrants for the years ended December 31, 2005 and
2004, respectively. We expect to continue to increase market awareness, continue
to develop our strategic approaches, perform due diligence on acquisition
candidates and acquire them accordingly. However, we plan to reduce the related
consulting expenses by using internal resources as much as
possible.
In
2005,
depreciation and amortization expense increased to 464% of net sales. This
increase is attributable to the acquisition of licenses for Apple Peel, Polymann
and Open Cell Biotech. With the successful approval of our patent applications,
intellectual property amortization expense will account for the significant
share of depreciation and amortization expense for the foreseeable future.
Significantly all capitalized loan fees were fully amortization during
2004.
Penalties
paid to preferred stock shareholders increased from $611,000 in 2004, to
$789,000 in 2005. All penalties were paid with equity.
Other
selling, general and administrative expenses include such items as automobile
expenses, delivery and freight costs, office supplies and services, rent,
travel, and utilities. Within other selling general and administrative expenses,
insurance expense allocated to general and administrative expenses totaled
approximately $149,000 for the year ended December 31, 2005 compared to $103,000
for the year ended December 31, 2004.
Impairment
of intangible Assets.
At
December 31, 2005, the Company recognized approximately $438,000 as “Impairment
of Intangible Assets” in the Company’s statement of operations resulting from a
reduced valuation of the Company’s apple peel powder processing license. In
addition, the Company abandoned certain patent applications, which had been
previously capitalized in the purchase price allocation at the time BioSelect
was acquired.
At
December 31, 2004, impairments to goodwill and formulations at the Company’s
discontinued XCEL subsidiary totaled approximately $351,000 and $540,000,
respectively, and are included in Loss from Discontinued Operation of XCEL
in
the statement of operations. In 2004, impairments to patents held by BioSelect
totaled approximately $994,000 and recognized as “Impairment of Intangible
Assets” in the Company’s statement of operations.
Other
expenses.
Interest
expense totaled approximately $1,072,000 and $691,000 for the years ended
December 31, 2005 and 2004, respectively and includes interest paid on lines
of
credit, notes payable, capital leases and amortization of discount on
convertible debentures and convertible preferred stock. Amortization of
discounts on debentures and preferred stock are non-cash expenditures that
represent the interest cost associated with issuing the convertible debentures
and preferred stock with warrants and the intrinsic value of the beneficial
conversion feature, which totaled approximately $1,013,000 and $558,000 for
the
years ended December 31, 2005 and 2004 respectively. Other non-cash expenditures
included in interest expense total approximately $59,000 and $130,000 for
the
years ended December 31, 2005 and 2004, respectively and relate to discounts
on
notes payable and the value of the issuance of common stock due to a price
adjustment provision.
The
decrease in fair value of warrant liability totaled approximately $3,803,000
and
$747,000 for the years ended December 31, 2005 and 2004 respectively, and
represents the change in fair value of warrants issued with registration
rights
to various professionals and the purchasers of our preferred stock. The decrease
in fair value is included as other income on our statement of operations.
Contingent
Loss from Discontinued Operations.
In 2004,
upon the discontinuation of Quality Botanical Ingredients and per Statement
of
Financial Accounting Standards No. 5 “Accounting for Contingencies,” the Company
recognized an expected loss of approximately $2,077,000 on both the disposal
of
assets held for sale and certain assets and capitalized costs whose future
economic value has been determined to be unrealizable. This loss effectively
reduces the carrying value of those assets identified with the discontinued
operations to the realized fair market value established in January 2005
during
the entity’s liquidation auction. The assets contributing to the loss
include:
| |
|
Amount
|
|
|
Accounts
receivable, net
|
|
$
|
110,000
|
|
|
Inventory,
net
|
|
|
1,235,000
|
|
|
Fixed
assets, net
|
|
|
680,000
|
|
|
Capitalized
loan fees, net
|
|
|
32,000
|
|
|
Security
deposits
|
|
|
20,000
|
|
| |
|
|
|
|
|
Total
loss from discontinued operations
|
|
$
|
2,077,000
|
|
Loss
from Discontinued Operations.
Loss
from discontinued operations, excluding contingent losses, for the years
ended
December 31, 2005 and 2004 totaled approximately ($174,000) or (290%) of
net
sales and approximately ($2,931,000) or (4,362%) of net sales, respectively.
Net
loss from discontinued operations, including contingent losses, per share
of
common stock was ($0.01) and ($0.36) for the years ended December 31, 2005
and
2004, respectively. The decrease in net loss is due to the discontinuance
of QBI
in October 2004 and XCEL Medical Pharmacy in May 2005.
Loss
from Continuing Operations.
Loss
from continuing operations for the years ended December 31, 2005 and 2004
totaled approximately ($5,576,000) or (9,272%) of net sales and approximately
($5,445,000) or (8,100%) of net sales, respectively. Net loss from continuing
operations per share of common stock was ($0.23) and ($0.42) for the years
ended
December 31, 2005 and 2004, respectively. Non-cash charges that contributed
to
the losses included asset impairments, services and financing costs associated
with our debt and equity financing transactions and the issuance of registered
shares without an effective registration statement as previously discussed.
There can be no assurance that we will ever achieve profitability or that
a
stream of revenues can be generated and sustained in the future.
Capital
Resources and Liquidity
Assets.
At
December 31, 2005, our assets from continuing operations consisted primarily of
net patents, goodwill and licenses totaling approximately $4,024,000, and
net
accounts receivable totaling approximately $7,000, inventory totaling
approximately $91,000 and cash on hand of approximately $21,000.
Liabilities
and Working Capital.
At
December 31, 2005, our liabilities from continuing operations consisted
primarily of accounts payable and accrued expenses totaling approximately
$1,149,000, warrant liability of approximately $1,211,000, convertible preferred
stock totaling $2,827,000, convertible debentures of $315,000, notes payable
-
including notes payable to shareholders - totaling $20,000, and dividends
payable of approximately $215,000.
Decreases
in current liabilities from continuing operations are significantly attributable
to the payment of convertible debenture obligations, payroll tax obligations,
and accrued expenses. Increases in long term liabilities from continuing
operations were due to the sale of Series C Preferred Stock, which is to
be
settled in our registered common stock.
Liabilities
held for sale from discontinued operations totaled approximately $3,329,000
at
December 31, 2005, as follows:
| |
|
Amount
|
|
| |
|
|
|
|
Account
payable and accrued expenses
|
|
$
|
1,175,000
|
|
|
Line
of credit
|
|
|
1,789,000
|
|
|
Payroll
taxes payable
|
|
|
97,000
|
|
|
Notes
payable
|
|
|
201,000
|
|
|
Capital
leases payable
|
|
|
67,000
|
|
| |
|
|
|
|
|
Total
liabilities held for sale
|
|
$
|
3,329,000
|
|
Cash
Requirements and Additional Funding
We
generated financial growth primarily through cash flows provided by financing
activities. In 2005 and 2004, financing activities generated net cash of
approximately $3,680,000 and $820,000, respectively. Proceeds totaling
approximately $4,199,000 were received during the year ended December 31,
2005
and were derived from the sale of our equity securities (preferred and common),
proceeds from the exercise of options and warrants, and loans from officers.
