================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------------------
For the Fiscal Year Ended Commission File Number
December 31, 2004 0-32565
NUTRACEA
(Name of Small Business Issuer in It Charter)
--------------------------------------------
California 87-0673375
(State of Incorporation) (I.R.S. Employer Identification)
------------------------ --------------------------------
Principal Executive Offices:
1261 Hawk's Flight Court
El Dorado Hills, CA 95762
Telephone: (916) 933-7000
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Title of Class
--------------
Common Stock, no par value
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 reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
The issuer's revenues for its most recent fiscal year were $1,224,229.
As of March 30, 2005, the aggregate value of the voting stock held by
non-affiliates of the Registrant, computed by reference to the average of the
bid and ask price on such date was approximately $16,199,720 based upon the
average price of $0.58/share.
As of March 30, 2005, the Registrant had outstanding 36,214,611 shares of common
stock.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
================================================================================
NUTRACEA
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ITEM 1. DESCRIPTION OF BUSINESS. . . . . . . . . . . . . . . . . . . .1
ITEM 2. DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . .9
ITEM 3. LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . .9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. . . . . .9
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.. . . . . . . . . . . . . . . . . . . . .10
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF . . . . . . 12
ITEM 7. FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . 16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE . . . . . . . . . . . . . . . . . . 20
ITEM 8A. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . . . . . 20
ITEM 8B. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . 20
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROLPERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT. . . . . . 21
ITEM 10. EXECUTIVE COMPENSATION. . . . . . . . . . . . . . . . . . . .24
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT ANDRELATED STOCKHOLDER MATTERS. . . . . . . . . . 29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. . . . . . . .30
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K. . . . . . . . . . . . . . .31
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
i
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
NutraCea (referred to as "NutraCea" or "we" or "us") is a California corporation
formerly known as Alliance Consumer International, Inc. As a result of the
Exchange Transaction discussed below, NutraCea's business is now the business
previously carried on by NutraStarTechnologies Incorporated ("NTI"), a Nevada
corporation that was formed and started doing business in February 2000.
NutraCea is a relatively new health science company focused on the development
and distribution of products based upon the use of stabilized rice bran and
proprietary rice bran formulations. Rice bran is the outer layer of brown rice
which until recently was a wasted by-product of the commercial rice industry.
These products include food supplements and medical foods (known as
"nutraceuticals") which provide health benefits for humans and animals, as well
as cosmetics and beauty aids based on stabilized rice bran, rice bran
derivatives and rice bran oil. NutraCea believes that stabilized rice bran
products can deliver beneficial physiological effects with fewer of the adverse
side effects commonly associated with many prescription drugs. As a result,
NutraCea believes that certain of its products may be used in place of, or as a
supplement to, some of the most commonly used pharmaceuticals. NutraCea has
conducted and is currently involved in ongoing clinical trials and third party
analyses in order to support the uses for and effectiveness of its products.
NutraCea has developed a number of product lines that are currently or soon will
be available for sale in the market through its four divisions: TheraFoods(R),
which provides health food supplements to the retail market; ProCeuticals(R),
which distributes Medical Foods through the medical community; NutraGlo(R),
which distributes animal feed products; and NutraBeauticals(R), which has
commenced the development and marketing of cosmeceuticals and beauty aids.
NutraCea anticipates developing strategic distribution and marketing agreements
with retail merchandisers, pharmaceutical companies and medical practices,
including HMOs, hospitals and institutions.
NutraCea's corporate offices and operations are located at 1261 Hawk's Flight
Court, El Dorado Hills, California 95762. NutraCea's telephone number is (916)
933-7000. NutraCea has one wholly owned subsidiary, NTI, which in turn wholly
owns NutraGlo Incorporated, a Nevada corporation. Both of these subsidiaries
maintain business offices at NutraCea's principal business office in El Dorado
Hills, California.
HISTORY
NutraCea was originally incorporated on March 18, 1998 in California as Alliance
Consumer International, Inc. On December 14, 2001, NTI effected a reorganization
with the inactive publicly-held company, Alliance Consumer International, Inc.,
and the name was changed to NutraStar Incorporated. As a result of the
reorganization NTI became a wholly owned subsidiary of NutraStar Incorporated
and NutraStar Incorporated assumed the business of NTI.
On October 1, 2003, NutraStar Incorporated changed its name to NutraCea and the
common stock began trading on the OTCBB under the symbol "NTRC." On November 12,
2003, NutraCea declared a 1:10 reverse stock split. Post-split shares of
NutraCea trade on the OTCBB under the symbol "NTRZ."
1
On April 27, 2000, NutraStar formed NutraGlo Incorporated ("NutraGlo"), a Nevada
corporation, which was owned 80% by NTI and 20% by NaturalGlo Investors L.P.
During 2001, NutraGlo started marketing, manufacturing and distributing one of
NutraCea's products to the equine market. In 2002, NutraCea issued 250,001
shares of its common stock to NaturalGlo Investors L.P. in exchange for the
remaining 20% of the common stock of NutraGlo. The value of the shares was
$250,001. As a result, NutraGlo is now a wholly owned subsidiary of NTI.
INDUSTRY OVERVIEW
By definition, nutraceuticals are products from natural sources which that have
biologically therapeutic effects in humans and mammals. These compounds include
vitamins, antioxidants, polyphenols, phytosterols, as well as macro and trace
minerals. Rice bran and rice bran oil are good sources for some of these
compounds, including tocotrienols, a newly discovered complex of vitamin E, and
gamma-oryzanol, which is found only in rice bran. Among other things, these
compounds act as potent antioxidants. Stabilized rice bran and its derivatives
also contain high levels of B-complex vitamins and beta-carotene, a vitamin A
precursor. Stabilized rice bran also contains high levels of carotenoids and
phytosterols, both essential fatty acids, as well as a balanced amino acid
profile and both soluble and insoluble fiber which promote colon health.
Rice is one of the world's major cereal grains, although United States
production of rice is only a small fraction of total world production. According
to the United States Department of Agriculture, approximately 65% of the
nutritional value of rice is contained in the rice bran, the outer brown layer
of the rice kernel which is removed during the milling process. However, raw,
unstabilized rice bran deteriorates rapidly. Because of the rapid degradation
and short shelf life, rice bran has not been widely accepted as a component of
nutrition, health or beauty products notwithstanding the known benefits. The
RiceX Company ("RiceX"), one of NutraCea's primary suppliers, has developed a
method of stabilizing rice bran that NutraCea believes is superior to other
methods, and provides a shelf life of approximately two years, which NutraCea
believes is longer than any other stabilized rice bran. Using stabilized rice
bran as an ingredient provides the longer shelf life necessary for economical
production of nutrition products which incorporate rice bran ingredients.
As the population of the United States ages over the next 30 years, NutraCea
believes demand for its products will grow dramatically. Since stabilized rice
bran is a safe food product, we believe that its beneficial effects can be
obtained with no known deleterious side effects, such as those that may be
present in pharmaceuticals. Many physicians have taken an interest in NutraCea's
nutraceutical products as a means of offering alternative or complementary
approaches for treating serious healthcare problems. If further clinical trials
support the beneficial effects of NutraCea's nutraceutical and medical foods
products and if the medical community widely endorses such use of its products,
NutraCea believes that its products may be used as a nutritional therapy either
prior to or as a complement to traditional pharmaceutical therapies for the
treatment of a variety of ailments including diabetes and coronary heart
disease.
PRODUCTS
NutraCea has two segments with four primary divisions through which it sells its
products.
PRODUCTS OF NUTRASTAR TECHNOLOGIES INCORPORATED:
2
- TheraFoods(R) Nutrition Supplements. NutraCea distributes its
consumer products through its TheraFoods(R) Nutritional Supplements
division. The primary products currently sold through this division
are RiSolubles(R), RiceMucil(R), CeaFlex(R), FlexBoost(R),
DiaBoost(R), MigraCea(R), ProstaCea(R), Cea100(R), NutraImmune(TM),
LiverBoost(R), SuperSolubles(R), SynBiotics(TM) and StaBran(R)
Nutritional Supplements. All the products are currently available in
either capsule or powdered form for use as food supplements. The
powdered form can also be used as a food additive in breads, cookies,
snacks, beverages, and similar foods. We have also developed and
currently produce CeaFlex(R) Cream, a topical, cream product for
arthritic joint and muscle pain. Consumer products are sold directly
to consumers through toll-free telephone sales and Internet sales.
- ProCeuticals(R) Medical Foods. NutraCea distributes its medical
foods products to doctors, clinics and healthcare providers through
its ProCeuticals(R) Medical Foods Division. In addition to certain
consumer products, the primary products to be distributed through this
division are SynBiotics 1(TM) Probiotics to support treatment of
Irritable Bowel Syndrome, SynBiotics 2(TM) Probiotics to support
treatment of Inflammatory Bowel Disease, SynBiotics 3(TM) Probiotics
to support treatment of antibiotic-induced diarrheal conditions, and
LiverBoost(R) to support liver health. Medical foods will be marketed
to healthcare providers through the same distribution systems that
market pharmaceutical and medical supplies.
- NutraBeauticals(R) Beauty Products. NutraCea distributes its
natural beauty products through its NutraBeauticals(R) Beauty Products
Division. The principal product sold through this division is
NutraBeauticals(R) Skin Cream, a topical emollient containing rice
bran oil and other natural ingredients to support the health and
improve the appearance of skin. NutraCea does not have an established
distribution system for its beauty and skin care products.
PRODUCTS OF NUTRAGLO INCORPORATED:
- NutraGlo(R) Animal Products. NutraCea developed a derivative of
its CeaFlex(R) Nutritional Supplement to prevent and rehabilitate
joint degeneration in horses and markets CeaFlex(R) Equine Nutritional
Supplements and Absorbine Flex+(R) Equine Pain Relief though its
NutraGlo(R) Animal Products Division. NutraCea's Absorbine Flex+(TM)
Equine products are distributed exclusively through W. F. Young, Inc.
pursuant to a distribution agreement in the United States and 36
foreign countries. Other equine and animal health care products will
be distributed through this or other channels.
MARKETING
NutraCea's TheraFoods(R) Division is currently marketing its products
domestically through various distribution channels including NutraCea's
toll-free phone number and through the Internet at
http://www.nutracea.com/products.html.
--------------------------------------
NutraCea's equine products are distributed under the name "Absorbine Flex+(R)"
by W.F. Young, Inc. pursuant to a distribution agreement with NutraCea dated May
1, 2001 pursuant to which Absorbine Flex+ is being marketed nationwide and
internationally. The distribution agreement provides for NutraGlo to
manufacture, package and ship all W.F. Young's sales requirements while W.F.
Young is granted a license to use and market NutraCea's equine products.
NutraGlo has agreed to sell its equine healthcare products exclusively through
W.F. Young at preferred product prices. W.F. Young has agreed
3
to use its best efforts to promote NutraGlo's current and future equine products
and make minimum product purchases. In May of 2003 the purchase requirements for
the three-year contract had been met. The distribution agreement was for an
initial term of three years ending on August 31, 2004. On September 18, 2003,
NutraCea, W.F. Young and Wolcott Farms, Inc. entered into a Technology Agreement
which, among other things, extended the initial term of the Distribution
Agreement through September 12, 2006 and can be additionally renewed for
subsequent one-year terms. Additionally, the minimum purchase requirement was
amended. NutraCea has developed a number of other animal products, which it is
seeking to distribute through various distribution channels such as the Internet
and strategic joint ventures in the large animal, pet and veterinarian
industries.
