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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) of the SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from to
Commission File No. 000-50508
NUVIM(R), INC.
(Name of Small Business Issuer in Its Charter)
DELAWARE 13-4083851
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12 North State Route 17
Paramus, NJ 07652
(Address of principal executive offices) (Zip Code)
(201) 556-1010
(Issuers Telephone Number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such report(s), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
At May 9, 2006, 5,572,845 shares of the registrant's Common Stock, par value
$0.00001 per share, were outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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NUVIM, INC.
QUARTERLY REPORT ON FORM 10-QSB
QUARTERLY PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheet - December 31, 2005 and March 31, 2006 (Unaudited) 3
Statements of Operations - For the three months ended March 31, 2006 and 2005 (Unaudited) 4
Statement of Changes in Stockholders' Deficit for the three months ended March 31, 2006 and 2005 (Unaudited) 5
Statements of Cash Flows for the three months ended March 31, 2006 and 2005 (Unaudited) 6
Notes to Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 14
Item 3. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUVIM, INC.
BALANCE SHEETS
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 1,551 $ 270,468
Accounts receivable, net 19,739 35,399
Inventory 185,685 172,714
Prepaid expenses and other current assets 233,984 328,915
-------------- -----------------
Total Current Assets 440,959 807,496
Equipment and furniture, net 1,276 1,502
Deposits and other assets 8,547 8,547
-------------- -----------------
TOTAL ASSETS $ 450,782 $ 817,545
============== =================
LIABILITIES AND STOCKHOLDERS'DEFICIT
Current Liabilities:
Senior secured notes payable - related parties $ 500,000 $ 500,000
Accrued interest - senior notes payable - related party 134,160 119,160
Secured convertible promissory notes, net of unamortized discount 60,582 52,971
Stockholder loans - subordinated convertible promissory notes 225,000 225,000
Accrued interest stockholder loans 33,191 28,691
Accounts payable 978,353 881,345
Accounts payable and accrued expenses to related parties 102,054 231,328
Accrued expenses 178,098 269,968
Accrued compensation 577,182 420,100
Rescinded series B offering payable 18,920 18,920
Other note payable, includes accrued interest of $2,542 and $14,467 150,792 147,467
-------------- -----------------
Total Current Liabilities 2,958,332 2,894,950
-------------- -----------------
Commitments and Contingencies
Stockholders' Deficit:
Preferred Stock - 65,000,000 shares authorized: -0- issued and
Outstanding
Common Stock, 120,000,000 shares authorized, $.00001 par value,
issued and outstanding, 5,093,745 at March 31, 2006 52 51
Additional paid-in capital 18,232,162 18,167,605
Accumulated deficit (20,739,764) (20,245,061)
-------------- -----------------
Total Stockholders' Deficit (2,507,550) (2,077,405)
-------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'DEFICIT $ 450,782 $ 817,545
============== =================
The Notes to Financial Statements are an integral part of these statements.
3
NUVIM, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31
(Unaudited)
2005 2006
-------------- --------------
Gross Sales $ 375,719 $ 271,073
Less: Discounts, Allowances and Promotional Payments 166,843 94,852
-------------- --------------
Net Sales 208,876 176,221
Cost of Sales 207,835 121,231
-------------- --------------
Gross Profit 1,041 54,990
Selling, General and Administrative Expenses 536,691 512,673
-------------- --------------
Loss from Operations (535,650) (457,683)
Other Income (Expense):
Interest Expense (178,802) (37,065)
Interest Income -- 45
Gain on Forgiveness of Accounts Payable -- --
-------------- --------------
Total Other Income (Expense) - Net (178,802) (37,020)
-------------- --------------
Net Loss Before Income Tax Benefit (714,452) (494,703)
Income Tax Benefit -- --
-------------- --------------
Net Loss $ (714,452) $ (494,703)
============== ==============
Basic and Diluted Loss Per Share $ (1.73) $ (.10)
============== ==============
Weighted Average Number of Common Shares Outstanding -
Basic and Diluted 414,073 5,054,278
============== ==============
The Notes to Financial Statements are an integral part of these statements.
4
NUVIM, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2006
(Unaudited)
COMMON STOCK ADDITIONAL TOTAL
--------------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------------ ------------ ------------ ------------- -------------
Balance at December 31, 2005 5,034,995 $ 51 $ 18,167,605 $ (20,245,061) $ (2,077,405)
Shares issued for services 58,750 1 33,557 -- 33,558
Employee Share Based Compensation -- -- 31,000 -- 31,000
Net loss for the three months ended
March 31, 2006 -- -- -- (494,703) (494,703)
------------ ------------ ------------ ------------- -------------
Balance at March 31, 2006 5,093,745 $ 52 $ 18,232,162 $ (20,739,764) $ (2,507,550)
============ ============ ============ ============= =============
The Notes to Financial Statements are an integral part of this statements.
5
NUVIM, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31 2005 and 2006
(Unaudited)
2005 2006
-------------- --------------
Cash Flow From Operating Activities:
Net Loss $ (714,452) $ (494,703)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation 4,688 226
Amortization of debt discount on notes payable -- 7,611
Stock issued for services -- 33,558
Employee share based compensation -- 31,000
Provision for sales returns and allowances 166,843 94,852
Changes in Operating Assets and Liabilities:
Accounts receivable (208,124) (79,192)
Inventory (23,936) (12,971)
Prepaid expenses and other current assets 40,385 94,931
Accounts payable 216,312 97,008
Accrued compensation 156,085 157,082
Accrued expenses 137,282 (91,870)
Accrued interest 164,047 22,825
Accounts payable to related parties (33,700) (129,274)
-------------- --------------
Net Cash Used in Operating Activities (94,570) (268,917)
Cash Flow From Investing Activities:
Purchase of equipment and furniture (442) (--)
-------------- --------------
Net Cash Used in Investing Activities (442) (--)
Cash Flow From Financing Activities:
Proceeds of Related Party Advances 31,000 --
Deferred Offering Costs (213,637) --
-------------- --------------
Net Cash Used In Financing Activities (182,637) --
-------------- --------------
Decrease in Cash and Cash Equivalents (277,649) (268,917)
Cash and Cash Equivalents at Beginning of Period 277,649 270,468
-------------- --------------
Cash and Cash Equivalents at End of Period $ -- $ 1,551
============== ==============
The Notes to Financial Statements are an integral part of these statements.
6
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
A. BUSINESS
NuVim, Inc. (The "Company") markets and distributes dietary supplement beverages
which enhance the immune system, promote sturdy joints, muscle flexibility and
muscle recovery. The Company distributes its products through supermarkets in
approximately 13 states, predominantly on the East Coast. The Company's beverage
products contain certain micronutrients which Stolle Milk Biologies, Inc.