Cash flows used by financing activities were primarily payments issued on
notes
payable ($55,000), expenses related to selling common and preferred stock,
approximately ($356,000), and outflows from discontinued operations of
approximately ($108,000). Proceeds totaling approximately $1,959,000 were
received during the year ended December 31, 2004 from the sale of our equity
securities (preferred and common) and proceeds from the exercise of options
and
warrants, and loans from officers. Cash flows used by financing activities
were
primarily payments issued on our notes payable ($224,000), cash flows used
by
discontinued operations, approximately ($758,000) and expenses related to
selling common and preferred stock of approximately ($158,000). Cash and
cash
equivalents decreased by approximately $219,000 to approximately $21,000
at
December 31, 2005.
The
following table summarizes our contractual obligations from continuing
operations at December 31, 2005:
| |
|
Less
Than
|
|
1
to 3
|
|
4
to 5
|
|
After
|
|
|
|
|
Contractual
Obligation
|
|
Total
|
|
One
Year
|
|
Years
|
|
Years
|
|
5
Years
|
|
|
Notes
payable to shareholders
|
|
$
|
20,000
|
|
$
|
20,000
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Operating
leases
|
|
|
10,000
|
|
|
10,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Convertible
debentures
|
|
|
315,000
|
|
|
315,000
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
750,000
|
|
|
250,000
|
|
|
500,000
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
contractual cash obligations
|
|
$
|
1,095,000
|
|
$
|
595,000
|
|
$
|
500,000
|
|
$
|
-
|
|
$
|
-
|
|
The
operating lease for our offices and employment contracts are expected to
be paid
either with cash generated from operations or from financing activities.
The
repayment of principal on the shareholder loans will either be paid by cash
generated from operations or from financing activities. The convertible
debentures are expected to be converted into shares of our common stock pursuant
to the agreements, resulting in additional issuances of our common stock.
In
2005, cash used for operating activities totaled approximately ($4,099,000)
while cash generated from financing activities totaled approximately $3,680,000.
In 2004, cash used for operating activities totaled approximately ($1,054,000)
while cash generated from financing activities totaled approximately $820,000.
Additionally,
our other principal commitments consist of agreements with various consultants
who will provide us with business development, public and financial relations,
and raising additional debt or equity financing in exchange for stock of
the
Company or a portion of proceeds from the sale of stock. The amount due is
based
on the fair market price of our stock on the date the transaction is consummated
and the value of the transaction.
We
believe that cash on hand will be sufficient to meet our anticipated needs
for
working capital, capital expenditures and business development for the next
twelve months. The failure to obtain future debt or equity financing could
have
a substantial adverse effect on our business and financial results, and we
may
need to delay the purchase of additional companies. Although we have
historically relied upon financing provided by our officers and directors
to
supplement operations, they are not legally obligated to provide the Company
with any additional funding in the future.
In
the
future, we may be required to seek additional capital by selling debt or
equity
securities, selling assets, or otherwise be required to bring cash flows
in
balance when it approaches a condition of cash insufficiency. The sale of
additional equity securities, if accomplished, may result in dilution to
our
shareholders. We cannot assure shareholders, however, that financing will
be
available in amounts or on terms acceptable to us, or at all.
As
reflected in the accompanying consolidated financial statements, the Company
has
realized financial losses, negative cash flows from operations and negative
working capital. These matters raise substantial doubt about the Company’s
ability to continue as a going concern.
In
the
first three months of 2006, management plans to take, or has taken, the
following steps that it believes will be sufficient to provide the Company
with
the ability to continue in existence:
|
·
|
The
Company has raised $100,000 from the exercise of options and warrants
and
management anticipates raising additional equity funds that will
be used
to fund any capital shortfalls.
|
|
·
|
The
Company executed a distribution agreement with DNP International
to sell
Shugr; the Company’s zero-calorie, diabetic safe sweetener that tastes and
bakes like cane sugar. Per the agreement, DNP is subject to a minimum
sales requirement targeting $1.0 million in 2006, $4.0 million
in 2007,
and $5.5 million in 2008.
|
|
·
|
The
Company will launch its new product, Sequesterol, in April of 2006
and
commence an escalating marketing campaign thereafter.
|
|
·
|
Management
is decreasing expenses by using internal resources to perform due
diligence and other acquisition related duties on future
acquisitions.
|
|
·
|
Management
has streamlined its operations and is developing new products,
which are
anticipated to have increased gross profit margins.
|
Recently
Issued Pronouncements
In
December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an
amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The
amendments made by Statement 153 are based on the principle that exchanges
of
nonmonetary assets should be measured based on the fair value of the assets
exchanged. Further, the amendments eliminate the narrow exception for
nonmonetary exchanges of similar productive assets and replace it with a
broader
exception for exchanges of nonmonetary assets that do not have commercial
substance. Previously, Opinion 29 required that the accounting for an exchange
of a productive asset for a similar productive asset or an equivalent interest
in the same or similar productive asset should be based on the recorded amount
of the asset relinquished. Opinion 29 provided an exception to its basic
measurement principle (fair value) for exchanges of similar productive assets.
The Board believes that exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover basis. By focusing
the exception on exchanges that lack commercial substance, the Board believes
this Statement produces financial reporting that more faithfully represents
the
economics of the transactions. The Statement is effective for nonmonetary
asset
exchanges occurring in fiscal periods beginning after June 15, 2005. Earlier
application is permitted for nonmonetary asset exchanges occurring in fiscal
periods beginning after the date of issuance. The provisions of this Statement
was applied prospectively. The Company has evaluated the impact of the adoption
of SFAS 153, and the impact was not significant to the Company's overall
results
of operations or financial position.
In
December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based
Payment”. Statement 123(R) will provide investors and other users of financial
statements with more complete and neutral financial information by requiring
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the
fair
value of the equity or liability instruments issued. Statement 123(R) covers
a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights,
and
employee share purchase plans. Statement 123(R) replaces FASB Statement No.
123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. Statement 123, as originally issued
in
1995, established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that Statement
permitted entities the option of continuing to apply the guidance in Opinion
25,
as long as the footnotes to financial statements disclosed what net income
would
have been had the preferable fair-value-based method been used. The Company
will
be required to apply Statement 123(R) in 2006. The Company has evaluated
the
impact of the adoption of SFAS 123(R), and does not believe the impact will
be
significant to the Company's overall results of operations or financial
position.
In
May
2005, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 154, Accounting Changes and Error
Corrections - a replacement of APB Opinion No. 20 and FASB Statement No.
3. SFAS
No. 154 requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless it is impracticable
to
determine either the period-specific effects or the cumulative effect of
the
change. SFAS No. 154 also requires that retrospective application of a change
in
accounting principle be limited to the direct effects of the change. Indirect
effects of a change in accounting principle, such as a change in
nondiscretionary profit-sharing payments resulting from an accounting change,
should be recognized in the period of the accounting change. SFAS No. 154
also
requires that a change in depreciation, amortization or depletion method
for
long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes
and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. Management does not expect the implementation of this
new
standard to have a material impact on their financial position, results of
operations and cash flows.