NutraCea also intends to distribute many of its consumer products through direct
response marketing channels such as infomercials and catalogue sales.
PRODUCT SUPPLY
NutraCea currently purchases all of its stabilized rice bran, rice bran
solubles, rice bran fiber concentrates, and other rice bran products from RiceX.
We believe RiceX has a proprietary manufacturing process for stabilizing the
rice bran it processes. This process results in an estimated shelf life for the
rice bran products of approximately two years under proper storage conditions,
compared to a typical shelf life of approximately two months for rice bran
products processed by other suppliers. The extended shelf life is a critical
factor in the use of rice bran products as an ingredient since the availability
of rice bran products would otherwise be seasonal and inventories of products
using rice bran products would spoil or become unusable between seasons.
NutraCea does not currently have a supply contract with RiceX and purchases its
rice bran products at RiceX's standard prices. NutraCea(R) believes that it will
be able to continue purchasing its requirements of stabilized rice bran products
from RiceX. There are no other known sources of stabilized rice bran of the
quality comparable to that produced by RiceX. The interruption of supply from
RiceX, either because of other significant purchasers or the damage or
destruction of the RiceX processing facility, could interrupt the production of
NutraCea's products, and a prolonged interruption would have a material adverse
effect on our business, financial condition and our results of operation if we
did not quickly locate another suitable supplier.
COMPETITION
NutraCea competes with other companies which offer products that incorporate
stabilized rice bran as well as companies that offer other food ingredients and
nutritional supplements. Suppliers of nutritional supplements and other products
that use stabilized rice bran provided by other suppliers are subject to the
higher costs of shorter shelf life and the seasonal availability of stabilized
rice bran ingredients. NutraCea also faces competition from companies providing
products that use oat bran and wheat bran in the nutritional supplements as well
as health and beauty aids. Many consumers may consider such products to be a
replacement for the products manufactured and distributed by NutraCea even
though they have a higher incidence of allergic reactions and adverse health
indications. Many of NutraCea's competitors have greater marketing, research,
and capital resources than NutraCea does, and may be able to offer their
products at lower costs because of their greater purchasing power or the lower
cost of oat and wheat bran ingredients. There are no assurances that NutraCea's
products will be able to compete successfully.
GOVERNMENT REGULATION
4
The Federal Food, Drug, and Cosmetic Act ("FFDCA") and the U.S. Food and drug
Administration ("FDA") regulations govern the marketing of NutraCea's products.
The FFDCA provides the statutory framework governing the manufacturing,
distribution, composition and labeling of dietary supplements for human
consumption. These requirements apply to NutraCea's products distributed by the
TheraFoods(R) and ProCeutical(R) divisions.
Marketers of dietary supplements may make three different types of claims in
labeling: nutrient content claims; nutritional support claims; and health
claims.
- Nutrient content claims are those claims that state the nutritional content of
a dietary supplement and include claims such as "high in calcium" and "a good
source of vitamin C." The FFDCA prescribes the form and content of nutritional
labeling of dietary supplements and requires the marketer to list all of the
ingredients contained in each product. A manufacturer is not required to file
any information with the FDA regarding nutrient content claims, but must have
adequate data to support any such claims.
- Nutritional support claims may be either statements about classical
nutritional deficiency diseases, such as "vitamin C prevents scurvy" or
statements regarding the effect of a nutrient on the structure or function of
the body, such as "calcium builds strong bones." The FFDCA requires that any
claim regarding the effect of a nutrient on a structure or function of the body
must be substantiated by the manufacturer as true and not misleading. In
addition, the label for such products must bear the prescribed disclaimer:
"This statement has not been evaluated by the Food and Drug Administration.
This product is not intended to diagnose, treat, cure, or prevent any disease."
- Health claims state a relationship between a nutrient and a disease or a
health-related condition. FDA's regulations permit certain health claims
regarding the consumption of fiber and the reduction of risk for certain
diseases, such claims may relate to rice bran ingredients.
The FDA has broad authority to enforce the provisions of federal law applicable
to dietary supplements, including the power to seize adulterated or misbranded
products or unapproved new drugs, to request product recall, to enjoin further
manufacture or sale of a product, to issue warning letters, and to institute
criminal proceedings. In the future, NutraCea may be subject to additional laws
or regulations administered by the FDA or other regulatory authorities, the
repeal of laws or regulations that NutraCea might consider favorable or more
stringent interpretations of current laws or regulations. NutraCea is not able
to predict the nature of such future laws or regulations, nor can it predict the
effect of such laws or regulations on its operations. NutraCea may be required
to reformulate certain of its products, recall or withdraw those products that
cannot be reformulated, keep additional records, or undertake expanded
scientific substantiation. Any or all of such requirements could have a material
adverse effect on NutraCea's business and financial condition.
The Federal Trade Commission (the "FTC") regulates the advertising of dietary
supplement and other health-related products. The FTC's primary concern is that
any advertising must be truthful and not misleading, and that a company must
have adequate substantiation for all product claims. The FTC actively enforces
requirements that companies possess adequate substantiation for product claims.
FTC enforcement actions may result in consent decrees, cease and desist orders,
judicial injunctions, and the payment of fines with respect to advertising
claims that are found to be unsubstantiated.
In addition to the foregoing, NutraCea's operations will be subject to federal,
state, and local government laws and regulations, including those relating to
zoning, workplace safety, and accommodations for the
5
disabled, and its relationship with its employees are subject to regulations,
including minimum wage requirements, anti-discrimination laws, overtime and
working conditions, and citizenship requirements.
NutraCea believes that it is in substantial compliance with all material
governmental laws and regulations.
RESULTS OF TRIALS AND SCIENTIFIC RESEARCH
The beneficial attributes of stabilized rice bran, including the RiSolubles(R)
and RiceMucil(R) Nutritional Supplements, have been studied and reported by
several laboratories, including Medallion Laboratories, Craft's Technologies,
Inc., Southern Testing & Research Laboratories, and Ralston Analytical
Laboratories. NutraCea has no affiliation with any of the laboratories that
performed these studies but did pay for certain portions of these studies.
These analyses have verified the presence of antioxidants, polyphenols, and
phytosterols, as well as beneficial macro and trace minerals, in NutraCea's
stabilized rice bran products. Antioxidants are compounds which scavenge or
neutralize damaging compounds called free radicals. Polyphenols are organic
compounds which potentially act as direct antioxidants. Phytosterols are
plant-derived sterol molecules that help improve immune response to fight
certain diseases.
A 57-subject clinical trial conducted by Advanced Medical Research with funding
by RiceX suggested that consumption of the stabilized rice bran used in
NutraCea's RiSolubles(R) and RiceMucil(R) Nutritional Supplements may lower
blood glucose levels of type 1 and type 2 diabetes mellitus patients and may be
beneficial in reducing high blood cholesterol and high blood lipid levels. If
warranted, NutraCea(R) may develop products which address the use of stabilized
rice bran products as medical foods for, and to potentially make health benefit
claims relating to, the effects of dietary rice bran on diabetes and
cardiovascular disease.
Through several consulting physicians, NutraCea has relationships with several
medical institutions and practicing physicians who may continue to conduct
clinical trials and beta work for its products. Some of these previous clinical
trials are reviewed in an article published in the March 2002 issue of the
Journal of Nutritional Biochemistry. The trials produced positive results by
showing that the levels of blood lipids and glycosylated hemoglobin were
reduced. Subsequently six domestic and international patents were issued.
The W. F. Young Company, distributors of Absorbine(R) Equine Pain Relief
Products, sponsored a 50-horse equine clinical trial, which demonstrated the
NutraCea's Absorbine Flex+(R) Equine Products to be effective products for
treating joint degeneration as well as inflammation in horses.
INTELLECTUAL PROPERTY
NutraCea, through NTI, filed applications with the U.S. Patent and Trademark
Office and has successfully registered NutraCea's logo, StaBran(R),
RiSolubles(R), RiceMucil(R), and 22 other product names, as registered federal
trademarks and service marks. NutraCea has 27 additional trademark and service
mark applications pending. Six of these pending applications have been approved
and we are awaiting the trademark serial numbers. Five applications have been
rejected by the trademark office and require further prosecution, and eleven are
newly filed applications with no further action as yet required by the trademark
office
6
NutraCea has the international rights and operates under a license from RiceX
for the domestic use of Patent Number 6,126,943 entitled "A Method for Treating
Hypercholesterolemia, Hyperlipidemia, and Atherosclerosis," which was published
October 3, 2000; Patent Number 6,303,586 entitled "A Method for Treating
Diabetes, Hyperglycemia and Hypoglycemia," which was published October 16, 2001;
Patent Number 6,303,586 B1 entitled "Supportive Therapy for Diabetes,
Hyperglycemia and Hypoglycemia" which was published October 16, 2001; and Patent
Number 6,350,473 entitled "A Method for Treating Diabetes, Hyperglycemia and
Hypoglycemia, and Atherosclerosis" which was published February 26, 2002. Each
of the foregoing patents relate to the use of rice bran in connection with
products and methods of treatment for the above referenced diseases.
NutraCea, through NTI, filed a non-provisional patent application with 47 claims
entitled "Methods of Treating Joint Inflammation, Pain and Loss of Mobility" on
November 6, 2001. In a December 3, 2002 office action, the U.S. Patent and
Trademark Office allowed 26 and disallowed 21 of the patent's 47 claims.
Subsequently, in February 2004, the 26 claims which were allowed in December of
2002 were disallowed. In March 2004 NutraCea appealed the disallowance of the 26
claims which were previously allowed. Additionally, in October 2003, nine
additional preventive claims were added to the patent. In February 2005 NutraCea
received a written notification that the U.S. Patent and Trademark Office had
allowed 11 claims and the prosecution of the application was closed. The
associated fees have been paid and NutraCea is awaiting publication of the
patent.
NutraCea believes that its trademarks and patent rights represent a significant
asset and the loss of any such rights could have a significant effect on the
future of the company and its financial condition of NutraCea.
RESEARCH AND DEVELOPMENT EXPENDITURES
During fiscal years 2004 and 2003, NTI spent $78,331 and $63,873, respectively,
on product research and development.
EMPLOYEES
NutraCea has six full time employees, and four independent contracted staff
members. None of NutraCea's employees are employed pursuant to a collective
bargaining or union agreement, and it considers that its relationship with its
employees is good.
FACTORS AFFECTING NUTRACEA'S BUSINESS
NutraCea will need additional funds to finance long term product research and
development as well as fund our current operations. While NutraCea has adequate
cash reserves and working capital to fund current operations, its ability to
meet long term business objectives and debt obligations is dependent upon its
ability to raise additional financing through public or private equity
financings, establish increasing cash flow from operations, enter into
collaborative or other arrangements with corporate sources, or secure other
sources of financing to fund long term operations.
NutraCea has developed and is marketing a number of products, including food
supplements, medical foods and cosmeceuticals, which are derived from stabilized
rice bran and specially formulated rice bran oil. These rice bran based
products are relatively new which will require NutraCea to successfully
introduce products to the marketplace and create a sustainable and expanding
market for its products.