("SMBI") has patented. Spencer Trask Specialty Group, LLC ("ST") is the
controlling stockholder of SMBI, SMBI and ST collectively are micronutrients,
which can be terminated by SMBI under certain conditions.
B. GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company incurred net losses of $494,703 and $714,452 for the
three months ended March 31, 2006 and 2005 respectively. Management also expects
operating losses to continue in 2006 and 2007. The Company has negative working
capital of $2,517,373 and a Total Stockholders Deficit of $2,507,550. The
Company's continued existence is dependent upon its ability to secure adequate
financing to fund future operations and commence profitable operations. To date,
the Company has supported its activities through equity investments, the sale of
preferred common stock, notes payable and cash advances from related parties and
stockholders. It is the Company's intention to raise additional capital through
additional borrowings and sales of its equity securities. No assurance can be
given that these funding strategies will be successful in providing the
necessary funding to finance operations of the Company. Additionally, there can
be no assurance, even if successful in obtaining financing, the Company will be
able to generate sufficient cash flows to fund future operations. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements do not include any
adjustment relating to the recoverability and classification of recorded assets
or amounts and classification of liabilities that might be necessary related to
this uncertainty.
7
C. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. The unaudited interim consolidated
financial statements as of March 31, 2006 and 2005 reflect all adjustments
(consisting of normal recurring accruals) which, in the opinion of management,
are considered necessary for a fair presentation of its financial position as of
March 31, 2006 and as of the result of its consolidated operations and its
consolidated cash flows for the periods ended March 31, 2006 and 2005.
The Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2006 and 2005 are not necessarily indicative of results for the full
year.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, these financial statements should be read in
conjunction with the financial statements and accompanying notes included in the
Company's Current Report on Form 10KSB for the year ended December 31, 2005.
NOTE 2 -CRITICAL ACCOUNTING POLICIES
A. STOCK BASED COMPENSATION
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment" which revised Statement of Financial Standards No. 123,
"Accounting for Stock-Based Compensation" This statement supercedes Opinion No.
25, "Accounting for Stock Issued to Employees." The revised statement addresses
the accounting for share-based payment transactions with employees, eliminates
the ability to account for share-based compensation transactions using the
intrinsic value method pursuant to APB 25 and requires that the compensation
costs relating to such transactions be recognized in the statement of
operations. The revised statement has been implemented by the Company effective
January 1, 2006. The Company continued to account for stock awards issued to
non-employees under the fair value method as described in EITF 96-18 "Accounting
for Equity Investments that are Issued to Other than Employees for Acquiring or
in Conjunction with Selling Goods or Services."
The implementation of FAS No. 123R has the following effect on the statement of
operations for the three month period ending March 31, 2006:
Net loss before stock option expense ............... $ (464,000)
Less Stock Option Expense .......................... (31,000)
------------
Net Loss as Reported ............................... $ (495,000)
============
8
For the 2005 fiscal year, the Company accounted for its employee incentive stock
option plans using the intrinsic value method in accordance with the recognition
and measurement principles of Accounting Principals Board Opinion No. 25,
"Accounting for Stock Issued to Employees." Had the Company determined
compensation expenses based on the fair value at the grant dates for those
awards consistent with the method of SFAS 123, the Company's net loss per share
would have increased to the following pro forma amounts:
THREE MONTHS
ENDED
MARCH 31, 2005
--------------
Net income (loss) - as reported .................................. $ (714,000)
Add: total stock based employee compensation expense determined
under fair value based methods .............................. (5,000)
--------------
Net income (loss) - pro forma .................................... $ (719,000)
==============
Net income (loss) attributable to common stockholders per share:
Basic and diluted net loss per share as reported ............ $ (1.73)
==============
Pro forma and diluted basic loss per share .................. $ (1.74)
==============
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions:
MARCH 31, 2005
--------------
Risk free annual interest rate ............ 4.30%
Expected volatility ....................... 90%
Expected life ............................. 7 years
Assumed dividends ......................... None
Effective January 1, 2006, the Company adopted FAS No. 123R utilizing the
modified prospective method. FAS No. 123R requires the recognition of stock
based compensation expense in the financial statements.
Under the modified prospective method, the provisions of FAS No. 123R apply to
all awards granted or modified after the date of adoption. In addition, the
unrecognized expense of awards not yet vested at the date of adoption,
determined under the original provisions of FAS 123, "Accounting for Stock Based
Compensation", shall be recognized in net earnings in the periods after the date
of adoption. Stock based compensation consists primarily of stock options. Stock
Options are granted to employees at exercise prices equal to the fair market
value on the dates of grant. Stock options generally vest over three years and
have a term of seven years. Compensation expense for stock options is recognized
over the period for each separate vesting portion of the stock option award.
The fair value for options issued prior to January, 2006 was estimated at the
date of grant using a Black-Scholes option-pricing model. The risk free rate was
derived from the U.S. Treasury yield curve in effect at the time of the grant.
The volatility factor was determined based on a comparison to companies with
similar characteristics. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting
9
restrictions and are fully transferable. In addition, option-pricing models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options and because
changes in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion the existing models do not necessarily provide
a reliable single measure of the fair value of employee stock options
A summary of the status of the Company's options for the three months ended
March 31, 2006 is as follows:
WEIGHTED
AVERAGE AGGREGATE
EXERCISE REMAINING INTRINSIC
SHARES PRICE LIFE VALUE
------------ ------------ ------------ ------------
Balance at beginning of period ............ 1,643,316 $ 1.01 9.9 years $ 0.00
Granted ................................... -- -- -- --
Cancelled or Expired ...................... (--) -- -- --
Exercised ................................. -- -- -- --
------------ ------------ ------------ ------------
Outstanding at the end of the period ...... 1,643,316 $ 1.01 9.6 years $ 0.00
A summary of the status of the Company's nonvested shares as of March 31, 2006,
and changes during the three months ended March 31, 2006 is presented below:
WEIGHTED-
WEIGHTED- AVERAGE
AVERAGE REMAINING
FAIR VALUE CONTRACTUAL
NUMBER OF AT GRANT TERM
SHARES DATE (In years)
------------ ------------ ------------
Non-vested shares at December 31, 2005 .... 492,156 $ 1.00 9.5
Options granted ........................... -- -- --
Options vested ............................ (--) -- --
Options forfeited or expired .............. (--) -- --
------------ ------------ ------------
Non-vested shares at March 31, 2006 492,156 $ 1.00 9.5
============ ============ ============
As of March 31, 2006, there was approximately $340,000 of unrecognized
compensation cost related to non-vested stock option awards, which is expected
to be recognized over a remaining weighted-average vesting period of 2.75 years.
B. RECLASSIFICATIONS
Certain reclassifications were made to the 2005 financial statements in order to
conform to the 2006 financial statements.