General
Health
Sciences Group, Inc. (the “Company”), a Delaware corporation, is an integrated
provider of innovative products proprietary technologies used in nutritional
supplements and functional foods and beverages. Its subsidiaries include
BioSelect Innovations, which holds the Company’s internally developed
intellectual property, and Swiss Research, Inc., which markets and sells
branded
products addressing major wellness categories. We strive to differentiate
ourselves through the use of:
|
·
|
Proprietary/patented
technologies; and
|
|
·
|
Strategic
marketing and distribution
partnerships.
|
We
identify, develop and commercialize products and functional food ingredients
derived from natural sources to provide consumers and health professionals
with
preventive healthcare alternatives. We plan to leverage the exclusive and
proprietary benefits of our internally developed and patented products and
recently acquired licenses to increase sales through national and international
channels as we endeavor to maximize our earnings potential. We envision building
Health Sciences, Swiss DietTM
and
Swiss ResearchTM
into
leading brands while offering new and innovative products and functional
ingredients that promote a positive health benefit for a wide variety of
consumer needs.
Corporate
Background
In
December 2001, the Company acquired 100% of the outstanding stock of XCEL
Medical Pharmacy, Inc., (“XCEL”) a California corporation and the outstanding
shares of BioSelect Innovations, Inc., (“BioSelect”) a Nevada corporation for
approximately $4.4 million. XCEL and BioSelect provide pharmaceutical and
cosmeceutical products and services.
In
February 2003, effective January 1, 2003, the Company completed its acquisition
of Quality Botanical Ingredients, Inc. (“QBI”) pursuant to an Asset Purchase
Agreement for approximately $1.5 million. Quality Botanical Ingredients is
a
manufacturer and contract processor of bulk botanical materials and nutritional
ingredients supplied to buyers in various industries including pharmaceutical,
nutraceutical and cosmetics.
In
October 2004, the Company acquired Polymann Technologies, Inc. (“PTI”), a
wholly-owned subsidiary of UTEK Corporation in a tax-free stock-for-stock
exchange for approximately $810,000. PTI holds a license to a patented
technology known as Low Molecular Weight Polymannuronate, a natural cholesterol
reducing product.
In
November 2004, the Company acquired Apple Peel Technologies, Inc. (“APTI”), a
wholly-owned subsidiary of UTEK Corporation in a tax-free stock-for-stock
exchange for approximately $830,000. APTI holds a license to a patented
technology that has been shown to reduce cellular damage caused by free
radicals.
In
December 2004, the Company executed an asset purchase agreement to acquire
Swiss
Research, Inc. for approximately $360,000. This
transaction was completed in August, 2005.
In
February 2005, the Company acquired Open Cell Biotechnologies, Inc. (“OCBI”), a
wholly-owned subsidiary of UTEK Corporation in a tax-free stock-for-stock
exchange for approximately $955,000. OCBI holds a license to a patented edible
open-cell hydrocolloid technology.
Discontinued
Operations
In
October 2004, the Board of Directors of the Company elected to discontinue
operations of its wholly owned subsidiary, QBI. The Company is a co-guarantor
of
the obligations of QBI payable to La Salle Business Credit (“La Salle”) pursuant
to a Continuing Unconditional Corporate Guaranty dated as of February 21,
2003.
Since the decision to discontinue operations, and post asset liquidation,
QBI
has remained dormant. Management believes the Company’s continuing operations
will not be adversely affected by this action.
In
May
2005, management determined that its pharmaceutical business, XCEL Healthcare,
Inc. was inconsistent with the Company’s revised strategic direction of
identifying, developing and commercializing nutritional products and functional
food ingredients and discontinued operations. Since the decision to discontinue
XCEL has remained dormant.
BUSINESS
STRATEGY
Our
objective is to become a recognized leader in providing innovative and
proprietary products and ingredients that promote a positive health benefit
for
a wide variety of consumer needs. To achieve our objective, we intend to:
Build
Consumer Base and Brand Awareness through Advertising and Promotional
Activities.
We
intend to achieve consumer awareness of and create a demand for our products
through advertising and promotional activities in conjunction with the
establishment of distribution channels. We believe that one of the most
effective marketing tools is product sampling combined with the dissemination
of
educational information explaining the nutritional qualities of our products.
Accordingly, we anticipate increasing our advertising and marketing budget
as we
increase emphasis on television advertising.
Promote
the Proprietary, Science-based Qualities of our
Products.
The
proprietary qualities of our products are important to significant consumer
segments including the fitness, weight management and therapeutic markets.
We
intend to advertise in health and fitness magazines, in health-oriented
publications and in various other magazines with wider circulation to promote
consumer interest within these markets. We expect to distribute educational
materials that promote interest in our brand and our products.
Introduce
New Products and Product Line Extensions.
Although we are initially focusing on a few products, we intend to introduce
further extensions of our products.
Acquire
Complementary Companies or Product Lines.
To grow
sales outside of existing product lines and related products, we will consider
strategic acquisitions. We intend to focus on acquisitions of product lines
or
companies with product lines that are marketed to the nutraceutical and
cosmeceutical markets. We may also consider possible acquisitions of or
investments in manufacturers of foods and beverages.
Attract
and Retain Quality Employees.
We
recognize the need to continue to attract and retain quality employees. We
intend to target established leadership bases for growth in both existing
and
new markets, enhance our infrastructure to create an atmosphere of teamwork
and
cooperation, improve reward and recognition, and develop more interactive
training programs.
Enter
New Markets.
We
believe that, in addition to the North American market, significant growth
opportunities continue to exist in international markets. New markets will
be
selected based on an assessment of several factors, including market size,
anticipated demand for our products, receptivity to network marketing, and
ease
of entry, which includes consideration of possible regulatory restrictions
on
the products or network marketing system. We expect to register certain products
with regulatory and government agencies in preparation for international
expansion.
PRODUCT
OVERVIEW
We
focus
on delivering a complete wellness program and way of life to health-conscious
consumers. Our products are designed to appeal to the growing number of
consumers who seek to live a long and healthy lifestyle. We are continuing
to
develop products in three categories which address (i) diet and weight
management; (ii) cholesterol and heart health; and (iii) personal care and
wellness.
Shugr™
Shugr™
is
a zero-calorie sugar substitute, that tastes and bakes like cane sugar. It
is
made with high-quality ingredients and manufactured under strict Good
Manufacturing Practices ("GMP") standards. Shugr is based on a proprietary
blend
of erythritol, tagatose, maltodextrin and a trace of sucralose. Erythritol
occurs naturally in many fruits and vegetables, maltodextrin comes from corn
starch, and tagatose provides added sweetness and prebiotic fiber which aids
in
digestion. Shugr's unique formulation results in a sweet taste that is
remarkably like cane sugar without any aftertaste typically associated with
zero-calorie sweeteners. Shugr tastes like sugar and cooks like sugar. Shugr™
has a patent pending. Shugr is made with high quality ingredients. and its
ingredients have a GRAS (Generally Recognized as Safe) designation for food
safety as determined by the U.S. Food & Drug Administration (FDA). Shugr™ is
currently available through Vitamin Shoppe, Meijer, Drugstore.com, Amazon.com,
and LavazzaStore.com.
Sequesterol™ Advance
Cardio Formula
SequesterolTM Advance
Cardio Formula
is a
proprietary blend of clinically studied ingredients selected by medical
professionals for their unique ability to maintain cardiovascular health
and a
free-flowing circulatory system. SequesterolTM
contains
a proprietary blend of natural ingredients formulated to take a multi-faceted
approach to maintain and support ones coronary vascular system. This combination
includes: cassia nomame, a natural fat-blocking lipase inhibitor; octacosanol,
a
natural phytochemical and a major constituent of policosanol which has been
found to maintain healthy cholesterol levels; and omega-3 (DHA) fatty acids,
which have been found to be helpful in reducing the risk of coronary artery
disease. SequesterolTM
combines
the benefits of these powerful nutrients with heart-healthy vitamins to provide
cardio support! SequesterolTM
is
currently available for purchase at http://www.Sequesterol.com
with
plans to sell SequesterolTM
directly
to consumers via a direct to consumer television campaign.