7
The failure of NutraCea to effectively create a market and demand for its
products would have a material adverse affect on business, financial condition
and results of operations.
The dietary supplement and cosmetic industries are subject to considerable
government regulation both as to efficacy as well as labeling and advertising.
There is no assurance that all of NutraCea's products and marketing strategies
will satisfy all of the applicable regulations of the DSHEA, FDA and/or the FTC.
Failure to meet any applicable regulations would require NutraCea to limit the
production or marketing of any non-compliant products or advertising which could
subject NutraCea to financial or other penalties.
Our prospects for financial success are difficult to forecast because we have a
relatively limited operating history. NutraCea's current business commenced in
February 2000, when its wholly owned subsidiary, NTI, first started its
operations. Consequently, both NutraCea and its operating subsidiary have a
limited operating history upon which an evaluation of their future prospects can
be based. Neither NutraCea nor its subsidiaries, NTI and NutraGlo, have ever
made a profit in any fiscal quarter. Our prospects for financial success must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new, unproven and rapidly evolving markets. To
address these risks, NutraCea must, among other things, expand its customer
base, increase its cash flow from operations, develop new products, respond
effectively to competitive developments, and continue to attract, retain and
motivate qualified employees. NutraCea's inability to further develop and
expand its operations would materially adversely affect NutraCea's business,
financial condition and results of operations.
NutraCea operates in a rapidly changing and growing industry, which is
characterized by vigorous competition from both established companies and
potential new companies. The markets for food supplements and cosmetics are
extremely competitive both as to price and quality.
NutraCea utilizes certain patents owned by RiceX. While RiceX is aware of
NutraCea's use of these certain patents, both internationally and domestically,
the companies have never formalized this use in a written agreement.
Consequently, RiceX could notify NutraCea to discontinue utilizing those certain
patents referred to above under the Section "Intellectual Property." While
NutraCea believes it has certain rights to use these patents, any interruption
in their availability to NutraCea could have an adverse effect on certain
products marketed by NutraCea.
Dependence on Key Supplier
RiceX is a publicly owned company. The spouse of our largest stockholder owns
approximately 5% of RiceX and is a director of RiceX. RiceX is our sole
supplier for rice bran derivatives, which are integral to the manufacturing of
our products and which account for about 72% of our total cost of sales.
RiceX agreed to sell to us its rice bran derivatives at prices equal to the
lower of RiceX's standard price or the price negotiated by other customers for
like quantities and products. The agreement also provided that RiceX would not
sell any rice bran derivatives products in the United States except to NutraCea.
This latter part of the agreement was terminated on July 9, 2002.
In addition to the risks associated with the potential termination of RiceX as
NutraCea's major supplier, the inability of RiceX to deliver the amount of
product that NutraCea requires, any interruption in product delivery for any
reason, or the inability of RiceX to fulfill its contractual obligations would
have a material adverse effect on NutraCea's business, results from opera-tions,
and financial condition, as NutraCea could not readily find and implement
alternative suppliers and likely not on advantageous
8
terms. RiceX's ability to manufacture certain of NutraCea's raw materials is
currently limited to the production capability of RiceX's Dillon, Montana plant
(the "Dillon Plant"). Currently, the Dillon Plant is capable of producing all of
NutraCea's rice bran raw materials, but that capacity may not be sufficient to
meet all of NutraCea's long-term supply needs.
In summary, NutraCea's net sales and operating results in any particular quarter
may fluctuate as a result of a number of factors, including its current
dependence on one source for its stabilized rice bran, the need to validate the
benefits and applications for stabilized rice bran products, delays in
establishing markets for its products, the current rise in economic recovery as
well as the overall performance of the food supplement and cosmetic industries
as discussed above. NutraCea's future operating results will depend, to a large
extent, on its ability to anticipate and successfully react to these and other
factors and successfully implements its growth strategy.
ITEM 2. DESCRIPTION OF PROPERTY
NutraCea subleases its executive offices, warehouse and laboratory, located at
1261 Hawk's Flight Court, El Dorado Hills, California, from RiceX for a monthly
rental of $6,366. We have subleased this 10,080 square foot facility through
September 30, 2006. NutraCea believes that this facility will be adequate for
current operations.
ITEM 3. LEGAL PROCEEDINGS
NutraCea is involved from time to time in various lawsuits that arise in the
course of its business. At the current time there is no outstanding litigation
involving NutraCea.
On July 16, 2002, NutraCea was summoned to answer a Complaint filed by Faraday
Financial, Inc. ("Faraday") in District Court, County of Salt Lake, Utah (Case
No. 020906477). The Complaint claims that NutraCea issued convertible
promissory notes totaling $450,000 and a promissory note totaling $50,000. On
December 13, 2001, Faraday entered into a settlement agreement with NutraCea,
whereby Faraday agreed to cancel the promissory notes in exchange for 735,730
shares of NutraCea's preferred stock. Faraday claims that the settlement
agreement required that NutraCea effect a registration statement covering the
preferred stock by June 30, 2002, which NutraCea failed to do, and new demands
that NutraCea immediately forfeit to Faraday 735,730 shares of common stock
owned by the Chief Executive Officer of NutraCea. Faraday has filed its fourth
claim for relief for a judgment against NutraCea for $500,000, plus accrued, but
unpaid interest, attorneys' fees and costs, and other such costs. A Settlement
Agreement was executed on December 10, 2003. In consideration for the mutual
releases, Faraday converted 735,730 preferred into 735,730 common shares and
$90,127 of accrued preferred dividends into 1,201,692 common shares. During
2004 NutraCea issued an additional 250,000 shares to Faraday to compensate for
minimum realization amounts. Concurrently, with the executed Settlement
Agreement, a joint stipulated motion to stay all proceedings was filed with the
Court. If Faraday has not lifted the stay by June 10, 2005, NutraCea shall
deliver to Faraday an executed stipulation for dismissal with prejudice of the
Complaint and Counterclaim.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
On September 17, 1998, Alliance Consumer International, Inc. ("Alliance") was
approved for quotation on the National Association of Securities Dealers'
Over-the-Counter Bulletin Board ("OTCBB") where it was quoted under the symbol
"ACIL" until June 3, 1999. On June 3, 1999, Alliance moved to the "Pink Sheets"
published by the Pink Sheets LLC (previously National Quotation Bureau, LLC).
In May 2001, Alliance's common stock was once again approved for quotation on
the OTCBB and its symbol was changed to "ACIN." Effective December 17, 2001,
Alliance changed its name to NutraStar Incorporated and the Common Stock began
trading on the OTCBB under the symbol "NTRA." On October 1, 2003, NutraStar
changed its name to NutraCea and the Common Stock began trading on the OTCBB
under the symbol "NTRC." On November 12, 2003, NutraCea declared a 1:10 reverse
stock split. Post-split shares of NutraCea trade on the OTCBB under the Symbol
"NTRZ".
A public trading market having the characteristics of depth, liquidity and
orderliness depends upon the existence of market makers as well as the presence
of willing buyers and sellers, which are circumstances over which we do not have
control. The following table sets forth the high and low bid prices for our
Common Stock in the periods indicated. The quotations below reflect
inter-dealer prices, without retail mark-up, markdown or commission, and may not
represent actual transactions.
-------------------------------------------
YEAR ENDED DECEMBER 31, 2003 LOW HIGH
-------------------------------------------
First Quarter $.60* $1.10*
-------------------------------------------
Second Quarter $.50* $1.10*
-------------------------------------------
Third Quarter $.70* $2.70*
-------------------------------------------
Fourth Quarter $ .85 $ 1.85
-------------------------------------------
-------------------------------------------
YEAR ENDED DECEMBER 31, 2004 LOW HIGH
----------------------------------- ------
First Quarter $ .87 $ 2.14
----------------------------------- ------
Second Quarter $ .83 $ 1.33
----------------------------------- ------
Third Quarter $ .29 $ 1.16
-------------------------------------------
Fourth Quarter $ .32 $ .56
-------------------------------------------
*Represents stock prices adjusted for 1 for 10 share split in November
2003.
____________________________
As of March 15, 2005, there were approximately 185 holders of record of
NutraCea's Common Stock. This amount does not include shares held in street
name.
DIVIDEND POLICY
NutraCea has never paid any cash dividends on its common stock. NutraCea
currently anticipates that it will retain all future earnings for use in its
business. Consequently, it does not anticipate paying any cash dividends in the
foreseeable future.
10
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
--------------------------------------------------------------------------------------------------------
Plan Category Number of securities Weighted-average Number of Number of securities
to be issued upon exercise price of shares issued remaining available
exercise of outstanding options, for future issuance
outstanding options, warrants and rights under equity
warrants and rights compensation plans
(excluding securities
reflected in column
--------------------------------------------------------------------------------------------------------
Equity compensation
plans approved by -0- N/A 9,895,190 104,810
security holders
--------------------------------------------------------------------------------------------------------
Equity compensation
plans not approved by 14,744,856 $ 0.56 -0- 14,744,856
security holders
--------------------------------------------------------------------------------------------------------
Total 14,744,856 $ 0.56 9,895,190 14,849,666
--------------------------------------------------------------------------------------------------------
STOCK COMPENSATION PLANS
On October 30, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of NutraCea to execute a
registration statement under the Securities Act of 1933 for 10,000,000 shares of
common stock. Under the plan, the Board of Directors or a committee thereof may
grant warrants, options, restricted common shares, unrestricted common shares
and other awards to directors, employees and consultants of NutraCea for
services rendered. As of December 31, 2004, 9,905,327 shares of common stock
have been issued under the Stock Compensation Plan.
Other equity compensation plans not approved by shareholders include options and
warrants issued in connection with employment agreements (8,289,700 options) and
options and warrants issued to consultants in exchange for services rendered
(6,095,156).
RECENT SALES OF UNREGISTERED SECURITIES
During the three months ended December 31, 2004, NutraCea issued the following
equity securities pursuant to the private placement exemption provided by
Section 4(2) of the Securities Act of 1933. These are deemed to be "restricted
securities" as defined in Rule 144 under the 1933 Act and bear a legend stating
the restrictions on resale.
- Options and warrants representing 25,000 shares of common stock
were exercised for a total value of $5,000.
- NutraCea issued 1,717,069 shares of common stock to three
consultants for services valued at $657,531.
- On September 8, 2004, NutraCea and Langley Park Investments PLC
("Langley") signed a Stock Purchase Agreement under which NutraCea
agreed to sell 7,000,000 shares of its common stock to Langley. The
transaction will close at the time that Langley's shares are trading
on the London Stock Exchange for anticipated consideration to NutraCea
(i) immediately following the closing of approximately $1,190,000
U.S.D. in Langley stock, and (ii) additional consideration of that
11
number of Langley shares which, as of the closing, will have a value
of approximately $1,190,000 (the "Langley Shares").
In addition, during the year ended December 31, 2004, NutraCea issued the
following equity securities pursuant to Section 3(a)(9) of the Securities Act of
1933 pertaining to securities issued for conversion or exchange of preferred
stock and dividends thereon.
- NutraCea issued 5,759 shares of common stock in payment of
preferred dividends in the amount of $5,986.
- NutraCea converted 540,000 shares of preferred stock to 630,000
shares of common stock valued at $348,351.
RECENT SALES OF REGISTERED SECURITIES
NutraCea issued 55,588 shares of common stock to one consultant for services
valued at $22,500.