C. LOSS PER SHARE
Loss per share is presented in accordance with the provisions of SFAS No. 128,
Earnings Per Share and SEC Staff Accounting Bulletin No. 98. Basic EPS is
calculated by dividing the
10
income or loss available to common stockholders by the weighted number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. These common stock equivalents have
been omitted from earnings per share because they are anti-dilutive,
accordingly, basic and diluted EPS were the same for the three months ended
March 31, 2006 and 2005. Common stock equivalents outstanding at March 31, 2006
consisted of 1,643,316 incentive stock options and warrants to purchase
7,473,937 shares of common stock.
D. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction ("SFAS 154"), which replaces Accounting Principles Board Opinions No.
20 "Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first quarter of
fiscal 2006. The adoption of SFAS 154 did not have an impact on the Company's
consolidated financial statements.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations" in March 2005. FIN 47 clarifies that
an entity must record a liability for a conditional asset retirement obligation
if the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. This guidance did not have a
material affect on the Company's financial statements.
NOTE 3 - EMPLOYEE STOCK OPTIONS
In January 2005, the Board of Directors approved the 2005 Incentive Stock Option
Plan for the benefit of its officers, employees and consultants. The Board also
approved the 2005 Directors' Stock Option Plan for the Company's board members.
These plans became effective concurrently with the closing of the Company's
initial public offering. The Plans expire ten years from the date of adoption.
The Company is authorized to grant options for up to 1,500,000 common shares
under the employee plan, and 200,000 under the directors plan. Under each Plan,
the option price of an ISO may not be less than the fair market value of a share
of common stock on the date of grant. An ISO may not be granted to a "ten
percent stockholder" (as such term is defined in Section 422 of the Internal
Revenue Code) unless the exercise price is at least 110% of the fair market
value of the common stock and the term of the option may not exceed five years
from the date of grant. Nonqualified stock options under both plans may be
granted at exercise prices equal to or greater than 85% of the fair market value
on the date of grant. The maximum term of each stock option granted to persons
other than ten percent stockholders is ten years from the date of the grant. The
Company may also grant options to purchase up to 35,373 shares of common stock
under three plans adopted in 2000, 2001 and 2003, which have similar terms.
11
A summary of the activity in the Plans is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
------------ ------------
Outstanding December 31, 2005 1,643,316 $ 1.01
Cancelled -- --
Issued -- --
------------
Outstanding March 31, 2006 1,643,316 $ 1.01
============
The options generally expire 10 years from the date of grant. However, in the
event a participant's employment is terminated for any reason other than the
result of death, disability or retirement, as defined, the options expire 90
days after termination.
If a participant's employment is terminated as a result of death, permanent
disability or retirement, the options expire one year from the date of
termination.
The weighted average remaining contractual life of options outstanding was 9.9
and 9.6 years as of December 31, 2005 and March 31, 2006.
Pro-forma information regarding net loss is required by SFAS No. 123 and has
been determined as if the Company had accounted for its employee stock options
under the fair value method of SFAS No. 123. Since there is not trading history
for the Company's stock, the fair value of the Company's issued options and
warrants were estimated at the date of grant using the fair value method with
the following assumptions:
Assumptions:
Risk-free rate 4.30%
Dividend yield 0
Volatility factor of the expected market 90%
Price of the Company's common stock 1.00
Average life 7 Years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
12
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Three Months Ended
-------------------------------
March 31, 2006 March 31, 2005
-------------- --------------
Interest Paid -0- -0-
NOTE 5 - SUBSEQUENT EVENTS
On April 10, 2006, Paulson Investment Company, Inc. and the Company
entered into a Placement Agent Agreement pursuant to which Paulsen would attempt
to place up to 2,500,000 shares (subject to additional allocations with the
consent of Paulsen and the Company) of the Company's common stock with
accredited investors. Paulson is the company that served as underwriter of
NuVim's recently completed initial public offering of securities. Under the
agreement a commission of seven percent would be paid to the selling broker and
Paulsen would receive an unaccountable expense allowance of three percent of the
total amount placed under the agreement. The agreement also provides that the
Company will use its best efforts to register the shares to be sold under the
Securities Act of 1933, as amended within 120 business days of the sale of
2,500,000 shares.
As of May 15, 2006, at total of 1,935,000 shares have been placed for
a total of $387,000.
On April 7, 2006 the Company agreed with Messrs. Clark and Moger to
acquire their respective 12.5% interests in NuVim Powder LLC., the powder
subsidiary, for 225,000 shares of Company common stock each. The Company
executed the agreement on April 18. 2006. The Company shares were exchanged for
the interests in the powder subsidiary on April 20, 2006.
In April 2006 the Company and two current and one retired executives
reached agreement on the number of shares to be granted in lieu of a cash bonus
for 2005 and the additional restrictions to be imposed on their ability to sell
the shares. A total of 661,500 shares were granted, 341,500 to Mr. Kundrat, the
CEO, 200,000 to John L. Sullivan, the Vice-President of Sales, and 120,000 to
Paul J. Young, who was until April 1, 2006 the Vice President of Operations and
is now a member of the Advisory Board.
On April 30, 2006 the Company issued 183,955 shares of common stock to a
former executive in payment of an incentive stock grant for 2005 and past due
salary.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our financial
statements and related notes included elsewhere in this Quarterly Report on Form
10-QSB. This discussion contains forward-looking statements that are based on
our management's beliefs and assumptions and on information currently available
to our management. Forward-looking statements include, but are not limited to,
statements regarding:
o possible or assumed future results of operations, including statements
regarding revenue mix, cost of revenues, promotion of our products through
advertising, sampling and other programs, changes to our internal
financial controls, trends in our operating expenses and provision for
income taxes, increased costs as a result of becoming a public company and
expenses related to stock-based compensation;
o financing plans, including the adequacy of financial resources to meet
future needs;
o business strategies, including any expansion into new products;
o our industry environment, including our relationships with our significant
customers and suppliers;
o potential growth opportunities; and
o the effects of competition.
Some of our forward-looking statements can be identified by use of words
such as "may," "will," "should," "potential," "continue," "expects,"
"anticipates," "intends," "plans," "believes" and "estimates."
Forward-looking statements involve many risks, uncertainties and
assumptions. Actual results may differ materially from those expressed in the
forward-looking statements for a number of reasons, including those appearing
under the caption "Factors Affecting Operating Results" and elsewhere in this
Quarterly Report on Form 10-QSB. The cautionary statements contained or referred
to in this report should be considered in connection with any subsequent written
or oral forward-looking statements that may be issued by us or persons acting on
our behalf. We undertake no obligation to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
We produce, market and distribute NuVim(R) dietary supplements in ready
to drink beverage form and in powder for mixing with water or adding to other
beverages. Both forms of our beverages have two exclusive and patented
micronutrients, MunePro(R) and Accuflex(R). MunePro(R) enhances the immune
system and AccuFlex(R) helps build muscle flexibility, sturdy
14
joints and muscle recovery. These micronutrients have been clinically proven to
enhance the immune system, muscle flexibility and athletic performance after 19
studies, 8,000 case histories and an expenditure of $50 million.
