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
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Page
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1
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4
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9
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10
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10
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12
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12
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14
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25
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31
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36
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37
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40
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40
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42
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43
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43
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44
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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.