PURCHASE OF EQUITY SECURITIES BY COMPANY
------------------------------------------------------------------------------------------------------
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Shares (or Units) Shares (or Units)
Total Number of Purchased as Part of that May Yet be
Shares (or Units) Average Price Paid Publicly Announced Purchased Under the
Period Purchased per Share (or Unit) Plans or Programs Plans or Programs
------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------
344,956
April 1, 2004 Common $ 0.67 -0- -0-
------------------------------------------------------------------------------------------------------
130,000 Series A
December 22, 2004 Preferred $ 1.00 -0- -0-
------------------------------------------------------------------------------------------------------
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS AND PLAN OF
OPERATION
For more detailed financial information, please refer to the audited December
31, 2004 Financial Statements included in this Form 10-KSB.
CAUTION ABOUT FORWARD-LOOKING STATEMENTS
This Form 10-KSB includes "forward-looking" statements about future financial
results, future business changes and other events that have not yet occurred.
For example, statements like we "expect," we "anticipate" or we "believe" are
forward-looking statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of risks and
uncertainties about the future. We do not undertake to update the information
in this Form 10-KSB if any forward-looking statement later turns out to be
inaccurate. Details about risks affecting various aspects of NutraCea's
business are discussed throughout this Form 10-KSB and should be considered
carefully.
RESULTS OF OPERATIONS
Our revenues decreased by $311,924, to $1,224,229 in 2004 from $1, 536,153 in
2003. The 20% decrease resulted from a decrease of approximately $730,500 in
sales by our equine division from $1,248,996 in 2003 to $600,976 in 2004. This
decrease was partially offset by product licensing fees of
12
$214,500 in 2004 ($0 in 2003). We expect sales by our equine division to
increase in 2005 and approach the level reached in 2003.
Cost of goods sold decreased by $245,539 to $600,129 in 2004 from $845,668 in
2003. This 29% decrease results primarily from a decrease in cost of goods sold
from our equine division of $321,371 in 2004.
Gross profit decreased by $66,385 to $624,100 in 2004, from $690,485 in 2003.
This 10% decrease is due to lower equine division sales, which have been
partially offset by the licensing fees revenue in 2004.
Operating expenses increased by $15,257,973 to $24,175,462 in 2004, from
$8,917,489 in 2003. This increase was primarily due to increased non-cash
expenses related to issuances of common stock and common stock warrants and
options awards. These non-cash items totaled $20,998,119 in 2004 and $1,577,938
in 2003. Also, professional fees increased $703,360 to $1,122,250 in 2004 from
$418,890 in 2003. Primary reasons for the increase in professional fees include
the use of consultants instead of hiring permanent employees ($351,820), legal
fees associated with transactions ($157,570), and additional costs associated
with public filings ($109,042). Employee wages and related expense increased by
$153,640 due to increased bonuses of $305,000 which were partially offset by
reductions in the total number of employees.
Interest expense decreased by $4,283,194 to $27,602 in 2004, from $4,310,796 in
2003 primarily due to the recording of $4,224,246 in interest expense in 2003
relating to modifications of stock option and warrant awards attached to debt as
a result of the 1 for 10 reverse split on November 12, 2003.
CAPITAL FINANCING
During December 2004, we borrowed $2,400,000 in notes payable to help finance
future operations. The notes are for a one year term, bear interest at 7%
interest compounded quarterly and are secured by all of the assets of NutraCea.
The holders were issued warrants to purchase a total of 2,400,000 shares of
NutraCea's common stock at an exercise price of $0.30 per share. The warrants
are immediately exercisable and expire in seven years from the date of issuance.
Debt discount expense of $786,370 was recorded in connection with issuance of
these warrants and is being amortized over the life of the notes payable.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred significant operating losses for its last three fiscal years
and, as of December 31, 2004 NutraCea had an accumulated deficit of $44,927,792.
At December 31, 2004, NutraCea had cash and cash equivalents of $1,928,281 and a
net working capital of $283,835. While we believe this amount is sufficient to
fund current business requirements it is not deemed sufficient to cover our
expanded business plan and growth, nor the repayment of debt obligations.
To date, we have funded our operating deficits through a combination of
short-term debt and the issuance of common and preferred stock. During 2004, we
raised $2,400,000 from the issuance of third-party notes payable. We also
raised $2,776,468 through the exercise of stock options during 2004.
13
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial conditions and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States. The preparation of financial statements requires managers to
make estimates and disclosures on the date of the financial statements. On an
on-going basis, we evaluate our estimates, including, but not limited to, those
related to revenue recognition. We use authoritative pronouncements, historical
experience and other assumptions as the basis for making judgments. Actual
results could differ from those estimates. We believe the following critical
accounting policies affect our more significant judgments and estimates in the
preparation of our consolidated financial statements.
Revenue recognition
-------------------
We are required to make judgments based on historical experience and future
expectations, as to the realizability of shipments made to its customers. These
judgments are required to assess the propriety of the recognition of revenue
based on Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," and
related guidance. NutraCea makes these assessments based on the following
factors: i) customer-specific information, ii) return policies, and iii)
historical experience for issues not yet identified.
Valuation of long-lived assets
------------------------------
Long-lived assets, consisting primarily of property and equipment, patents and
trademarks, and goodwill, comprise a significant portion of NutraCea's total
assets. Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that their carrying values may not be recoverable.
Recoverability of assets is measured by a comparison of the carrying value of an
asset to the future net cash flows expected to be generated by those assets. The
cash flow projections are based on historical experience, management's view of
growth rates within the industry, and the anticipated future economic
environment.
Factors NutraCea considers important that could trigger a review for impairment
includes the following:
(a) significant underperformance relative to expected historical or
projected future operating results,
(b) significant changes in the manner of its use of the acquired
assets or the strategy of its overall business, and
(c) significant negative industry or economic trends.
When NutraCea determines that the carrying value of patents and trademarks,
long-lived assets and related goodwill and enterprise-level goodwill may not be
recoverable based upon the existence of one or more of the above indicators of
impairment, it measures any impairment based on a projected discounted cash flow
method using a discount rate determined by its management to be commensurate
with the risk inherent in its current business model.
14
Marketable Securities - Marketable securities are marked to market at each
----------------------
period end. Any unrealized gains and losses on the marketable securities are
excluded from operating results and are recorded as a component of Other
comprehensive income (loss). If declines in value are deemed other than
temporary, losses are reflected in Net income (loss).
Inventory - Inventory is stated at the lower of cost (first-in, first-out) or
---------
market and consists of nutraceutical products manufactured by an affiliated
company, RiceX, which the Company enhances for final distribution to its
customers. While the Company has an inventory of these products, which contain
ingredients supplied by RiceX, any significant prolonged shortage of these
ingredients or of the supplies used to enhance these ingredients could
materially adversely affect the Company's results of operations.
Property and Equipment - Property and equipment are stated at cost. The Company
----------------------
provides for depreciation using the straight-line method over the estimated
useful lives as follows:
Furniture and equipment 5-7 years
Automobile 5 years
Software 3 years
Leasehold Improvements 2.4 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
Fair Value of Financial Instruments - For certain of the Company's financial
-----------------------------------
instruments, including cash, accounts receivable, inventory, prepaid expenses,
accounts payable, accrued salaries and benefits, deferred compensation, accrued
expenses, customer deposits, due to related party, notes payable - related
party, and note payable the carrying amounts approximate fair value due to their
short maturities.
Stock-Based Compensation - Compensation is recorded for stock-based compensation
------------------------
grants based on the excess of the estimated fair value of the common stock on
the measurement date over the exercise price. Additionally, for stock-based
compensation grants to consultants, NutraCea recognizes as compensation expense
the fair value of such grants as calculated pursuant to SFAS No. 123, recognized
over the related service period. SFAS No. 148 requires companies to disclose pro
forma results of the estimated effect on net income and earnings per share to
reflect application of the fair value recognition provision of SFAS No. 123.
Off Balance Sheet Arrangements
------------------------------
None
15
ITEM 7. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
Page
REPORT OF INDEPENDENT REGISTRED PUBLIC
ACCOUNTING FIRM . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Statements of Operations . . . . . . . . . . . . . . . F-3
Consolidated Statement of Comprehensive Losses. . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholder Equity . . . . . F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements. . . . . . . . . . . . . F-10
16
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Board of Directors
NutraCea and subsidiaries
El Dorado Hills, California
We have audited the accompanying consolidated balance sheet of NutraCea as of
December 31, 2004, and the related statements of operations, changes in
stockholders' deficit, and cash flow for each of the two years then ended.
These financial statements are the responsibility of NutraCea's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NutraCea as of
December 31, 2004, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with accounting principles generally
accepted in the United States of America.