We focus on developing the NuVim(R) brand through a mix of advertising
and promotional programs that build consumer awareness, trial and repeat
purchases. The marketing consists of newspaper advertising/advertorials, product
sampling, coupon distribution, and promotional price discounts. These marketing
expenditures are essential to build the NuVim(R) brand. We continue to test
various ways to find the most cost efficient means to use these marketing funds
to increase consumer awareness, trial and repeat purchases. We believe that
these advertising and promotional activities are critical to the growth of our
business and expect to continue these programs in the future.
We have distributed our refrigerated beverages since the year 2000 and
are in approximately 2,100 Supermarkets in the Eastern United States. In 2002
company revenues were $3.5 million. However, we eliminated most advertising and
marketing support for our product in the second half of 2002 due to a lack of
funding. We recapitalized our company in June 2005 through the conversion of
approximately $7.7 million of debt into common stock and an initial public
offering of our common stock. Since that time we have concentrated our limited
financial resources on developing and supporting distribution opportunities that
we believe will provide the greatest sales expansion potential. We also
developed a powder version of our product to be sold through direct distribution
such as the internet and infomercials, as well as retail outlets. Sales of the
product to date have not been material. We expect NuVim Powder LLC to begin
marketing the NuVim(R) powder products through an internet affiliate marketing
program in May 2006.
We have launched an equity funded print news media campaign to educate
consumers about the benefits of NuVim(R) and create market awareness for our
product. In November, 2005 we issued 250,000 shares of common stock, a warrant
to purchase 250,000 shares of common stock at $1.50 and a warrant to purchase
250,000 shares of common stock at $2.00 as payment for a contract to provide
$3,000,000 worth of nationally syndicated print features at standard rates, at a
discounted amount. The media program which began in January 2006 and will
continue for approximately twelve months or until the contracted amount of the
newspaper features has been completed.
Case shipments of our refrigerated product declined by 5,932 or 28.7%
during the first quarter of 2006 as compared to the same period in the prior
year. The reasons for the decline included a reduction in the number of the
Publix warehouses stocking NuVim, and declines in the markets that have not been
supported with advertising or consumer promotion. During 2006 we continued to
have had limited funding to support product sampling and advertising programs,
which we believe are critical to maintain and increase sales of our products.
Therefore, we have focused our spending on product sampling in accounts that we
believe will offer the greatest potential for sales growth and expansion
opportunities until we are able to raise funding for additional marketing
programs.
15
In late 2003 we began a test program with a single Wal-Mart supercenter.
In late 2004 the test was expanded to 43 supercenters and then further expansion
to 120 supercenters in late 2005 that covered most of the Wal-Mart supercenters
in the State of Florida. During the 2005 expansion the number of NuVim(R)
varieties carried by the supercenters was increased from two to three. First
quarter 2005 Wal-Mart sales were 8% of the total 2005 first quarter sales. In
April 2006, we increased our distribution to the entire southeast region,
encompassing 312 supercenters in 6 states.
The table set forth below discloses selected data regarding sales for
the quarters ended March 31, 2006 and 2005. The data is not necessarily
indicative of continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case"
means a unit of measurement equal to 512 U.S. fluid ounces of finished beverage
(eight 64-ounce containers). Unit case volume means the number of unit cases (or
unit case equivalents) of beverages directly or indirectly sold by us. Gross
cases sold to the customer represent the number of cases shipped to the customer
prior to any returned cases containing product that has not been sold by its
expiration date.
UNIT CASE VOLUME/CASE SALES
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
---------- ----------
Gross Cases Sold 14,747 20,679
Gross Sales $ 271,073 $ 375,719
Net Sales $ 176,221 $ 208,876
Gross sales are the amount invoiced to customers, while net sales deduct
from gross sales any payment or discount terms, promotional allowances, slotting
fees, warehouse damage and returned goods in accordance with the Financial
Accounting Standards Board Emerging Issues Task Force Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. In some accounts
we pay slotting fees when our products are initially introduced to a new account
and run price feature promotions to encourage trials of our product. As brand
loyalty grows in a market, we anticipate that we will be able to run fewer price
promotions and will not incur the one time additional slotting fees to gain new
distribution. Cases sold decreased 5,932, or 28.7%, for the three months ended
March 31, 2006, when compared to the same quarter in 2005. As discussed above,
we believe that the number of cases sold is directly impacted by the
effectiveness of advertising, sampling and marketing activities we are able to
fund in support of our refrigerated product. We have not had funding available
to fund advertising and marketing programs on a sustained basis across the
majority of the stores our products are distributed in since mid 2002. This has
caused sales to decline in those markets. Since we recapitalized our Company in
June of 2005 we have concentrated our marketing programs on selected growth
opportunities for our refrigerated product and the introduction of our NuVim
Powder product line. We believe these initiatives will provide better
opportunity for long term growth and increase sales in our existing markets by
creating market awareness for our product.
16
RESULTS OF OPERATIONS
Results of operations for the three months ended March 31, 2006 compared to the
three months ended March 31, 2005
Gross Sales. For the three months ended March 31, 2006, gross sales were
$271,073, a decrease of $104,646, or 28% lower than gross sales of $375,719 for
the three months ended March 31, 2005. The decrease in gross sales is primarily
attributable to a decrease in case volume in stores in New York, New Jersey,
Pennsylvania, Virginia and Maryland, and decreased sales to the Publix
supermarket chain, partially offset by increased sales at Wal-Mart Supercenters.
We have not had funds to support advertising and sampling of our products in our
existing stores since mid 2002, including the Publix Supermarket chain which we
added in August of 2004, resulting in declining sales. In June of 2005, we
restructured our balance sheet through the issuance of common stock, but were
only able to raise a limited amount of funds for advertising and sampling
programs. We have focused these limited resources on selected opportunities with
future expansion potential, and the introduction of a powder product, until such
time as we are able to fund programs across all of our markets. The powder
products offer a much higher gross profit to help bring the company to
profitability.