Other
unique and innovative products include Aplevia™ - an ultra-powerful antioxidant
derived from apple peels and Edible SpongesTM,
an
open-cell hydrocolloid product.
PRODUCT
MANUFACTURING
We
use
third-party vendors to produce our products. These third-party vendors and
manufacturers produce and, in most cases, package these products according
to
formulations developed by or in conjunction with our in-house product
development team.
We
place
a strong emphasis on quality control because we believe that quality standards
play a critical factor in consumer purchasing decisions and in differentiating
the Swiss Research brand. All of our products will be manufactured in accordance
with current GMPs. Outsourcing key products is designed to allow us to enhance
production flexibility and capacity while substantially reducing capital
expenditures, avoiding the costs of managing a production work force, and
to
focus our energy and resources on marketing and sales.
The
selected contract manufacturer will manufacture our products under formulations
that we own. They will be prohibited from producing products for any other
customers using our formulas. In addition, the selected contract manufacturer
is
contractually prohibited from producing products based on our organic functional
nutrition concept for any other customer, with limited exceptions. Product
will
be shipped to locations throughout the nation from their centrally located
warehouse facility.
We
believe that the selected contract manufacturer will have the capacity to
fulfill our planned production needs for at least the next twelve months.
In
addition, we believe that the manufacturer is willing to increase capacity
to
meet our additional production needs, if necessary. If our growth exceeds
the
production capacity of the selected contract manufacturer, or if they were
unable or unwilling to continue production, we believe we could locate and
qualify other contract manufacturers to meet our production
needs.
Quality
Assurance
We
require all raw materials or finished products produced by third party vendors
to be placed in quarantine upon receipt before release by our quality control
laboratory. We conduct sample testing, weight testing, purity testing,
dissolution testing and, where required, microbiological testing. When materials
are released from quarantine, each lot is assigned a unique lot number which
is
tracked throughout the manufacturing process. Materials are blended, tested
and
then encapsulated or formed into pills which may or may not be coated. We
routinely perform qualitative and quantitative quality control procedures
on its
finished products.
Our
contract manufacturer is expected to produce and package our products in
accordance with GMP standards. All raw materials are purchased from approved
suppliers and inspected by the contract manufacturer as they are received
into
the production facilities. Raw materials are then labeled to indicate their
source of supply, lot number, and date of receipt, and samples of the raw
materials are kept for two years from the date received. The ingredients
are
mixed into batches under the supervision of two quality assurance contract
manufacturer employees to verify adherence to our formulations and ensure
taste
consistency. The finished products are weighed, wrapped, and date coded.
After
each production run, samples are analyzed to test the product for
micro-impurities and to ensure accurate labeling.
SALES
& MARKETING
Nutritional
products are distributed through six major sales channels. Each channel has
changed in recent years, primarily due to advances in technology and
communications that have resulted in improved product distribution and faster
dissemination of information. We expect to distribute products through the
following channels:
|
·
|
Mass
market retailers - mass merchandisers, drug stores, supermarkets,
and
discount stores;
|
|
·
|
Direct
response television;
|
|
·
|
Natural
health food retailers;
|
|
·
|
Healthcare
professionals and practitioners;
|
|
·
|
Mail
order; and
|
|
·
|
The
Internet.
|
We
plan
to build the Health Sciences, Swiss DietTM
and
Swiss ResearchTM
brand
name within multiple channels of distribution in order to develop increased
brand awareness and strong brand recognition among consumers seeking products
with a reputation for high quality and efficacious results. We plan to position
our products within the specialty retail and direct-to-consumer distribution
channel as high quality products using proprietary, pharmaceutical grade
ingredients supported by clinical data which presents a positive health benefit.
Our marketing strategy has the following components:
Product
Branding and Wellness. Our
underlying initiative is to build a reputation as a company that is focused
on a
complete wellness program and way of life. We believe we are ideally positioned
to take advantage of current consumer trends indicating that individuals
are
turning more and more to nutritional supplements for weight loss, fitness
and
age-related health concerns. We plan to undertake an advertising, public
relations and branding campaign. To further product awareness, we will
concentrate our marketing efforts on those products that are proprietary
and
have scientific, clinical data that supports their efficacy.
Advertising.
We
intend to use advertising campaigns to create greater awareness of the
convenience, taste, and nutritional attributes of our products. We plan to
use a
combination of print, Internet, radio, and television advertising, with primary
emphasis on print and Internet advertising to reach our target audiences
in a
cost-effective manner. However, we expect to spend a significant portion
of
future our advertising budget on television advertising to reach a larger
number
of targeted consumers.
Promotions.
We
believe that one of our most effective marketing tools is product sampling
combined with the on-site dissemination of information explaining the
nutritional attributes of our products. We expect to participate in various
trade shows targeted at buyers in the health and fitness, food, and sports
markets, in addition to consumer health fairs.
Customer
and Consumer Service.
We are
committed to providing superior service to our customers and consumers. Our
sales and marketing team will continually gather information and feedback
from
consumers and retailers to enable us to better tailor our consumer support
to
meet changing consumer needs. We expect to provide access to nutritionists
and
consumer service representatives through a toll free number to answer questions
and educate consumers on nutrition, new products and developments. In addition,
we expect to maintain updated consumer information on our web
site.
COMPETITION
The
business of developing and distributing nutritional and personal care products,
such as those we sell and distribute is highly competitive. Numerous
manufacturers, distributors, and retailers compete for consumers and
distributors. We expect to compete directly with other entities that develop,
manufacture, market, and distribute products in each of our product lines.
We
compete with these entities by emphasizing the underlying science, value,
and
high quality of our products. However, many of our competitors are substantially
larger and have greater financial resources and broader name recognition.
Our
markets are highly sensitive to the introduction of new products that may
rapidly capture a significant share of those markets. The nutritional supplement
market is characterized by:
|
·
|
Large
selections of essentially similar products that are difficult to
differentiate;
|
|
·
|
Retail
consumer emphasis on value pricing;
|
|
·
|
Constantly
changing formulations based on evolving scientific
research;
|
|
·
|
Low
entry barriers resulting from low brand loyalty, rapid change,
widely
available manufacturing, low regulatory requirements, and ready
access to
large distribution channels; and
|
|
·
|
A
lack of uniform standards regarding product ingredient sources,
potency,
purity, absorption rate, and form.
|
Similar
factors are also characteristic of products comprising our other product
lines.
There can be no assurance that we will be able to effectively compete in
this
intensely competitive environment. In addition, nutritional and personal
care
products can be purchased in a wide variety of channels of distribution,
including retail stores. Our product offerings in each product category are
relatively few compared to the wide variety of products offered by many of
our
competitors and are often premium priced. As a result, our ability to remain
competitive depends in part upon the successful introduction of new products
and
enhancements of existing products.