MALONE & BAILEY, PC
www.malone-bailey.com
Houston, Texas
February 14, 2005
F-1
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 1,928,281
Marketable securities 183,801
Accounts receivable 7,681
Inventory 304,064
Prepaid expenses 30,755
-------------
Total current assets 2,454,582
RESTRICTED MARKETABLE SECURITIES 183,801
PROPERTY AND EQUIPMENT, net 119,650
PATENTS AND TRADEMARKS, net 329,851
GOODWILL 250,001
-------------
TOTAL ASSETS $ 3,337,885
=============
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 261,073
Accrued expenses 180,049
Due to related parties 73,978
Notes payable 1,635,174
Convertible, mandatorily redeemable series A preferred stock,
no par value, $1 stated value
20,000,000 shares authorized
0 shares issued and outstanding 20,473
-------------
Total current liabilities 2,170,747
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value
100,000,000 shares authorized
36,130,544shares issued and outstanding 48,123,282
Deferred compensation (15,954)
Accumulated deficit (44,927,792)
-------------
Accumulated other comprehensive income,
unrealized loss on marketable securities (2,012,398)
-------------
Total shareholders' equity 1,167,138
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,337,885
=============
F-2
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended
December 31
2004 2003
-------------- -------------
REVENUES
Net product sales $ 1,009,729 $ 1,536,153
Licensing fees 214,500 -
-------------- -------------
Total revenues 1,224,229 1,536,153
COST OF GOODS SOLD 600,129 845,668
-------------- -------------
GROSS PROFIT 624,100 690,485
OPERATING EXPENSES 24,175,462 8,917,489
-------------- -------------
LOSS FROM OPERATIONS (23,551,362) (8,227,004)
-------------- -------------
OTHER INCOME (EXPENSE)
Interest income 4,497 2
Interest expense (27,602) (4,310,796)
-------------- -------------
Total other income (expense) (23,105) (4,310,794)
-------------- -------------
NET LOSS (23,574,467) (12,537,798)
CUMULATIVE PREFERRED DIVIDENDS 8,373 124,411
-------------- -------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $ (23,582,840) $(12,662,209)
============== =============
BASIC AND DILUTED LOSS AVAILABLE TO COMMON
SHAREHOLDERS PER SHARE $ (1.18) $ (2.07)
============== =============
BASIC AND DILUTED WEIGHTED-AVERAGE SHARES
OUTSTANDING 19,905,965 6,106,548
============== =============
F-3
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
For the years ended
December 31
2004 2003
-------------- -------------
NET LOSS $ (23,574,467) $(12,537,798)
OTHER COMPREHENSIVE LOSS
Unrealized loss on marketable
securites (2,012,398) -
-------------- -------------
COMPREHENSIVE LOSS $ (25,586,865) $(12,537,798)
============== =============
F-4
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Convertible, Redeemable
Series A Preferred Stock Common Stock Committed Deferred Other Com-
------------------------- ---------------------- Common Compen- prehensive Accumulated
Shares Amount Shares Amount Stock sation Loss Deficit
----------- ------------ --------- ----------- ---------- ---------- --------- ------------
BALANCE, DECEMBER 31, 2002 2,144,707 $ 2,060,931 2,375,807 $5,861,702 $ 571,674 $(873,273) $ - $(8,682,746)
PREFERRED STOCK ISSUED
FOR ACCRUED INTEREST 200,000 8,351
PREFERRED STOCK DIVIDEND 124,411 (124,411)
PREFERRED STOCK CONVERTED
TO COMMON STOCK (1,674,707) (1,633,453) 254,323 1,651,860
PREFERRED DIVIDENDS CONVERTED
TO COMMON STOCK (208,450) 278,766 190,043
COMMON STOCK ISSUED
for committed stock 145,917 571,674 (571,674)
for cash 134,048 111,500
for services rendered 28,688 29,795
for deferred salaries 475,555 416,899
for accounts payable 80,114 62,724
for convertible notes payable 3,431,251 823,119
for loan collateral 50,000
ISSUANCE COSTS (7,000)
AMORTIZATION OF DEFERRED
COMPENSATION 140,114
REVERSAL OF DEFERRED
COMPENSATION (243,605) 243,605
STOCK OPTIONS EXERCISED
FOR CASH 4,519,373 427,575
Total
------------
BALANCE, DECEMBER 31, 2002 $(3,122,643)
PREFERRED STOCK ISSUED
FOR ACCRUED INTEREST
PREFERRED STOCK DIVIDEND (124,411)
PREFERRED STOCK CONVERTED
TO COMMON STOCK 1,651,860
PREFERRED DIVIDENDS CONVERTED
TO COMMON STOCK 190,043
COMMON STOCK ISSUED
for committed stock __
for cash 111,500
for services rendered 29,795
for deferred salaries 416,899
for accounts payable 62,724
for convertible notes payable 823,119
for loan collateral
ISSUANCE COSTS (7,000)
AMORTIZATION OF DEFERRED
COMPENSATION 140,114
REVERSAL OF DEFERRED
COMPENSATION __
STOCK OPTIONS EXERCISED
FOR CASH 427,575
F-5
The accompanying notes are an integral part of these financials
STOCK OPTIONS ISSUED
in lieu of deferred salaries 150,465
for services rendered 1,274,584 (109,000)
for accounts payable 40,527
for convertible debt 183,855
BENEFICIAL CONVERSION FEATURE
FOR CONVERTIBLE DEBT 99,516
STOCK OPTIONS CANCELLED (476,362) 476,362
MODIFICATION OF OPTIONS AND WARRANTS
non-employees 9,507,253
employees 303,750
NET LOSS (12,537,798)
BALANCE, DECEMBER 31, 2003 670,000 $ 351,790 11,773,842 $20,979,874 $ - $(122,192) $ - $(21,344,955)
PREFERRED STOCK DIVIDEND 8,373 (8,373)
PREFERRED STOCK DIVIDEND PAID (48,004)
PREFERRED STOCK REPURCHASED (130,000)
PREFERRED STOCK CONVERTED
TO COMMON STOCK (540,000) (348,351) 630,000 348,351
PREFERRED DIVIDENDS CONVERTED
TO COMMON STOCK (5,986) 5,759 5,986
COMMON STOCK ISSUED
for marketable securities 7,000,000 2,380,000
for services rendered 4,407,950 3,470,100
for patent incentive plan 180,000 239,100
for accounts payable 168,626 57,944
for settlements 5,780,000 8,837,816
STOCK OPTIONS ISSUED
in lieu of deferred salaries 150,465
for services rendered 1,165,584
for accounts payable 40,527
for convertible debt 183,855
BENEFICIAL CONVERSION FEATURE
FOR CONVERTIBLE DEBT 99,516
STOCK OPTIONS CANCELLED __
MODIFICATION OF OPTIONS AND WARRANTS
non-employees 9,507,253
employees 303,750
NET LOSS (12,537,798)
BALANCE, DECEMBER 31, 2003 $ (487,273)
PREFERRED STOCK DIVIDEND (8,373)
PREFERRED STOCK DIVIDEND PAID
PREFERRED STOCK REPURCHASED
PREFERRED STOCK CONVERTED
TO COMMON STOCK 348,351
PREFERRED DIVIDENDS CONVERTED
TO COMMON STOCK 5,986
COMMON STOCK ISSUED
for marketable securities 2,380,000
for services rendered 3,470,100
for patent incentive plan 239,100
for accounts payable 57,944
for settlements 8,837,816
F-6
The accompanying notes are an integral part of these financials
AMORTIZATION OF DEFERRED
COMPENSATION 57,648
REVERSAL OF STOCK OPTIONS (48,590) 48,590
COMMON STOCK CANCELLED (50,000)
STOCK OPTIONS EXERCISED FOR CASH 6,579,323 2,776,468
STOCK OPTIONS ISSUED
for services rendered 8,582,516
for notes payable 786,370
RECLASS OF OPTIONS TO
PREFERRRED STOCK 62,651 (62,651)
COMMON STOCK REPURCHASED (344,956) (230,000)
OTHER COMPREHENSIVE LOSS (2,012,398)
NET LOSS - - - - - (23,574,467)
-------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004 - $20,473 36,130,544 $48,123,284 $ - $(15,954) $(2,012,398) $(44,927,795)
=====================================================================================
AMORTIZATION OF DEFERRED
COMPENSATION 57,648
REVERSAL OF STOCK OPTIONS -
COMMON STOCK CANCELLED -
STOCK OPTIONS EXERCISED FOR CASH 2,776,468
STOCK OPTIONS ISSUED
for services rendered 8,582,516
for notes payable 786,370
RECLASS OF OPTIONS TO
PREFERRRED STOCK (62,651)
COMMON STOCK REPURCHASED (230,000)
OTHER COMPREHENSIVE LOSS (2,012,398)
NET LOSS (23,574,467)
-------------
BALANCE, DECEMBER 31, 2004 $ 1,167,137
=============
F-7
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
December 31,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(23,574,467) $(12,537,798)
Adjustments to reconcile net loss to net cash used in operating activities
Accretion of warrants used as a debt discount
Depreciation and amortization 38,057 238,900
Non-cash issuances of preferred stock (354,337) -
Non-cash issuances of common stock 15,339,296 29,795
Non-cash issuances of stock options & warrants 9,306,234 1,349,439
Beneficial conversion feature - 99,516
Modifications of options and warrants, non-employees 62,651 9,507,253
Modifications of options and warrants, employees (48,590) 303,750
(Increase) decrease in
Accounts receivable 22,772 (23,180)
Inventory (233,170) (28,199)
Prepaid expenses (15,898) 12,323
Increase (decrease) in
Advances from related parties 55,590 (8,206)
Accounts payable (43,280) (231,061)
Accrued salaries and benefits 7,287 19,149
Deferred compensation 106,238 289,244
Accrued expenses (51,058) (53,107)
Customer deposits - 57,170
------------- -------------
Net cash provided (used) in operating activities 617,325 (975,012)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (2,380,000) -
Purchase of property and equipment (117,421) (20,075)
Purchase of patents and trademarks (295,284) (17,770)
------------- -------------
Net cash used in investing activities (2,792,705) (37,845)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable, net 1,635,174 544,000
Proceeds from notes payable-related parties - 320,422
Principal payments on notes payable - (60,000)
Principal payments on notes payable-related parties - (258,335)
Payment of preferred dividends (48,004)
Repurchase of preferred stock (130,000)
Repurchase of common stock (230,000)
Proceeds from the issuance of common stock, net 104,500
F-8
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
Proceeds from exercise of stock options 2,776,468 427,575
Net cash provided by financing activities 4,003,638 1,078,162
Net increase (decrease) in cash 1,828,258 65,305
---------- ------------
CASH, BEGINNING OF YEAR 100,023 34,718
---------- ------------
CASH, END OF YEAR $1,928,281 $ 100,023
========== ============
CASH PAID FOR INTEREST $ 1,391 $ 21,631
CASH PAID FOR INCOME TAXES $ - $ -
NON-CASH DISCLOSURE: $2,380,000 $ -
========== ============
PURCHASE OF LANGLEY PLC SHARES WITH COMMON STOCK
F-9
The accompanying notes are an integral part of these financials
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND LINE OF BUSINESS
General
-------
NutraCea was originally incorporated on February 4, 2000 in California as
NutraStar Technologies Incorporated. On December 14, 2001, NutraStar
Technologies Incorporated ("NTI") effected a reorganization with the inactive
publicly-held company, Alliance Consumer International, Inc., and the name was
changed to NutraStar Incorporated. The name was changed again to NutraCea on
October 1, 2003.
NutraCea is a relatively new health science company focused on the development
and distribution of products based upon the use of stabilized rice bran and
proprietary rice bran formulations. Rice bran is the outer layer of brown rice
which until recently was a wasted by-product of the commercial rice industry.
These products include food supplements and medical foods which provide health
benefits for humans and animals (known as "nutraceuticals") as well as cosmetics
and beauty aids based on stabilized rice bran, rice bran derivatives and the
rice bran oils.
On April 27, 2000, NTI formed NutraGlo Incorporated ("NutraGlo"), a Nevada
corporation, which was owned 80% by NTI and 20% by NaturalGlo Investors L.P.
During 2001, NutraGlo started marketing, manufacturing and distributing one of
NutraCea's products to the equine market. In 2002, NutraCea issued 250,001
shares of its common stock to NaturalGlo Investors L.P. in exchange for the
remaining 20% of the common stock of NutraGlo. The value of the shares was
$250,001. As a result, NutraGlo is now a wholly owned subsidiary of NTI.
For internal reporting purposes, management segregates NutraCea into two
segments: (1) NutraCea, including the transactions of TheraFoods(R),
ProCeuticals(R), and NutraBeauticals(R), and (2) NutraGlo.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
---------------------------
accounts of NutraCea and its wholly owned subsidiaries, NutraCea Technologies
Incorporated and NutraGlo(R) (collectively, the "Company"). All significant
inter-company accounts and transactions are eliminated in consolidation.
Revenue Recognition- Revenue is generally recognized upon shipment of product
-------------------
with a provision for estimated returns and allowances recorded at that time, if
applicable. Commission revenue is generally recognized when earned and
collection is reasonably assured. Licensing revenue is recognized when earned
and collection is reasonably assured.
Accounts Receivable-The Company provides for the possible inability to collect
-------------------
accounts receivable by recording an allowance for doubtful accounts. As of
December 31, 2004, there were no uncollectible accounts.
Marketable Securities-Marketable securities are marked to market at each period
----------------------
end. Any unrealized gains and losses on the marketable securities are excluded
from operating results and are recorded as a component of Other comprehensive
income (loss). If declines in value are deemed other than temporary, losses are
reflected in Net income (loss).
F-10
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventory-Inventory is stated at the lower of cost (first-in, first-out) or
---------
market and consists of nutraceutical products manufactured by an affiliated
company, RiceX, which the Company enhances for final distribution to its
customers. While the Company has an inventory of these products, which contain
ingredients supplied by RiceX, any significant prolonged shortage of these
ingredients or of the supplies used to enhance these ingredients could
materially adversely affect the Company's results of operations.