Discounts, Allowances and Promotional Payments. For the three months
ended March 31, 2006, promotional allowances and discounts were $94,852, a
decrease of $71,991 or 43%, from the promotional allowances and discounts of
$166,843 for the three months ended March 31, 2005. This decrease is primarily
attributable to lower sales volume and lower coupon expense resulting from a
sampling and coupon program at the Publix chain in the first quarter of 2005
that was not repeated in 2006. We record the price reductions, which are
reimbursed by us to the retailers, in accordance with Financial Accounting
Standards Board Emerging Issues Task Force, No. 01-09, Accounting for
Consideration Given by a Vendor to a Customer. We expect to continue to use
price promotions and coupon distribution selectively as a means to promote
consumer sampling and trial of our product into the foreseeable future. As the
product matures and a higher percentage of users of our product are repeat
purchasers, we expect coupon expense, relative to gross sales, to decline.
Product returned after its expiration date increased primarily due to the lower
sales volume discussed above. Total Discounts, Allowances and Promotional
payments as a percentage of gross sales decreased from 44% for the three months
ended March 31, 2005 to 35% for the three months ended March 31, 2006.
THREE MONTHS ENDED
MARCH 31,
----------------------- INCREASE
2006 2005 (DECREASE) PERCENTAGE
---------- ---------- ---------- ----------
Discounts for timely payment $ 5,894 $ 4,685 $ 1,209 26%
Product returned after its expiration date 34,545 31,001 3,544 11%
Promotional price allowances, coupons and other
incentives 54,413 115,157 (60,744) (53)%
Slotting fees -- 16,000 (16,000) (100)%
---------- ---------- ---------- ----------
Total Discounts, Allowances and Promotional
Payments $ 94,852 $ 166,843 $ (71,991) (43)%
========== ========== ========== ==========
17
Net Sales. Net sales for the three months ended March 31, 2006 were
$176,221, a decrease of $32,655, or 16% lower than net sales of $208,876 for the
three months ended March 31, 2005. The decrease in net sales is primarily
attributable to the decreased case sales and a decrease in the promotional
pricing discussed above.
Cost of Sales. For the three months ended March 31, 2006, cost of sales
was $121,231, a decrease of $86,604, or 42% lower than cost of sales of $207,835
for the three months ended March 31, 2005. Cost of sales as a percentage of
gross sales decreased to 45% for the three months ended March 31, 2006, compared
to 55% for the three months ended March 31, 2005. The decrease in cost of sales
was primarily the result of lower case volume.
Gross Profit. Gross profit was $54,990 for the three months ended March
31, 2006, an increase of $53,949 from the $1,041 gross profit for the three
months ended March 31, 2005. Gross profit as a percentage of gross sales was 19%
for the three months ended March 31, 2006 compared to gross profit of
approximately one quarter of one percent for the three months ended March 31,
2005. The increase in gross profit as a percentage of gross sales was primarily
due to the to lower cost of goods. Gross profit for the first quarter of 2006 as
a percentage of net sales was 30% as compared with approximately one-half of a
percent in the same period in 2005.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $512,673 for the three months ended March 31, 2006,
a decrease of $24,018, or 4% from selling, general and administrative expenses
of $536,691 for the three months ended March 31, 2005. Selling, general and
administrative expenses exceeded net sales in both periods as we are still in an
early stage of our development and have not achieved sales volumes sufficient to
generate net sales in excess of our selling, general and administrative
expenses. The decrease in selling, general and administrative expenses is
primarily due to decreases product sampling expenses. During the three months
ended March 31, 2005 we promoted our product through in store sampling,
including a program at the Publix Supermarket chain. We had no extensive
sampling activities in the first quarter of 2006 due to a lack of funding. We
expect to out source the financial services beginning in the second quarter of
2006 to decrease administrative costs. We feel that out sourcing this service at
this time can decrease cost without decreasing effectiveness. We have also out
sourced the operations work which will further decrease administrative costs
going forward.
Loss from Operations. Loss from operations was $457,683 for the three
months ended March 31, 2006 compared to $535,650 for the three months ended
March 31, 2005. The $77,967 decrease in loss from operations was primarily
attributable to the increased gross profit and decreased operating expenses
described above.
Interest Expense. Interest expense was $37,065 for the three months
ended March 31, 2006, a decrease of $141,737, or 79%, from interest expense of
$178,802 for the three months ended March 31, 2005. The decrease in interest
expense is primarily attributable to the retirement of indebtedness. On June 24,
2005, in connection with the closing of our initial public offering, we
extinguished approximately $7.7 million of indebtedness through the issuance of
common stock.
18
Net Loss. Net loss was $494,703 for the three months ended March 31,
2006 compared to $714,452 for the three months ended March 31, 2005. The
$219,749 decrease in net loss was primarily attributable to the improved
operating results and the lower interest expense discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our operations to date have generated significant operating losses that
have been funded through the issuance of common stock and external borrowings.
We will require additional sources of outside capital to continue our
operations. Additionally secured convertible promissory notes with a face amount
of $67,600 are due June 23, 2006 and senior secured promissory notes with a
principal amount of $500,000 are due on November 30, 2006. We also have
outstanding notes payable with a principal balance of approximately $375,000,
and approximately $350,000 of accounts payable for which the holders have agreed
to defer payment until a subsequent financing. We are currently seeking
additional financing through the sale of equity securities, and negotiating
modified payment terms with our creditors, but there can be no assurance we will
be successful in this endeavor.
In April 2006 we signed a placement agent agreement with Paulsen
Investment Company. Inc. pursuant to which they undertook to privately place up
to 2,500,000 restricted shares of our common stock (with a possible 50% over
allocation) at a price of twenty cents per share to raise $500,000. As of the
date hereof, $387,000 has been received.
In March 2006 the board and compensation committee authorized a total
of 661,500 shares of common stock in lieu of the executive cash bonuses for 2005
and agreed with these executives to defer the payment of their 2005 accrued
salaries until 2007 and established the parameters for settling these accruals
in common stock. Also in March 2006, 50,000 shares of common stock to the new
corporate secretary for a portion of his 2006 fees. Finally, in March 2006,
NuVim issued 8,750 shares of common stock to SmallCapVoice.com, for investor
relations services.
Also in April 2006, our former CFO agreed to accept a total of 183,955
shares of common stock for a portion of the salary remaining due to him on the
date of his resignation and in lieu of this 2005 bonus.
We will need to raise additional financing to pay our past due
obligations, fund operating losses and to support sales and marketing programs
to increase sales of our products. If we are not able to identify additional
sources of financing, we may not be able to continue operations beyond June
2006.
19
Net cash used in operating activities for the three months ended March
31, 2006 was $268,917 compared to cash used in operating activities of $94,570
during the same period in 2005. The increase in cash used by operating
activities of $174,347 was primarily attributable to a payment of $202,000 to
SMBI, the exclusive provider of the proprietary whey protein concentrate used in
our products, in full settlement of past due balances due to them.
No cash was provided by financing activities during the three months
ended March 31, 2006, compared to $31,000 provided by related party advances
offset by an expenditure of 213,637 for deferred offering costs during the three
months ended March 31, 2005.