GOVERNMENT
REGULATION
The
manufacturing, packaging, labeling, advertising, distribution, and sale of
our
products are subject to the regulation of various government agencies,
principally the FDA. The FDA regulates our products pursuant to the Federal
Food, Drug, and Cosmetic Act ("FDCA") and the Fair Packaging and Labeling
Act
("FPLA") and regulations thereunder. The FDCA is intended, among other things,
to assure consumers that foods are wholesome, safe to eat, and produced under
sanitary conditions, and that food labeling is truthful and not deceptive.
The
FPLA provides requirements for the contents and placement of information
required on consumer packages to ensure that labeling is useful and informative.
Our products are generally classified and regulated as food under the FDCA,
and
are, therefore, not subject to pre-market approval by the FDA. However, our
products are subject to the comprehensive labeling and safety regulations
of the
FDA, the violation of which could result in product seizure and condemnation,
injunction of business activities, or criminal or civil penalties. Furthermore,
if the FDA determines, on the basis of labeling, promotional claims, or
marketing by the Company, that the intended use of any of our products is
for
the diagnosis, cure, mitigation, treatment, or prevention of disease, it
could
regulate those products as drugs and require, among other things, pre-market
approval for safety and efficacy. We believe that we presently comply in
all
material respects with the foregoing laws and regulations. However, there
can be
no assurance that future compliance with such laws or regulations will not
have
a material adverse effect on our business, results of operations or financial
condition.
Our
advertising is subject to regulation by the FTC, pursuant to the Federal
Trade
Commission Act ("FTCA") which prohibits unfair or deceptive acts or practices
including the dissemination of false or misleading advertising. Violations
of
the FTCA may result in a ‘cease and desist’ order, injunction, or civil or
criminal penalties. The FTC monitors advertising and entertains inquiries
and
complaints from competing companies and consumers. It also reviews referrals
from industry self-regulatory organizations, including the National Advertising
Division (“NAD”). The NAD of the Council of Better Business Bureaus, Inc.
administers a voluntary self-regulatory, alternative dispute resolution process
that is supported by the advertising industry and serves the business community
and the public by fostering truthful and accurate advertising.
Our
activities are also regulated by various agencies of the states, localities,
and
foreign countries in which our products are sold. In addition, we may be
required to re-formulate our products to comply with foreign regulatory
standards. We believe that we presently comply in all material respects with
the
foregoing laws and regulations. There can be no assurance, however, that
future
compliance with such laws or regulations will not have a material adverse
effect
on our business, results of operations and financial condition.
We
may be
subject to additional laws or regulations administered by the FDA or other
federal, state, or foreign regulatory authorities, the repeal of laws or
regulations, or more stringent interpretations of current laws or regulations,
from time to time in the future. We cannot predict the nature of such future
laws, regulations, interpretations, or applications, nor can we predict what
affect additional government regulations or administrative orders, when and
if
promulgated, would have on our business in the future. Such laws could, however,
require the reformulation of products, the recall, withholding or discontinuance
of products, the imposition of additional recordkeeping requirements, the
revision of labeling, advertising, or other promotional materials, and changes
in the level of scientific substantiation needed to support claims. Any or
all
such government actions could have a material adverse effect on our business,
results of operation and financial condition.
Research
and Development
Research
and development efforts are generally devoted to four principal areas: (1)
development of new technologies; (2) application of our existing technologies
to
new products; (3) improvement of existing processes; and (4) formulation
of
existing and new biologically active compounds.
As
part
of our focus on delivering a complete wellness program and way of life to
our
customers, we plan to explore and develop new products. New product ideas
are
derived from a number of sources, including trade publications, scientific
and
health journals, our executives, staff and consultants and outside parties.
In
general, we maintain a strategy of introducing our own proprietary formulations
of products successfully offered by others in the market. Although our products
use ingredients that we regard as safe when taken as suggested by us, we
expect
to conduct limited clinical studies of certain proprietary products. In advance
of introducing products into our markets, local counsel and other
representatives, retained by us, investigate product formulation matters
as they
relate to regulatory compliance and other issues. Our products are then
reformulated to suit both the regulatory and marketing requirements of the
particular market.
Patents
and Trademarks
BioSelect
has developed a number of proprietary and patented product formulations.
These
patents address the unique integration of selective traditional over-the-counter
generic drugs with complementary alternative medications such as vitamins,
herbs
and other natural nutraceutical supplements. The product development effort
focuses on developing proprietary formulations for existing products and
on the
creation of formulations for product line extensions. The preservation and
improvement of the quality of BioSelect's products are also integral parts
of
its overall strategy. To date, BioSelect has been issued five
patents.
We
maintain and have applied for trademark and copyright protection in the United
States relating to certain of our existing and proposed products and processes,
including Swiss Research TM,
Shugr
TM,
Sequesterol TM,
Aplevia
™, Open Cell Biotechnology TM.
There
can be no assurance that we will be able to successfully protect our
intellectual property.
BioSelect
maintains and has applied for trademark and copyright protection in the United
States relating to certain of its existing and proposed products and processes,
including CoCareTM,
ConaseTM,
CoprofenTM,
Epigest
EessentialsTM,
Femderm
EssentialsTM,
Femgest
EssentialsTM,
and
TranslipobaseTM.
There
can be no assurance that BioSelect will be able to successfully protect its
intellectual property.
Employees
At
August
31, 2006, we employed two persons, both of which are full-time. The Company
retains additional employees for accounting, administrative, sales and marketing
duties on an as-needed basis. A standard package of employee benefits is
provided to all full-time employees. The Company’s employees are not covered by
a collective bargaining agreement nor are represented by labor unions. We
do not
have key man insurance on any employee.
At
August
31, 2006, we had an employment agreement with the following
personnel:
| |
|
|
|
Expiration
|
|
Annual
Base
|
|
Employee
|
|
Position
|
|
Date
|
|
Salary
|
|
Stuart
Avery Gold
|
|
Chief
Executive Officer1
|
|
June
2009
|
|
$200,000
|
|
Fred
E. Tannous
|
|
CFO,
Treasurer & Co-Chairman2
|
|
June
2008
|
|
$250,000
|
1
Mr. Gold
commenced his employment effective as of June 1, 2006 and has agreed to defer
and accrue cash compensation. Pursuant to his employment agreement dated
June
28, 2006, Mr. Gold has received 300,000 shares of the Company’s common stock.
2
Since
July 1, 2005 to date, Mr. Tannous received shares of the company’s common stock
in lieu of cash for the payment of his salary.
Properties
Our
executive office address is at Howard Hughes Center, 6080 Center Drive, 6th
Floor, Los Angeles, California, 90045 and we also maintain an office located
at
21515 Hawthorne Blvd., Suite 1070, Torrance, CA 90503. The annual lease payments
for our office space totaled approximately $12,000. We are currently on a
month-to-month basis at the Los Angeles address and have entered into a one-year
lease at the Torrance location which expires on February 28, 2007. Management
intends to seek alternative facilities upon expansion of its
operations.
Legal
Proceedings
Health
Sciences Group vs. Miles
On
February 10, 2006, the Company filed a Complaint in Los Angeles Superior
Court
against Loren Miles (“Miles”) alleging causes of action for: (1) breach of
contract; (2) fraud; (3) intentional misrepresentation; (4) negligent
misrepresentation; (5) conversion; (6) breach of fiduciary duty; and (7)
constructive trust. The Complaint arises out of false and fraudulent
representations made by Miles on or around December 2004 to the Company
in
connection with the Company’s purchase of the assets of Swiss Research, Inc., a
California corporation (“SRI-CA”), of which Miles was the Chief Executive
Officer and sole shareholder. Pursuant to the purchase, SRI-CA initially
became
a wholly owned subsidiary of Health Sciences and was thereafter to be
liquidated. On March 2, 2006, Miles filed his answer to the Complaint.