Property and Equipment-Property and equipment are stated at cost. The Company
------------------------
provides for depreciation using the straight-line method over the estimated
useful lives as follows:
Furniture and equipment 5-7 years
Automobile 5 years
Software 3 years
Leasehold Improvements 2.4 years
Expenditures for maintenance and repairs are charged to operations as incurred
while renewals and betterments are capitalized. Gains or losses on the sale of
property and equipment are reflected in the statements of operations.
Patents and Trademarks-The Company has exclusive licenses for several patents,
----------------------
which were acquired from independent third parties and a related party. All
costs associated with the patents are capitalized. Patents acquired from
related parties are recorded at the carryover basis of the transferor. The
Company paid cash as consideration for all patents and trademarks acquired,
except the Via-Bran registered trademark, which was acquired for 21,409 shares
of common stock valued at $21,409.
Amortization is computed on the straight-line method based on estimated useful
lives of 17 to 20 years. The Company also has registered trademarks, which are
amortized over estimated useful lives of 10 years.
The Company recorded a loss reserve totaling $75,359 as of December 31, 2002
related to the impairment of certain patents.
Deferred Compensation-Deferred compensation at December 31, 2004 represents the
---------------------
intrinsic value of options previously issued to employees that have not been
vested.
Fair Value of Financial Instruments-For certain of the Company's financial
-----------------------------------
instruments, including cash, accounts receivable, inventory, prepaid expenses,
accounts payable, accrued salaries and benefits, deferred compensation, accrued
expenses, customer deposits, due to related party, notes payable - related
party, and note payable the carrying amounts approximate fair value due to their
short maturities.
Stock-Based Compensation-Compensation is recorded for stock-based compensation
------------------------
grants based on the excess of the estimated fair value of the common stock on
the measurement date over the exercise price. Additionally, for stock-based
compensation grants to consultants, NutraCea recognizes as compensation expense
the fair value of such grants as calculated pursuant to SFAS No. 123, recognized
over the related service period. SFAS No. 148 requires companies to disclose pro
forma results of the estimated effect on net income and earnings per share to
reflect application of the fair value recognition provision of SFAS No. 123.
F-11
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years
ended December 31,
2004 2003
-------------- -------------
Net loss available
to common shareholders:
As reported: $ (23,582,840) $(12,662,209)
Pro forma: $ (25,955,080) $(12,754,495)
Basic loss per common share:
As reported: $ (1.18) $ (2.07)
Pro forma: $ (1.31) $ (2.09)
Advertising Expense-The Company expenses all advertising costs, including direct
--------------------
response advertising, as they are incurred. Advertising expense for 2004 and
2003 was $22,074 and $21,959, respectively.
Income Taxes-The Company accounts for income taxes under the liability method,
-------------
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred income taxes
are recognized for the tax consequences in future years of differences between
the tax bases of assets and liabilities and their financial reporting amounts at
each period end based on enacted tax laws and statutory tax rates applicable to
the periods in which the differences are expected to affect taxable income.
Valuation allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
Loss Per Share-Basic loss per share is computed by dividing loss available to
---------------
common shareholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except that
the denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. Common equivalent shares are
excluded from the computation if their effect is anti-dilutive. As such, basic
and diluted loss per share is the same.
Estimates-The preparation of financial statements requires management to make
----------
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk-On May 1, 2001, the Company entered into a
------------------------
three-year, exclusive distribution agreement with a customer, in which the
customer is required to purchase a minimum of 90,000 pounds of the Company's
product on or before July 1, 2001, 120,000 pounds before September 1, 2002,
275,000 pounds between September 1, 2002 and August 31, 2003, and 350,000 pounds
between September 1, 2003 and August 31, 2004. During 2004, sales to this
customer totaled $600,976 (59% of total sales). During 2003, sales to this
customer totaled $1,247,086 (81% of total sales).
Recently Issued Accounting Pronouncements-SFAS No. 150, "Accounting for Certain
-----------------------------------------
Financial Instruments with Characteristics of both Liabilities and Equity"
establishes standards for how an issuer classifies and measures in its statement
F-12
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. SFAS No. 150 is effective for financial instruments entered into or
modified after May 31, 2003 and otherwise will be effective at the beginning of
the first interim period beginning after June 15, 2003. Having adopted of SFAS
No. 150 in 2003, NutraCea has reclassified its preferred dividends as a current
liability.
In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based
Compensation" SFAS No. 123R establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123R requires that the fair value of such equity instruments be
recognized as expense in the historical financial statements as services are
performed. Prior to SFAS No. 123R, only certain pro forma disclosures of fair
value were required. SFAS No. 123R shall be effective for small business issuers
as of the beginning of the first interim or annual reporting period that begins
after December 15, 2005. The impact of the adoption of this new accounting
pronouncement would be similar to the Company's calculaton of the pro forma
impact on net income of SFAS 123 included above.
NOTE 3 - MARKETABLE SECURITIES
On September 8, 2004 NutraCea purchased 1,272,026 shares of Langley Park
Investment Trust, PLC, a United Kingdom closed-end mutual fund that is actively
traded on a London exchange. Per the Stock Purchase Agreement, NutraCea paid
with 7,000,000 shares of its own common stock.
Per the Agreement, NutraCea may sell 636,013 shares of Langley at any time, and
the remaining 636,013 shares of Langley and the 7,000,000 shares of NutraCea are
escrowed for a 2-year period. At the end of the period, Langley's NutraCea
shares are measured for any loss in market value and if so, NutraCea must give
up that pro-rata portion of its Langley shares up to the escrowed 636,013
shares.
As of December 31, 2004 the NutraCea shares had not lost any value. However,
the Langley shares are marked down to their fair market value of $367,602, with
one-half or $183,801 shown as a current asset because they may be sold at any
time, and the other one-half shown as long-term because they are held in escrow
pending the 2-year review of NutraCea's stock valuation.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2004 consisted of the following:
Furniture and equipment $ 62,007
Automobile 73,096
Software 286,047
Leasehold improvements 13,870
----------
Subtotal $ 435,020
Less accumulated depreciation (315,370)
----------
TOTAL $ 119,650
==========
F-13
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was $16,303 and $88,589 for 2004 and 2003, respectively.
NOTE 5 - PATENTS AND TRADEMARKS
Patents and trademarks at December 31, 2004 consisted of the following:
Patents, net of $75,359 of impairment expense from 2002 $ 317,024
Trademarks 62,328
---------
379,352
Less accumulated amortization (49,501)
---------
TOTAL $ 329,851
=========
At December 31, 2004, $91,009 of the NutraCea's patents and trademarks had been
purchased from RiceX. Amortization expense was $21,754 and $10,198 for 2004 and
2003, respectively.
NOTE 6 - NOTES PAYABLE
In December 2004 NutraCea executed three promissory notes to third party
investors totaling $2,400,000. The notes are for a one year term, bear interest
at 7% interest compounded quarterly and are secured by all of the assets of
NutraCea. The holders were issued warrants to purchase a total of 2,400,000
shares of NutraCea's common stock at an exercise price of $0.30 per share. The
warrants are immediately exercisable and expire in seven years from the date of
issuance. A discount on the debt of $786,370 was recorded for these warrants
and is being amortized over the life of the notes.
NOTE 7 - PUT OPTION
During the year ended December 31, 2001, NutraCea issued 130,000 shares of
Series A preferred stock to a related party as payment of accounts payable
totaling $130,000. On January 15, 2002, these holders of the Series A preferred
stock executed a put/call agreement. The put allowed for the holder to sell to
NutraCea all, but not less than all, of the 130,000 shares of NutraCea's Series
A preferred stock, or common stock if any of the Series A preferred stock were
converted, for $130,000, plus all accumulated, but unpaid dividends, at any time
after six months from January 15, 2002. In addition, NutraCea maintained the
right to call the option and purchase back the shares of the Series A preferred
stock for $130,000, plus any unpaid and accrued dividends at any time, subject
to certain provisions. Prior to December 31, 2004 NutraCea purchased back the
shares of the Series A preferred stock for $130,000.
NOTE 8 - INCOME TAXES
NutraCea has had losses since inception and, therefore, has not been subject to
federal or state income taxes. As of December 31, 2004, NutraCea had
accumulated net operating loss ("NOL") carryforwards for income tax purposes of
approximately $28.2 million, resulting in a deferred tax asset amount of $9.6
million. All deferred tax asset amounts are fully reserved. These
carryforwards expire in 2019 through 2024.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Lease
-----
F-14
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NutraCea leases its office space under a non-cancelable operating lease with
RiceX that expires in September 2006 and requires monthly payments of $6,366.
Future minimum payments under this lease agreement at December 31, 2004 were as
follows:
Year Ending
December 31,
-------------
2005 $ 76,389
2006 57,292
--------
TOTAL $133,681
========
Rent expense was $64,688 and $63,899 for the years ended December 31, 2004 and
2003, respectively.
Agreements
----------
For all agreements where stock is awarded as partial or full consideration, the
expense is valued at the fair value of the stock. Expense for stock options and
warrants issued to consultants is calculated at fair value using the
Black-Scholes valuation method.
Effective January 1, 2004, NutraCea amended two executive employment contracts
to reflect quarterly bonuses. Under the contract, compensation shall be $45,000
per calendar quarter, with 250,000 shares of common stock to be granted in the
event NutraCea achieves gross revenues of $1 million or more for the quarter. In
addition, a one-time stock grant of 550,000 shares of common stock will be
awarded for the first quarter gross revenues equal or exceed $5 million. This
bonus agreement is effective until April 15, 2006, unless extended by the board.
NutraCea also agreed to maintain an annual bonus program for members of the
senior management group, including the Chief Executive Officer. The Chief
Executive Officer shall be eligible to receive an annual bonus under terms
otherwise governing the annual bonus program.
Effective January 1, 2004, NutraCea amended the stock options section of an
executive employment contract dated April 15, 2003. The amendment changed the
vesting conditions on 250,000 shares of common stock to "upon the completion of
the twelfth month of employment "instead of "upon the Company achieving two
successful calendar quarters of net profits from operations of the business of
the Company before interest, taxes, depreciation and amortization as
conclusively determined by the independent certified public accountant for the
Company".
On January 12, 2004, NutraCea entered into a one-year consulting agreement with
a sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 4,000,000 shares of common stock as follows:
300,000 shares at $.50 per share on or before January 12, 2004; 400,000 shares
at $.50 per share on or before February 17, 2004; and 3,300,000 shares at $.50
per share on or before April 19, 2004. Non-cash compensation expense of
$3,911,886 was recorded relating to this agreement. All of the warrants had been
exercised at March 31, 2004.
On January 28, 2004, NutraCea entered into a one-year consulting agreement with
a sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 90,000 shares of common stock at an exercise price
of $.01 per share. Non-cash compensation expense of $137,158 was recorded
relating to this agreement. As of March 31, 2004, these warrants had been
exercised.
F-15
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 2, 2004, NutraCea entered into a six -month consulting agreement
with a communications company. Under the terms of the agreement, compensation
shall be $2,500 per month, plus shares of common stock valued at $6,000 issued
at signing of contract. Either party may terminate the agreement with sixty
days written notice. At March 31, 2004, the shares had been issued in full.