APPLICATION OF RECENT AND CRITICAL ACCOUNTING POLICIES AND PRONOUNCEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction ("SFAS 154"), which replaces Accounting Principles Board Opinions No.
20 "Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and is required to be adopted by the Company in the first quarter of
fiscal 2006. The adoption of SFAS 154 did not have an impact on the Company's
consolidated results of operations and financial condition.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asst Retirement Obligations" in March 2005. FIN 47 clarifies that an
entity must record a liability for a conditional asset retirement obligation if
the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. This guidance did not have a
material affect on the Company's financial statements.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure on contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments, estimates and uncertainties and potentially result in
materially different results under different assumptions and conditions. For a
detailed discussion on the application of these and other accounting policies,
see Note 2 to our annual financial statements for the year ended December 31,
2005.
20
PLACEMENT AND PROMOTIONAL ALLOWANCES AND CREDITS FOR PRODUCT RETURNS
As an inducement to our customers to promote our products in preferred
locations of their stores, we provide placement and promotional allowances to
certain customers. We also provide credits for customer coupon redemptions,
consumer price reductions, and product which has not been sold by its expiration
date. These allowances and credits are reflected as a reduction of revenue in
accordance with Emerging Issues Task Force ("EITF") No. 01-9, which requires
certain sales promotions and customer allowances previously classified as
selling, general and administrative expenses to be classified as a reduction of
sales or as cost of goods sold. Provisions for promotional allowances are
recorded upon shipment and are typically based on shipments to the retailer
during an agreed upon promotional period. We expect to offer promotional
allowances at historical levels in the near future as an incentive to our
customers. One time per account slotting or placement fees are deducted from
revenue in the period paid. Provisions for coupon redemptions and product
returned that has reached its expiration date are based on historical trends.
Information such as the historical number of cases returned per unit shipped,
product shelf life, current sales volume, and coupons distributed during the
period are used to derive estimates of the required allowance. As we expand
production and introduce new products, we may incur increased levels of returned
goods. Also, our estimates assume we will continue as a going concern and
maintain distribution with wholesalers and supermarkets that currently carry our
product. If a supermarket or wholesaler discontinues our product, we may
experience return rates in excess of our historical trend. This could result in
material charges to future earnings for reimbursements to our customers for
returned, unsold product.
ACCOUNTS RECEIVABLE
We evaluate the collectablity of our trade accounts receivable based on
a number of factors. Accounts receivable are unsecured, non-interest bearing
obligations that are typically due from customers within 30 days of the invoice
date. We apply collections in accordance with customer remittance advices or to
the oldest outstanding invoice if no remittance advice is presented with
payment. We provide an incentive to customers for paying in less than 30 days
which results in our overall receivables to be approximately 17 days.
We estimate an allowance for doubtful accounts and revenue adjustments
based on historical trends and other criteria. We have had only one account that
could not be collected. Further, as accounts receivable outstanding are deemed
uncollectible or subject to adjustment, these allowances are adjusted
accordingly. In circumstances where we become aware of a specific customer's
inability to meet its financial obligations to us, a specific reserve for bad
debts is estimated and recorded which reduces the recognized receivable to the
estimated amount we believe will ultimately be collected. In addition to
specific customer identification of potential bad debts, bad debt charges are
recorded based on our recent past history and an overall assessment of past due
trade accounts receivable outstanding. We also estimate the amount of credits
for product placement, promotion and expired product that are expected to be
issued for product sold based on an evaluation of historical trends and record
an allowance when the sale is recorded.
21
INFLATION
We do not believe that inflation had a significant impact on our results
of operations for the periods presented.
OFF-BALANCE SHEET TRANSACTIONS
At March 31, 2006, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
FACTORS AFFECTING OPERATING RESULTS
Investing in our shares involves a high degree of risk. You should
carefully consider the following risks, as well as the other information in this
report, before deciding whether to invest in our shares. If any of the following
risks actually occur, our business, financial condition, results of operations
and liquidity could suffer. In that event, the trading price of our shares could
decline and you might lose all or part of your investment.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL.
We are currently operating at a loss and expect our expenses to continue
to increase as we expand our product line as well as our geographic presence
throughout the United States. To date, we have relied primarily on financing
transactions to fund operations. We could face unforeseen costs such as an
increase in transportation costs resulting from the recent significant increases
in the cost of fuel; or our revenues could fall short of our projections because
retail outlets discontinue ordering our products or for reasons unrelated to our
products, such as a revenue decline due to changes in consumer habits and
preferences or we may achieve lower margins than planned on our products due to
cost increases or competitive pricing pressure. We will need another infusion of
capital to continue to fund our operations in 2006. Paulsen Investment Company.
Inc. has undertaken to raise $500,000 and is now privately placing up to
2,500,000 restricted shares of our common stock (with a possible 50% over
allocation) at a price of twenty cents per share. As of the date hereof,
$387,000 has been received.
We will still continue to need additional funds to continue its operations. New
sources of capital may not be available to us when we need it or may be
available only on terms we would find unacceptable. If such capital is not
available on satisfactory terms, or is not available at all, we will be unable
to continue to fully develop our business and our operations and financial
condition will be materially and adversely affected. Such a lack of additional
funding could force us to cease operations altogether. Debt financing, if
obtained, could increase our expenses and would be required to be repaid
regardless of operating results. In addition, if we raise additional funds
through the issuance of equity, equity-related or convertible debt securities,
these securities may have rights, preferences or privileges senior to those of
the rights of our ordinary shares and
22
our shareholders may experience additional dilution. Any such developments can
adversely affect your investment in our company, harm our financial and
operating results, and cause our share price to decline.
OUR AUDITORS HAVE SUBSTANTIAL DOUBT ABOUT OUR ABILITY TO CONTINUE AS A GOING
CONCERN.
In their report in connection with our 2005 financial statements, our
auditors included an explanatory paragraph stating that, because we have
incurred net losses and have a net capital deficiency for the years ended
December 31, 2004 and 2005, and, as of March 31, 2006, we were in default on
approximately $1 million of notes payable due upon our next financing, there is
substantial doubt about our ability to continue as a going concern. Our
continued existence will depend in large part upon our ability to successfully
secure additional financing to fund future operations. Our initial public
offering was not sufficient to completely alleviate these concerns; the proceeds
have been adequate to fund operations to date, but we will need to raise
additional funding to continue operations. If we are not able to achieve
positive cash flow from operations or to secure additional financing as needed,
we will continue to experience the risk that we will not be able to continue as
a going concern.
Our continued existence will depend in large part upon our ability to
successfully secure additional financing to fund future operations. Our initial
public offering was not sufficient to completely alleviate these concerns. If we
are not able to achieve positive cash flow from operations or to secure
additional financing as needed, we will continue to experience the risk that we
will not be able to continue as a going concern.