Also, on March 2, 2006, Miles and SRI-CA filed a
separate Complaint in Los Angeles Superior Court against the Company
and Swiss Research, Inc., a Delaware corporation (“SRI-DE”), alleging causes of
action for: (1) breach of contract (rescission); (2) declaratory relief
and a
temporary restraining order, preliminary and permanent injunction; (3)
cancellation of instrument; (4) declaratory relief; (5) unpaid wages; and
(6)
breach of contract. On April 7, 2006, the two cases were deemed
related and the Company’s complaint was designated the lead case. On
April 14, 2006, the Company named SRI-CA as a defendant to the
Complaint. On April 19, 2006, the Company and
SRI-DE filed their answer to the Complaint. The Company and
SRI-DE deny the claims and intend to vigorously defend against
them. On May 8, 2006, the Company filed a motion for leave to file a
First Amended Complaint, adding SRI-DE as a plaintiff and a new cause of
action for breach of contract (damages and specific performance), the
hearing of which is set for June 12, 2006. On April 27, 2006,
the Court denied a motion for preliminary injunction filed by Miles and
SRI-CA, finding that Miles and SRI-CA failed to establish that the
asset purchase agreement had not closed and failed to establish any grounds
for
rescission of the asset purchase agreement. Following the Court's denial
of the preliminary injunction motion, Miles and SRI-CA filed a motion to
disqualify the Company's counsel, which the Court denied on June 19,
2006. On September 18, 2006, the Company and SRI-DE filed a
Second Amended Complaint against Miles and SRI-CA, alleging causes of
action for: (1) breach of contract; (2) fraud; (3) intentional
misrepresentation; (4) negligent misrepresentation; and (5) breach of
contract. Miles and SRI-CA have filed a demurrer to the 2nd, 3rd, 4th and
5th causes of action of the Second Amended Complaint, which is set for
hearing
on November 22, 2006. A trial date has yet to be set.
Fred
Tannous, et al. vs. Miles
On May
11, 2006, Fred Tannous, the chief financial officer and Co-Chairman of
the Company, and Bill Glaser, Co-Chairman and former president of the
Company, filed a Complaint in Los Angeles Superior Court against Loren
Miles alleging a cause of action for defamation. The Complaint arises
out of false and defamatory allegations made by Miles on or around May
2006. On May 25, 2006, Tannous, Glaser and the Company filed a First
Amended Complaint, alleging causes of action against Miles for: (1) defamation,
(2) violation of right of privacy, (3) intentional interference with contract,
(4) intentional interference with prospective economic advantage, and (5)
negligent interference with prospective economic advantage. On
October 5, 2006, the Court granted Miles' Motion to Strike the Complaint.
However, the Court has not yet issued an Order specifying
the basis for its ruling. Tannous, Glaser and the Company intend
on pursuing any available remedies in response to the Court's
ruling. The Court further continued the hearing on Miles' Motion
for Attorneys' Fees and Sanctions to November 16, 2006. On October 18,
2006, Miles filed a Motion for Appointment of a Receiver over the Company,
set
for hearing on November 16, 2006. The Company intends to oppose Miles'
motions vigorously.
Claim
of Wrongful Termination
In
November 2004, an attorney for Jacob Engel, wrote a letter to the Company
alleging that Health Sciences Group, Inc. failed to pay Mr. Engel his salary
since January 1, 2004 at the rate of $150,000 per annum and wrongfully
terminated his participation in the Company’s health insurance coverage leaving
him uninsured for three months during which he incurred medical expenses
which
would have been covered and compelling his acceptance, with a reservation
of
rights of COBRA coverage for which he has been obliged to pay premiums since
September 2004. The letter stated that in the event cure is not fully effected
by December 5, 2004, Mr. Engel will terminate his Employment Agreement for
Good
Reason pursuant to the Employment Agreement. The letter further stated that
unless the defaults are fully cured prior to December 5, 2004, in addition
to
all unpaid base salary since January 1, 2004 through the date of termination
and
the reimbursement of COBRA payments made by Mr. Engel, the Company will be
obligated to pay Mr. Engel one year of his base salary and all accrued vacation
pay and to restore Mr. Engel to coverage under the health insurance plan.
The
letter further stated that in addition, Mr. Engel is entitled to have his
rights
in his stock options until December 5, 2005 and that Mr. Engel is owed $18,000
for legal expenses; has a claim for breach of the agreement between him and
the
Company by which he agreed to accept shares of the Company’s stock in lieu of
$100,000 of his 2003 salary and has a claim for the automobile allowance
of $350
per month which the Company agreed to provide him. There have been no further
developments related to this matter through September 30, 2006. The Company
does
not agree with the allegations made and is prepared to vigorously assert
its
position.
The
following table sets forth the name, age, position, and the start date of
each
director and executive officer of Health Sciences Group, Inc. and its
subsidiaries at September 30, 2006. There are no other persons who can be
classified as a promoter or controlling person of the Company.
| |
|
|
|
|
|
|
|
| |
Name
|
|
Age
|
|
Title
|
|
HeldSince
|
| |
|
|
|
|
|
|
|
| |
Stuart
Avery Gold
|
|
55
|
|
Chief
Executive Officer
|
|
2006
|
| |
|
|
|
|
|
|
|
| |
Fred
E. Tannous*
|
|
40
|
|
Chief
Financial Officer, Treasurer, and Co-chairman of the Board
|
|
2000
|
| |
|
|
|
|
|
|
|
| |
Bill
Glaser
|
|
40
|
|
Director,
Co-chairman of the Board
|
|
2000
|
| |
|
|
|
|
|
|
|
| |
William
T. Walker, Jr.
|
|
74
|
|
Director
|
|
2003
|
| |
|
|
|
|
|
|
|
| |
Merrill
A. McPeak
|
|
70
|
|
Director
|
|
2005
|
Stuart
Avery Gold
joined
Health Sciences Group, Inc. as the Chief Executive Officer in June 2006.
Previously, Mr. Gold was Chief Operating Office of The Republic of Tea, Inc.
where he is acknowledged as one of the innovative gurus behind the success
of
the Novato, California based company. Co-founded in 1992 by the creators
of The
Banana Republic, Stuart joined the fledgling company shortly thereafter to
create a Tea Revolution in America. With Stuart as the lauded editorial voice
for the company’s award winning mail-order catalogue, website and line of
innovative products, The Republic of Tea soared to national prominence, spawned
the entirely new category of specialty tea, and continues to thrive with
enormous success as the industry leader. The Republic of Tea’s 200 varietals of
premium teas, ready-to-drink bottled iced teas and its other signature offerings
are available through specialty and natural food stores, select department
stores, cafés and restaurants throughout North America. Stuart oversaw all
aspects of the company’s business and was instrumental in the company’s brand
building, marketing, and product development strategies that have made The
Republic of Tea one of the most successful and fastest growing specialty
brands
in America today. The Republic of Tea has been featured in the New
York Times, Business Week, The Wall Street Journal, USA Today, CNBC, The
TODAY
Show and
other
mainstream media. Stuart is often quoted in publications and books and is
a
sought-after facilitator and speaker having lectured at numerous schools
including Wharton School of Business, New School University, Parson's School
of
Design and Fortune 500 companies such as American Express.