On February 23, 2004, NutraCea entered into a one-year consulting agreement with
a marketing company. Under the terms of the agreement, compensation shall be
monthly issuance of shares of common stock valued at $7,500 per month. In
addition, the consultant is entitled to a 3% commission on equity or debt
financing introduced to NutraCea.
On March 1, 2004, NutraCea entered into a 90-day consulting agreement with a
financial relations company. Compensation shall be the issuance of 100,000
shares of common stock per month. As of March 31, 2004, 100,000 shares valued
at $142,000 had been issued to the consultant.
On March 1, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing company. Compensation shall be the issuance of 25,000
shares of common stock. At March 31, 2004, these shares had been issued.
Non-cash compensation expense of $35,500 was recorded relating to this
agreement.
On March 9, 2004, NutraCea entered into a one-year consulting agreement with a
communications company. Under the terms of the agreement, compensation shall be
issuance of shares of common stock valued at $36,000. At March 31, 2004, these
shares have been issued in full.
On March 15, 2004, NutraCea entered into a six-month consulting agreement with a
sales and marketing company. Under the terms of the agreement, compensation
shall be warrants to purchase 400,000 shares of common stock, at an exercise
price of $.001 and warrants to purchase up to 1,000,000 shares of common stock
at an exercise price of $1.20, to be exercised within three years. At March 31,
2004, the 400,000 warrants exercisable at $.001 had been exercised. Non-cash
compensation expense of $2,149,598 was recorded relating to this agreement.
On March 19, 2004, NutraCea approved granting a one-time cash bonus of 2/3 of
normal salary to the CEO and President. The bonus amount for both executives is
$180,000, was paid by April 1, 2004.
On March 25, 2004, NutraCea entered into two, two-year consulting agreements
with two medical advisors. Under the terms of the agreement, compensation shall
be 100,000 shares of common stock each, payable in advance, and options to
purchase 100,000 shares of common stock at a price of $.50 per share for the
second year of service. The 200,000 shares of common stock are valued at
$286,000, and the options are valued at $107,684. Expense for these amounts was
recorded in April 2004 when the shares and options were issued.
On March 25, 2004, NutraCea entered into a three-year consulting agreement with
a development and marketing company. Under the terms of the agreement,
compensation shall be $1 per unit (a minimum 30-day supply of NutraCea product)
for up to a total accumulated payment of $750,000, and $.50 per unit thereafter,
payable quarterly within 45 days after the end of the quarter. In addition,
NutraCea will issue 100,000 shares of common stock for each probiotic
formulation NutraCea markets, and options to purchase 300,000 shares of common
stock at an exercise price of $1 per share with 100,000 options to be vested
immediately and 50,000 shares per year thereafter. The vested options are
valued at $102,782.
On April 2, 2004, NutraCea entered into a 180-day consulting agreement with a
marketing and investor relations company. The term can be extended another 180
days by mutual agreement. Under the terms of the agreement, compensation shall
be 400,000 shares of common stock, and $4,000 cash per month.
F-16
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation shall also include an 8% cash commission on equity or debt
financing introduced to NutraCea, as well as a warrant, exercisable within 3
years, for common shares to equal 10% of the gross financing proceeds. The
warrant is to be priced at 110% of the closing bid price for the preceding 30
business days of the day of closing, such warrant or shares to be issued at
closing.
On April 15, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing consultant. Under the terms of the agreement, compensation
shall be warrants to purchase 50,000 shares of common stock at $.80 per share
upon the completion of certain benchmarks. The warrants are valued at $46,758
and expire in 3 years.
On April 29, 2004, NutraCea entered into a one-year consulting agreement (with
options to extend for four successive terms of one year each) with two retired
employees of NutraCea. Under the terms of the agreements, annual compensation of
$70,000 and $80,000 each is payable on a monthly basis. In addition, each of
the consultants received warrants to purchase 50,000 shares of common stock at
$.20 a share. The 100,000 warrants are valued at $91,370 and expire in 5 years.
Either party can cancel this agreement with 30-day written notice.
On April 15, 2004, NutraCea entered into a one-year consulting agreement with a
sales and marketing consultant. Under the terms of the agreement, compensation
shall be warrants to purchase 50,000 shares of common stock at $.80 per share
upon the completion of certain benchmarks. The warrants are valued at $46,758
and expire in 3 years.
On June 2, 2004, NutraCea entered into two consulting agreements with sales and
marketing consultants. Under the terms of the agreements, each consultant was
issued 150,000 restricted shares of common stock, valued at $161,500. The
agreement called for these shares to be included in the next registration
statement filed.
On July 14, 2004, NutraCea entered into a six-month consulting agreement with a
business consultant to provide NutraCea with consulting services and advice
pertaining to NutraCea's business affairs. Compensation was $12,000 payable in
cash monthly. In addition, should the consultant provide assistance to NutraCea
in the raising of capital either in the form of equity or debt, NutraCea agreed
to pay an additional future bonus or fee, which the consultant would receive
based on the efforts expended and results obtained.
On August 1, 2004, NutraCea entered in a 90-day Independent Contractor Agreement
with a contractor to prepare reports regarding investor relations, prepare
advertising and marketing materials, and prepare press releases. Compensation
was $12,000 payable in cash monthly.
On September 2, 2004, NutraCea entered into a 90-day consulting agreement with a
securities firm to serve as NutraCea's investment advisor regarding acquisitions
or similar corporate transactions and to provide assistance and advice with
respect to raising capital required to consummate an acquisition or similar
corporate transaction. A non-reimbursable initial fee of $50,000, to be credited
again Phase I fees, was paid at execution of the agreement. Services were to be
rendered as Phase I and Phase II services and compensated as follows.
Phase I services: A fee of two percent of the total value of a target
acquisition to be paid simultaneously with the closing of the acquisition
or similar corporate transaction, to be paid 50% in cash and 50% in newly
issued stock by NutraCea based on the closing values of the transaction on
that day.
F-17
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Phase II services: A cash fee of ten percent of the total amount of capital
raised pursuant to sources introduced to NutraCea by the consultant. In the
event NutraCea shall issue any equity or convertible securities to raise
capital in connection with an acquisition or similar corporate transaction,
NutraCea shall issue warrants for ten percent of the total amount of
securities issued. The warrants shall have an exercise price equal to one
hundred and twenty percent (120%) of the per share equity valuation
established in the capital raising transaction, but in no case less than
100% of the market value of the shares on the date of the transaction, and
shall be exercisable for a term of five years. A cash fee of six percent
will be paid in any capital raising transaction involving unsecured debt
securities.
On November 26, 2004, the Company hired a consultant to help in the facilitation
of the Company's business model. As compensation, the consultant was paid with
715,000 shares of common stock. Additionally, the consultant also entered into a
non-exclusive, non-transferable, revocable licensing agreement to import and
distribute the Company's products in accordance with its marketing plan. The
consultant paid the Company $214,500 for these distribution rights.
On December 10, 2004 the Company entered into an employment agreement that
expires December 31, 2007 with its Chief Executive Officer whereby the Company
is to pay the officer a base salary of $150,000 in year one; a base salary of
$150,000 in year two; and a base salary of $250,000 in year three. The agreement
also provides that the officer is entitled to an annual incentive bonus based
upon performance and to be provided a car of the employee's choice. The
incentive bonus shall be paid annually within 10 days of the completion of the
Company's annual independent audit. Such bonuses shall be one percent of
NutraCea's "Gross Sales over $25,000,000" on an annualized basis or $6,250,000
per quarter and the Company reports a positive EBITDA for the period. The bonus
amount shall be limited to a maximum of $750,000 in any calendar year and shall
continue so long as the officer is an employee or consultant for the Company. In
addition, the officer was issued warrants to purchase 2,000,000 shares of the
Company's common stock at an exercise price of $0.30 per share. The warrants are
immediately exercisable and expire in ten years from the date of issuance. On
December 17, 2004 the Company entered into an employment agreement that expires
December 31, 2007 with its President whereby the Company is to pay the officer a
base salary of $50,000 in year one; a base salary of $150,000 in year two; and a
base salary of $250,000 in year three. The agreement also provides that the
officer is entitled to an annual incentive bonus based upon performance and to
be provided a car allowance of $600 per month. The incentive bonus shall be paid
annually within 10 days of the completion of the Company's annual independent
audit. Such bonuses shall be one percent of NutraCea's "Gross Sales over
$25,000,000" on an annualized basis or $6,250,000 per quarter and the Company
reports a positive EBITDA for the period. The bonus amount shall be limited to a
maximum of $750,000 in any calendar year. In addition, the officer was issued
warrants to purchase 6,000,000 shares of the Company's common stock at an
exercise price of $0.30 per share. The warrants are immediately exercisable and
expire in ten years from the date of issuance. Minimum future payments under
these two agreements at December 31, 2004 were as follows:
Year Ending
December 31,
-------------
2005 $ 200,000
2006 300,000
2007 500,000
----------
TOTAL $1,000,000
==========
F-18
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Generally, if the Company terminates these agreements without cause or the
employee resigns with good reason, as defined, the Company will pay the
employees' salaries, bonuses, and benefits payable for the remainder of the term
of the agreements.
Litigation
----------
On July 16, 2002, the Company was summoned to answer a Complaint filed by
Faraday Financial, Inc. ("Faraday") in District Court, County of Salt Lake, Utah
(Case No. 020906477). The Complaint alleges that the Company issued convertible
promissory notes totaling $450,000 and a promissory note totaling $50,000. On
December 13, 2001, Faraday entered into a settlement agreement with the Company,
whereby Faraday agreed to cancel the promissory notes in exchange for 735,730
shares of preferred stock. Faraday claims that the settlement agreement
required that the Company effect a registration statement covering the preferred
stock by June 30, 2002, which the Company failed to do, and demands the Company
immediately forfeit to Faraday 735,730 shares of common stock owned by the Chief
Executive Officer of the Company. Faraday has filed its fourth claim for relief
for a judgment against the Company for $500,000, plus accrued, but unpaid
interest, attorneys' fees and costs, and other such costs. A Settlement
Agreement was executed on December 10, 2003. In consideration for the mutual
releases, Faraday converted 735,730 preferred into 735,730 common shares and
$90,127 of accrued preferred dividends into 1,201,692 common shares. Within the
next year, if Faraday cannot realize $551,797 and approximately $9800 in legal
expenses from the sale of the common shares, NutraCea will make up any
deficiency. If stock sale exceeds $561,597, Faraday is entitled to keep any
excess. Subsequent to December 31, 2003, the Company issued an additional
250,000 shares to Faraday. Concurrently, with the executed Settlement Agreement,
a joint stipulated motion to stay all proceedings was filed with the Court.
After all the above conditions are met, if Faraday has not lifted the stay
within 18 months of December 10, 2003, NutraCea shall deliver to Faraday an
executed stipulation for dismissal with prejudice of the Complaint and
Counterclaim.
NOTE 10 - PREFERRED AND COMMON STOCK
Effective November 12, 2003 and pursuant to adoption of the Company's
"Certificate of Amendment of Restated Articles of Incorporation" dated October
27, 2003, the Company effected a reverse split of all previously issued common
stock on the basis of one-for-ten shares. Additionally, per the "Certificate of
Amendment of Restated Articles of Incorporation", the number of authorized
shares of common stock was increased from 50,000,000 to 100,000,000, and the
number of authorized shares of preferred stock was increased from 10,000,000 to
20,000,000. All share amounts reflected in the following discussion of common
stock and elsewhere in this Form 10-KSB have been adjusted to account for the
one-for-ten reverse split.