We have approximately $1.5 million of indebtedness that is payable out
of proceeds of additional financing that we secure.
We have not had sufficient capital to operate our business for
approximately three years, and as a result, we have negotiated extended payment
terms on approximately $1,028,000 of notes payable, and $450,000 of accounts
payable which are due and payable upon receipt of additional financing.
These outstanding obligations may make it difficult to raise additional
financing.
OUR LIMITED OPERATING HISTORY MAKES EVALUATION OF OUR BUSINESS DIFFICULT.
We have a limited operating history and have encountered, and expect to
continue to encounter, many of the difficulties and uncertainties often faced by
early stage companies. We commenced our business operations in 1999 and began
marketing our initial products in 2000 on a limited basis. Accordingly, we have
only a limited operating history with which you can evaluate our business and
prospects. An investor in our units must consider our business and prospects in
light of the risks, uncertainties and difficulties frequently encountered by
early stage companies, including limited capital, delays in product development,
possible marketing and sales obstacles and delays, inability to gain customer
acceptance or to achieve significant distribution of our products to customers
and significant competition. We cannot be certain that we will successfully
address these risks. If we are unable to address these risks, our business may
not grow, our stock price may suffer and/or we may be unable to stay in
business.
23
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO CONTINUE TO OPERATE AT A LOSS FOR
THE FORESEEABLE FUTURE.
Since our inception in 1999, we have incurred net losses in every year,
including net losses of $2,239,440 for the year ended December 31, 2003,
$2,131,581 for the year ended December 31, 2004, 2,234,865 for the year ended
December 31, 2005 and $494,703 for the three months ended March 31, 2006. We had
a working capital deficit of $2,517,373 at March 31, 2006 and have negative cash
flows from operations. As a result of ongoing operating losses, we also had an
accumulated deficit of $20,739,764 and a stockholders' deficit of $2,507,550 at
the same date. We expect to incur losses until at least through 2006 and may
never become profitable. We also expect that our expenses will increase
substantially for the foreseeable future as we seek to expand our product line
and sales and distribution network, implement internal systems and
infrastructure and comply with the legal, accounting and corporate governance
requirements imposed upon public companies. These ongoing financial losses may
adversely affect our stock price.
OUR SUCCESS SUBSTANTIALLY DEPENDS ON MAINTAINING OUR RELATIONSHIPS WITH SMBI.
SMBI is the holder of certain patents and trademarks that cover the
micronutrients that we use in our products and is our only supplier of those
micronutrients. We have a license agreement and a supply agreement with SMBI,
both of which are critical to our business and expire in 2014. Under the SMBI
license agreement, we have the right to use SMBI's intellectual property for the
production and distribution of carbonated and noncarbonated beverages
incorporating the micronutrients that provide the health benefits of our
products. SMBI also supplies the key ingredient in our products under the terms
of the supply agreement. These agreements contain cross-termination provisions,
and therefore, we risk losing both our rights to the licensed use of the
micronutrients and other SMBI intellectual property needed for our business, as
well as our sole source of supply, if either agreement is terminated in
accordance with its terms. Furthermore, any exclusive rights we enjoy under the
license and supply agreements may be jeopardized if we fail to satisfy certain
minimum purchase requirements. In addition, SMBI and its affiliate, Spencer
Trask Specialty Group, LLC ("Spencer Trask"), are founders and significant
stockholders of our company and, as such, SMBI has provided us with favorable
terms under the supply contract. However, due to our relationship with Spencer
Trask, there is a potential for conflicts of interest between SMBI and us. If we
are unable to obtain the whey protein concentrate from SMBI for any reason, our
manufacturing and distribution processes could be severely disrupted, and our
operations could be adversely affected. We are aware of only one other source
that might be able to provide an immune enhancement whey protein but it does not
contain LactoActin and LactoMune, which are proprietary to SMBI, and we are not
certain of its effectiveness. Moreover, it is our understanding that this
ingredient would not provide the muscle flexibility health benefit that we
achieve by using the SMBI whey protein concentrate. In addition, even if we are
able to find acceptable alternative sources of supply, the new terms would
likely be less favorable than those that we receive from SMBI. Accordingly, it
is critical that we continue to meet all of our material obligations under both
the license agreement and the supply agreement. In the past, we have not always
been able to do so
24
because of a lack of financial resources. We paid SMBI $250,000 of past due
payables out of the net proceeds of our initial public offering and an
additional payment of $200,000 in January 2006 which secured the NuVim trademark
for us. We do not owe SMBI any past due payments and are currently on net 30 day
payment terms for the SBMI whey protein.
OUR BUSINESS DEPENDS ON THE ACCEPTANCE OF OUR PRODUCTS IN BOTH EXISTING AND NEW
MARKETING AREAS.
We intend to expand into new geographic areas and broaden our product
offerings to generate additional sales. Our refrigerated beverage products are
currently available in the northeastern United States and, recently, portions of
the south, but our beverage products have not yet been widely distributed. We do
not know whether the level of market acceptance we have received in our current
markets for our products will be matched or exceeded in the geographic locations
we are newly serving or in other areas of the country as we expand our
distribution in the future. We also will need to raise additional financing to
support this expansion.
As we expand our product line to include additional flavors of the refrigerated
beverage, as well as the shelf-stable sports drink and the powder mix, we will
face the additional uncertainty of whether these new products will gain market
acceptance in any market. We can give no assurance that we will expand into new
geographic areas or successfully expand our product line. It is unlikely that we
will achieve profitability and otherwise have a successful business unless we
are able to gain market acceptance of our existing and future products over a
wide geographic area.
CONSUMERS WHO TRY OUR PRODUCTS MAY NOT EXPERIENCE THE HEALTH BENEFITS WE CLAIM,
WHICH MAY CAUSE THEM TO DISCONTINUE USING OUR PRODUCTS.
There have been approximately 20 independent clinical studies that have
demonstrated the health benefits of the micronutrient components of our
products. However, there has been only one, small-scale study of the effects of
NuVim beverages directly. That study required the subjects to consume 12 ounces
of NuVim daily for six weeks. While the study did validate the positive health
claims we believe our products provide, it did not consider whether a smaller
quantity of the beverage or a shorter period of continued usage might provide
similar benefits. Therefore, we currently cannot confirm that the health
benefits of our products will be evident to casual consumers of our products.
Consumers may determine that drinking 12 ounces of NuVim per day for a minimum
of six weeks requires more discipline and expense than they are willing to
devote. If consumers do not use our product in the quantity or for the duration
we recommend, they may not achieve the health benefits we claim, which may cause
them to make alternative nutritional beverage and/or dietary supplement
purchasing decisions.
OUR BUSINESS MAY SUFFER FROM LACK OF DIVERSIFICATION.