Fred
E. Tannous
is
co-founder and co-Chairman of Health Sciences Group, Inc. and operated as
Chief
Executive Officer since founding the Company in 1996 through June 30, 2006.
During his tenure, Mr. Tannous was involved in all aspects of the Company’s
operations ranging from crafting and executing the Company’s overall growth
strategy to structuring debt and equity financings and seeking and evaluating
qualified acquisition candidates. Mr. Tannous maintains relationships with
investment bankers, capital market participants, accountants, attorneys,
and
management consultants. Previously, Mr. Tannous was employed at DIRECTV,
Inc.
where he was involved in various capacities including valuing, structuring,
and
executing strategic investments. Prior to joining DIRECTV, a wholly owned
subsidiary of Hughes Electronics Corporation, Mr. Tannous was with the corporate
treasury organization of Hughes where he assisted in conducting valuations
and
effectuating financing transactions for the company’s satellite and network
communication units. From
February 1996 to May 1999, Mr. Tannous served as Treasurer and Chief Financial
Officer of Colorado Casino Resorts, Inc., a gaming and lodging concern with
operations in Colorado. In addition to overseeing the company’s finance and
accounting operations,
he was
accountable
for all corporate finance and treasury activities. Previously, as principal
of
his own consulting firm, Mr. Tannous consulted to several start-up ventures
in
various industries where he was instrumental in developing business plans,
advising on business strategy and capital structure, and arranging venture
financings. Mr. Tannous received an MBA in finance and accounting from the
University of Chicago Graduate School of Business. He also holds a Masters
and
Bachelors degree in Electrical Engineering from the University of Southern
California.
*On
July
1, 2006, Mr. Tannous resigned as Chief Executive Officer and assumed the
role of
Chief Financial Officer.
Bill
Glaser
has been
Co-chairman, President, and Secretary of Health Sciences Group since October
2000. Mr. Glaser was founder and Chief Executive Officer of Zenterprise,
Inc., a
comprehensive investment banking and corporate consulting firm which focused
primarily on capital formation, M&A advisory, business strategy, marketing,
and management consulting services for public and private companies. From
September 1991 to July 1994, Mr. Glaser was a registered principal of a regional
stock brokerage firm where he gained diverse experience in finance, management,
marketing, sales, and public company relations. Previously, he was a registered
representative at Drexel, Burnham, Lambert and Smith Barney. Mr. Glaser holds
a
Bachelors degree in finance and economics from the Ithaca College - School
of
Business.
William
T. Walker, Jr.
is a
Director. Mr. Walker was appointed to the company’s Board of Directors in May,
2003, and is the founder of Walker Associates, a corporate finance consulting
firm that acts as advisor to corporations and investment banks, and has served
in that capacity since 1985. Prior to starting Walker Associates, he was
Executive Vice President and Managing Director of Investment Banking for
Bateman
Eichler, Hill Richards, a regional West Coast NYSE investment banking firm,
where he directed its merger into the Kemper Insurance Group. Mr. Walker
currently chairs the board of SupraLife International and its subsidiaries,
and
serves as a director of King Thomason Group, Stone Mountain Financial Systems,
Digid Technologies and Desert Health Products, Inc. He has served as a board
member of the Securities Industry Association, a Governor of the Pacific
Coast
Stock Exchange, a member of the American Stock Exchange Advisory Committee,
President of the Bond Club of Los Angeles, and Chairman of the California
District Securities Industry Association. Mr. Walker graduated from Stanford
University and served in the United States Air Force.
Merrill
A. McPeak (General U.S. Air Force Ret.).
In May
2005, Merrill A. McPeak was appointed to the Board of Directors. >From 1995
to the present, General McPeak has been the president of McPeak and Associates,
a consulting firm. From October 1990 to October 1994, he was Chief of Staff
of
the U.S. Air Force. He is a director of TEKTRONIX (NYSE) - Chairman of the
Audit
Committee, organization and Compensation Committee; SPAN Communications (OTC)
-
Chairman of the Audit Committee, Chairman of the Board; Del Global Technologies
(OTC) - Member of Compensation Committee; Gigabeam (OTC) - Member of Audit
Committee. General McPeak is also a director of private companies and the
author
of numerous publications in scholarly journals and of several books. General
McPeak has a B.A. in Economics from San Diego State University and an M.S.
in
International Relations from George Washington University and attended the
Executive Development Program, University of Michigan Graduate School of
Business.
Directors
Directors
are elected annually and hold office until the annual meeting of the
shareholders of Health Sciences and until the successors are elected and
qualified. There are no family relationships among Health Sciences’ officers and
directors. Non-management directors receive annual cash fees of $24,000 for
attending board meetings and 50,000 options per year.
SUMMARY
COMPENSATION TABLE
| |
|
|
|
|
Annual Compensation
|
|
|
Awards
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted |
|
|
Securities
|
|
|
|
|
| Name
and |
|
|
|
|
|
|
|
|
|
|
Other
Annual |
|
|
Stock
|
|
|
Underlying
|
|
|
All
Other
|
|
|
Principal Position
|
|
Year
|
|
|
Salary($) |
|
|
Bonus($) |
|
|
Compensation
|
|
|
Awards($)
|
|
|
Options/SARs |
|
|
Compensation |
|
|
Fred
E. Tannous(1)
|
|
12/31/05
|
|
$
|
220,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
500,000
|
|
|
--
|
|
|
CFO,
Treasurer
|
|
12/31/04
|
|
$
|
190,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,000,000
|
|
|
--
|
|
|
Co-Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Sciences Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bill
Glaser(2)
|
|
12/31/05
|
|
$
|
110,833
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
500,000
|
|
|
--
|
|
|
President,
Secretary
|
|
12/31/04
|
|
$
|
190,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,000,000
|
|
|
--
|
|
|
Co-Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
Sciences Group, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John
Park(3)
|
|
12/31/05
|
|
$
|
31,806
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
President
& CEO
|
|
12/31/04
|
|
$
|
125,000
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
100,000
|
|
|
--
|
|
|
XCEL
Healthcare, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As
of June 1, 2006, Mr. Tannous resigned from his position as Chief
Executive
Office and assumed the position of Chief Financial Officer and
continues
to serve as co-chairman of the Company’s Board of
Directors.
|
|
(2)
|
As
of August 1, 2005, Mr. Glaser resigned from his position as President
and
Secretary but has been retained as a consultant and continues to
serve as
co-chairman of the Company’s Board of Directors. In the table above, all
options awarded Mr. Glaser in 2005, were granted post his resignation
and
pursuant to his consulting agreement.
|
|
(3)
|
As
of March 18, 2005, Mr. Park was no longer employed with the
Company.
|
In
April
2005, the Company issued 120,000 and 110,000 shares to Messrs. Tannous and
Glaser respectively for salary and vacation compensation accrued during 2004.
The value of the shares totaled approximately $92,000 and $85,000, respectively,
and was based on the fair value of the Company’s stock on the day the Board
authorized the grant.
In
August
2005, the Company issued 342,466 shares of its common stock to Messer Tannous
for services to be provided over the next 11 months. The value of the
shares totaled approximately $257,000 on the date of issuance and was determined
based on the fair value of the company’s common stock at the date of grant.