Our business is centered on nutritional beverages. The risks associated
with focusing on a limited product line are substantial. If consumers do not
accept our products or if there is a general decline in market demand for, or
any significant decrease in, the consumption of nutritional beverages, we are
not financially or operationally capable of introducing alternative
25
products within a short time frame. As a result, such lack of acceptance or
market demand decline could cause us to cease operations.
EXPANSION OF OUR BUSINESS IS DEPENDENT ON OUR ABILITY TO EXPAND PRODUCTION.
We currently manufacture our refrigerated product line at Clover Farms
Dairy in Reading, Pennsylvania. Our ability to expand beyond our current
marketing areas depends on, among other things, the ability to produce our
product in commercial quantities sufficient to satisfy the increased demand.
Although our present production capacity is sufficient to meet our current and
short-term future production needs, production capacity may not be adequate to
supply future needs. If additional production capacity becomes needed, it will
be necessary to engage additional co-packers or to expand production capacity at
our present co-packer facility. If we expand production at Clover Farms Dairy,
we risk having to pay significantly greater transportation costs to transport
our products to warehouses in other regions of the United States. Any new
co-packing arrangement raises the additional risk of higher marginal costs than
we currently enjoy since we would be required to negotiate new terms with any
new co-packer. We may not be able to pass along these higher costs to our
customers. If we are unable to pass along the higher production costs imposed by
new co-packers to our customers, we either will suffer lower gross margins and
lower profitability, once achieved, or we may be unable to expand our business
as we have planned, which could disappoint our stockholders.
OUR BUSINESS CONTAINS RISKS DUE TO THE PERISHABLE NATURE OF OUR PRODUCT.
Our current refrigerated product is a perishable beverage that has a
limited shelf-life of approximately 83 days. This restricted shelf life means
that we do not have any significant finished goods inventory and our operating
results are highly dependent on our ability to accurately forecast near term
sales in order to adjust our raw materials sourcing and production needs. When
we do not accurately forecast product demand, we are either unable to meet
higher than anticipated demand or we produce excess inventory that cannot be
profitably sold. Additionally, our customers have the right to return products
that are not sold by their expiration date. Therefore, inaccurate forecasts that
either mean that we are unable meet higher than anticipated demand or that
result in excess production, or significant amounts of product returns on any of
our products that are not sold by the expiration date could cause customer
dissatisfaction, unnecessary expense and a possible decline in profitability.
GOVERNMENT REGULATION MAY ADVERSELY AFFECT OUR BUSINESS.
Our business is subject to government regulation, principally the United
States Food and Drug Administration (the "FDA"), which regulates the processing,
formulation, packaging, labeling and advertising of dietary products, and to a
lesser extent, state governments, where state attorneys general have authority
to enforce their state consumer protection acts. Specifically, we are subject to
the Dietary Supplement and Health Education Act ("DSHEA"). Under DSHEA, dietary
supplements are permitted to make "statements of nutritional support" with
notice to the FDA, but without FDA pre-approval. The FDA does not allow claims
that a dietary product may mitigate, treat, cure or prevent disease. There can
be no assurance that at some future time the FDA will not determine that the
statement of nutritional support we make
26
on our packaging is a prohibited claim rather than an acceptable nutritional
support statement. Such a determination by the FDA would require deletion of the
treatment, cure or prevention of disease claim, or, if it is to be used at all,
submission by our company and the approval by the FDA of a new drug application,
which would entail costly and time-consuming clinical studies, or revision to a
health claim, which would require demonstration of substantiated scientific
evidence to support such claim and would also consume considerable management
time and financial resources.
Our advertising of dietary supplement products is also subject to
regulation by the Federal Trade Commission (the "FTC") under the Federal Trade
Commission Act, which prohibits unfair or deceptive trade practices, including
false or misleading advertising. The FTC in recent years has brought a number of
actions challenging claims made by companies that suggest that their products
are dietary supplements. No assurance can be given that actions will not be
brought against us by the FTC or any other party challenging the validity of our
product advertising claims.
OUR BUSINESS MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS RELATING TO CONSUMER USE
OF OUR PRODUCTS.
As a marketer of beverages that are ingested by consumers, we face an
inherent risk of exposure to product liability claims if the use of our products
results in injury or our labeling contains inadequate warnings concerning
potential side effects. With respect to product liability claims, we have
obtained a $2.0 million liability insurance policy ($2.0 million per
occurrence), which we believe is adequate for our kind of business activity. The
policy contains certain exclusions that would pertain to food products such as
the additional products exclusion for bodily injury or property damage arising
out of the manufacture, handling, distribution, sale, application or use of
certain specified products ( e.g ., silicone, latex, and dexfenfluramine, among
others), the intended injury and the willful and intentional acts exclusions.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or, if available, that it will be adequate to cover potential
liabilities. If we are found liable for product liability claims that exceed our
coverage or are subject to a policy exclusion, such liability could require us
to pay financial losses for which we have not budgeted and may not have adequate
resources to cover. If the uninsured losses were significantly large enough to
impact our ability to continue our then-existing level of operations, we might
experience a decline in net income and earnings per share, and our stock price
might suffer. In an effort to limit any liability, we generally obtain
contractual indemnification from parties supplying raw materials or marketing
our products. Such indemnification is limited, however, by the terms of each
related contract and, as a practical matter, by the creditworthiness of the
indemnifying party.
Despite the insurance coverage that we plan on maintaining, it is
possible that we may be sued if one or more consumers believe our products have
caused them harm. While no such claims have been made to date, the results of
any such suit could result in significant financial damages to us, as well as
serious damage to the reputation and public perception of our company, even if
we are ultimately found not to be at fault.
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ITEM 3. CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and accounting firm of Hendel &
Hendel have reviewed the disclosure controls and procedures relating to the
Company at March 31, 2006 and concluded that such controls and procedures were
effective to provide reasonable assurance that all material information about
the financial and operational activities of the Company was made known to them.
There were no changes in the Company's internal control over financial reporting
during the three months ended March 31, 2006 that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are at present no legal proceedings pending against the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None in the first quarter not already reported in the Current Report on Form 8-K
filed on April 21, 2006.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None in the first quarter 2006
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
(a) A Current Report on Form 8-K was filled on April 21.2006 covering Items
3, 5, and 8.
(b) The following exhibits are filed as part of this report:
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
29
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUVIM, INC.
Date: May 15 , 2006 By: /s/ RICHARD P. KUNDRAT
-----------------------------
Richard P. Kundrat
Chief Executive Officer and
Chairman of the Board
(Principal Executive Officer)
Date: May 15 , 2006 By: /s/ RICHARD P. KUNDRAT
-----------------------------
Richard P. Kundrat
Chief Financial Officer
(Principal Financial and
Accounting Officer)
30