Option
Grants
The
following table provides information concerning grants of options to purchase
the Company’s common stock that the Company made to each of the executive
officers and significant employees named in the summary executive compensation
table during the fiscal year ended December 31, 2005. We did not grant stock
appreciation rights to these individuals during 2005.
| |
|
|
Number
of
|
|
Percentage
of Total
|
|
Exercise
|
|
|
| |
|
|
Securities
Underlying
|
|
Options
Granted to
|
|
Price
Per
|
|
Expiration
|
| |
Name
|
|
Options
Granted
|
|
Employees
in 2005
|
|
Share
|
|
Date
|
| |
Fred
E. Tannous
|
|
500,000
|
|
77%
|
|
$0.65
|
|
|
The
table
below sets forth information concerning the exercise of options during 2005
along with the aggregate 2005 year-end option holdings of the below named
officers of the Company:
AGGREGATED
OPTION EXERCISES IN 2005 AND YEAR END OPTION VALUES
COMMON
STOCK
| |
|
|
|
|
|
Number
of securities
|
|
Value
of unexercised
|
|
| |
|
|
|
|
|
underlying
options at |
|
in-the-money
|
|
| |
|
Shares
Acquired
|
|
Value
|
|
|
|
options
at
|
|
|
Name
|
|
on
Exercise
|
|
Realized
|
|
Exercisable/Unexercisable
|
|
|
|
|
Fred
E. Tannous
|
|
|
|
|
|
|
|
|
583,334/416,666
|
|
$
|
0
|
|
|
Bill
Glaser(1)
|
|
|
--
|
|
|
--
|
|
|
708,330/291,670
|
|
$
|
0
|
|
|
(1)
|
As
of August 1, 2005, Mr. Glaser resigned from his position as President
and
Secretary but has been retained as a consultant and continues to
serve as
co-chairman of the Company’s Board of Directors. Of the exercisable
options noted above, 500,000 were granted pursuant to his consulting
agreement of which 208,330 were vested as of December 31, 2005
and the
remaining 291,670 were unvested.
|
Executive
Compensation
The
table
above, for the fiscal years ended December 31, 2005 and 2004, sets forth
the
compensation paid or accrued by the Company to its named persons. The Company
has employment agreements, nondisclosure/non-competition agreements and
severance agreements with the following executive officers:
Stuart
Avery Gold.
We have
an employment agreement with Mr. Stuart Gold that commenced June 1, 2006
and
ends May 31, 2009. The base salary under this employment contract is $200,000
per year, subjected to annual increases of not less than 10% tied to the
achievement of annual sales milestones. This contract provides for a performance
bonus calculated as the greater of (i) 10% of the earnings before interest,
taxes, depreciation and amortization for said fiscal year or (ii) 50% of
the
Salary, provided,
however,
that the
Company has generated a minimum of $1 million EBITDA during the fiscal year
and
the annual bonus may not exceed 150% of the base salary at the time. Also,
Gold
received an option grant for the purchase of up to 6% of Company common stock,
after the completion of the contemplated equity financing, exercisable at
a
price equal to the offering share price. The first 3% of the option shares
shall
vest equally on each anniversary date over the term of his agreement. The
second
3% of the option shares shall vest as follows; one-third of the total option
shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $1 million, another
one-third of
the
total option shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $2 million; and the
final one-third of
the
total option shares shall vest upon the achievement of the
Company’s consolidated EBITDA for any fiscal year exceeding $3
million.
If this
employment contract is terminated by us without good cause, or if we are
in
breach of the agreement, or if we assign the executive without his consent
to a
lesser responsibility status than his current position, then we are required
to
pay Mr. Gold the lesser of (i) his salary for the remainder of the term of
the
agreement or (ii) one year’s salary and accrued benefits prorated through the
date of termination.
Fred
E. Tannous.
We have
an employment agreement with Mr. Fred E. Tannous that commenced July 1, 2005
and
ends June 30, 2008. The base salary under this employment contract is $250,000
per year. This contract provides for a performance bonus in an amount equal
to
of 5% of the Adjusted EBITDA for each fiscal year and an option grant for
the
purchase of up to 500,000 shares of Company common stock exerciseable at
a price
equal to $0.65 per share. The option shall be exercisiable on a monthly pro
rata
basis over the term of the agreement. If
the
Company shall merge, sell a controlling interest, or sell a majority of its
assets; or if there is a transaction (or series of transactions) in which
the
Company’s shareholders sell a majority of outstanding shares of Company capital
stock, then we shall pay Mr. Tannous the greater of the remainder of his
salary
or two hundred fifty thousand dollars. Further, at the date of any such merger
or sale is consummated, all unvested options shall be immediately accelerated
and as to any unexercised options to purchases shares in the Company which
are
held by Mr. Tannous, the Company shall pay Mr. Tannous cash in the amount
equal
to the difference between the consideration paid to the Company on a per
share
basis less the exercise price of the option, the value of which is multiplied
to
the number of options which Mr. Tannous holds. If
this
employment contract is terminated by us without good cause, or if we are
in
breach of the agreement, or if we assign the executive without his consent
to a
lesser responsibility status than his current position, or require the executive
to be based elsewhere other than our principal executive office, then we
are
required to Mr. Tannous the lesser of (i) his salary for the remainder of
the
term of the agreement or (ii) one year’s salary and accrued benefits prorated
through the date of termination.
While
we
have not established an Audit Committee at the present time, the entire Board
of
Directors acts as the Audit Committee until such time that an Audit Committee
is
formed and financial expert is elected. The Board of Directors adopted a
Code of
Ethics on July 10, 2003
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth information concerning common stock ownership
by
beneficial owners as of September 30, 2006 of five percent or more of our
common
stock and each of our officers and directors and our officers and directors
as a
group:
| |
|
Name
and Address
|
|
|
|
Percent
of
|
|
Title
of Class
|
|
of
Beneficial Owner
|
|
Beneficial
Ownership (1)
|
|
Class
|
|
Common
|
|
Bill
Glaser
|
|
|
|
|
|
|
$0.001
par value
|
|
6080
Center Drive, 6th
Floor
|
|
3,717,464
|
(2)
|
|
8.26%
|
| |
|
|
|
|
|
|
|
|
Common
|
|
Fred
E. Tannous
|
|
|
|
|
|
|
$0.001
par value
|
|
6080
Center Drive, 6th
Floor
|
|
3,597,383
|
(2)
|
|
8.00%
|
| |
|
|
|
|
|
|
|
|
Common
|
|
UTEK
Corporation
|
|
|
|
|
|
|
$0.001
par value
|
|
202
South Wheeler Street
|
|
3,023,703
|
(3)
|
|
6.85%
|
| |
|
|
|
|
|
|
|
|
Common
|
|
Stuart
Avery Gold
|
|
|
|
|
|
|
$0.001
par value
|
|
6080
Center Drive, 6th
Floor
|
|
300,000
|
(4)
|
|
0.68%
|
| |
|
|
|
|
|
|
|
|
Common
|
|
William
T. Walker, Jr.
|
|
|
|
|
|
|
$0.001
par value
|
|
6080
Center Drive, 6th
Floor
|
|
300,000
|
(5)
|
|
0.68%
|
| |
|
|
|
|
|
|
|
|
Common
|
|
Merrill
A. McPeak
|
|
|
|
|
|
|
$0.001
par value
|
|
6080
Center Drive, 6th
Floor
|
|
300,000
|
|
|
|
| |
|
|