Convertible, Redeemable Series A Preferred Stock
-----------------------------------------------------
In December 2001, the Company approved the issuance of 3,000,000 shares of
convertible, redeemable Series A preferred stock and executed a certificate of
designation of the rights, preferences, and privileges of the Series A preferred
stock. Each shareholder of Series A preferred stock is entitled to receive a 7%
cumulative dividend, which is only payable in the case of liquidation or
redemption. The Series A preferred stock has a $1 per share stated value and
will receive certain liquidation preferences after satisfaction of claims of
creditors, but before payment or distributions of assets and surplus funds. On
F-19
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
November 12, 2003, the number of authorized shares of preferred stock was
increased from 10,000,000 shares to 20,000,000 shares.
Furthermore, the Series A preferred stock is convertible at the option of the
holder at $1 per share into the Company's common stock, subject to certain
anti-dilution provisions. In addition, the Series A preferred stock will
automatically convert into common stock in the event of a qualified public
trading benchmark, which is defined as (i) the common stock is listed on a
national exchange at twice its conversion price or (ii) the common stock is
quoted on the over-the-counter bulletin board at an average bid price of at
least $1.25 per share over any 30-day trading period. At December 31, 2004, all
the outstanding preferred stock was converted under option (ii) above.
On July 7, 2003, the Company cancelled 634,121 shares of preferred stock
previously issued to a shareholder as collateral and issued 20,000 shares of
preferred stock for accrued interest totaling $8,351 on a promissory note dated
September 23, 2002.
During the year ended December 31, 2003, the Company converted 1,674,707 shares
of preferred stock to 254,323 shares of common stock valued at $1,651,860.
During the year ended December 31, 2003, the Company issued 278,766 shares of
common stock in payment of preferred stock dividends due in the amount of
$190,043.
During the year ended December 31, 2004 the Company repurchased 130,000 shares
of preferred stock for $130,000.
During the year ended December 31, 2004, the Company converted 540,000 shares of
preferred stock to 630,000 shares of common stock valued at $348,351.
During the year ended December 31, 2004, the Company issued 5,759 shares of
common stock in payment of preferred stock dividends due in the amount of
$5,986.
The Company may redeem any and all outstanding shares of Series A preferred
stock. Upon the five-year anniversary of the date of issuance, the Company is
required to redeem all of its outstanding shares of Series A preferred stock at
$1 per share, plus all accrued and unpaid dividends declared. As of December
31, 2004 all outstanding shares of preferred stock had either been repurchased
or converted into shares of common stock. As of December 31, 2004 there was a
balance of unpaid and accrued dividends of $20,473.
As of December 31, 2004, cumulative dividends totaled $20,473.
Common Stock
-------------
During 2003, NutraCea issued 134,048 shares of common stock for $104,500, net of
$7,000 in related commissions.
During 2003, NutraCea issued 4,519,373 shares of common stock pursuant to the
exercise of stock options and warrants for $427,575.
During 2003, NutraCea issued 28,688 shares of common stock to various
consultants for services rendered with a fair value of $29,795.
On August 18, 2003, NutraCea agreed to pay a consultant for unpaid fees in the
amount of $9,236. NutraCea will pay $4,636 in monthly installments of $1,159,
payable on the first of each month beginning October 1, 2003. NutraCea also
F-20
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
agreed to issue 2,421 shares of common stock, valued at $4,600, to the
consultant as payment in full.
In September 2003, NutraCea agreed to pay $38,771 of unpaid fees to a
consultant, of which $8,771 is payable upon execution of the agreement and the
balance, $30,000, is payable in monthly installments of $2000, payable on the
first of each month beginning October 1, 2003. NutraCea also agreed to issue
73,519 shares of common stock, valued at $56,037, to the consultant as payment
in full.
On October 31, 2003, the Board of Directors approved the issuance of common
stock in lieu of compensation to the Company's Chief Operating Officer and Chief
Executive Officer. Chief Operating Officer John Howell received 72,911 shares
of common stock in lieu of $94,784 in salary and other compensation accrued for
past services; Chief Executive Officer Patricia McPeak received 402,644 shares
of common stock in lieu of $322,115 in salary and other accrued compensation for
past services. These shares of common stock were issued under the 2003 Stock
Compensation Plan.
Due to the termination of certain employees during 2003, the Company recorded a
reversal of deferred compensation totaling $243,605.
During 2003, the Company issued 3,431,251 shares of common stock, valued at
$823,119, to various parties for conversion of convertible notes payable and
accrued interest in the amount of $776,887 and $46,232, respectively.
On March 25, 2004, NutraCea established the NutraCea Patent Incentive Plan,
which grants 15,000 shares of common stock to each named inventor on each
granted patent, which is assigned to NutraCea. Under the terms of this plan
during the year ended December 31, 2004, NutraCea issued 180,000 shares of
common stock valued at $239,100.
During the year ended December 31, 2004, NutraCea issued 280,000 shares of
common stock to two consultants in settlement of contractual agreements valued
at $477,816.
During the year ended December 31, 2004, NutraCea issued 5,500,000 shares of
common stock to NutraCea's Chief Executive Officer for services and cancellation
of indebtedness. Pursuant to the Restricted Stock Agreement between NutraCea
and the Chief Executive Officer ("Agreement"), the shares are subject to a
repurchase option at a price of $5,000 for any unreleased shares based upon a
vesting schedule. The shares vest 50% on January 1, 2006 and the remaining 50%
vest on January 1, 2007 contingent on the Chief Executive Officer's continuous
employment with NutraCea. Vesting may accelerate under the Agreement and 100% of
the shares not already released from the repurchase option will be immediately
released upon any of: (i) a Change of Control, as defined in the Agreement; (ii)
the Chief Executive Officer's death or disability; (iii) the Chief Executive
Officer's retirement after the second anniversary of the effective date of the
Agreement; (iv) termination of the Chief Executive Officer's employment by
NutraCea other than for Cause, as defined in the Agreement; or (v) at the sole
discretion of NutraCea's Board of Directors.
On April 1, 2004, NutraCea repurchased 344,956 shares of common stock valued at
$230,000 from the Chief Executive Officer of NutraCea pursuant to a repurchase
agreement of that date.
During the year ended December 31, 2004, NutraCea converted preferred dividends
in the amount of $5,986 into 5,759 shares of common stock.
F-21
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 8, 2004, NutraCea and Langley Park Investments PLC ("Langley")
signed a Stock Purchase Agreement under which NutraCea agreed to sell 7,000,000
shares of its common stock to Langley. The transaction will close at the time
that Langley's shares are trading on the London Stock Exchange for anticipated
consideration to NutraCea (i) immediately following the closing of approximately
$1,190,000 U.S.D. in Langley stock, and (ii) additional consideration of that
number of Langley shares which, as of the closing, will have a value of
approximately $1,190,000 (the "Langley Shares"). NutraCea has agreed to hold the
Langley Shares in escrow for two years from the date of closing. After the
two-year holding period, the Langley Shares will be subject to possible
reduction in number if NutraCea's common shares are trading at a value of less
than $0.34 U.S.D. After such reduction, if any, the remaining Langley Shares
may be sold by NutraCea at their then current value.
Pursuant to the Purchase Agreement, Langley has agreed that it will not sell,
transfer or assign any or all of the NutraCea shares for a period of two years
following the closing without the prior written consent of NutraCea, which
consent may be withheld by NutraCea in its sole discretion.
During the year ended December 31, 2004, Nutracea issued 3,767,950 shares of
common stock to consultants for services rendered valued at $2,542,300.
During the year ended December 31, 2004, Nutracea issued 640,000 shares of
common stock to officers and directors for services rendered valued at 927,800.
During the year ended December 31, 2004, NutraCea issued 168,626 shares of
common stock to vendors in payment of accounts payable totaling $57,944.
During the year ended December 31, 2004, Nutracea issued 6,579,323 shares of
common stock pursuant to the exercise of stock options for cash totaling
$2,776,468.
During the year ended December 31, 2004, NutraCea converted 540,000 shares of
preferred stock to 630,000 shares of common stock pursuant to the Mandatory
Conversion paragraph of the Private Placement Memorandum dated November 9, 2001.
NOTE 11 - STOCK OPTIONS AND WARRANTS
------------------------------------------
Expense for stock options and warrants issued to consultants is calculated at
fair value using the Black-Scholes valuation method.
On October 31, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of the Company to execute a
registration statement under the Securities Act of 1933 for 10,000,000 shares of
common stock.
The expense, if any, of stock options issued to employees is recognized over the
shorter of the term of service or vesting period. The expense of stock options
issued to consultants or other third parties are recognized over the term of
service. In the event services are terminated early, the entire amount is
recognized. The unamortized portion of the expense to be recognized is recorded
as deferred compensation.
In April 2003, the Company issued warrants to purchase 1,000,000 shares of
common stock to its Chief Operating Officer in accordance with an employment
agreement dated April 15, 2003. The warrants have an exercise price of $0.001
per share and vest as follows:
F-22
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- 250,000 on April 15, 2003
- 250,000 upon the fourth month of employment
- 250,000 upon the eighth month of employment
- 250,000 upon the twelfth month of employment
In relation to this transaction, the Company recorded deferred compensation
expense totaling $109,000. In addition, because this grant as modified due to
the reverse split of November 21, 2003 must be accounted for as a variable
award, an additional $303,750 was recorded relating to this award as of December
31, 2003.
On June 20, 2003, the Company issued warrants to purchase 32,900 shares of
common stock to a vendor as payment on accounts payable totaling $27,786. The
warrants have an exercise price of $.01 per share and expire June 18, 2008. In
addition, the Company entered into a note payable agreement with the consultant
totaling $17,000, payable at $3,000 per month beginning September 2003.
On July 31, 2003, the Company issued warrants to purchase 7,143 shares of common
stock to a vendor as payment on accounts payable totaling $5,676. The warrants
have an exercise price of $0.01 per share and expire June 12, 2008. In addition,
the Company entered into a note payable agreement with the consultant totaling
$4,000, payable at $1,000 a month beginning October 1, 2003.
During September 2003, the Company entered into a compensation agreement with a
consultant, whereby the Company will pay a total of $5,356 of unpaid fees due to
the consultant in monthly payments of $670, payable on the first of the month
beginning October 1, 2003. Per the agreement, the Company also issued warrants
valued at $7,065 to purchase 4,167 shares of common stock at an exercise price
of $0.01 per share. The warrants expire on August 5, 2008.
During the six months ended June 30, 2003, the Company issued warrants to
purchase 321,285 shares of common stock at exercise prices ranging from $0.01 to
$0.70 per share to employees in lieu of deferred salaries totaling $150,465. The
warrants expire five years from date of issue.
During the year ended December 31, 2003, options and warrants representing
4,519,373 shares of common stock were exercised for a total value of $427,575.
During the year ended December 31, 2003 the Company issued 3,796,563 options to
various consultants for services rendered. The options have exercise prices
between $.001 and $5.00 and expire at varying times between six months and five
years. Non-cash consulting expense of $1,165,584 was recorded relating to these
agreements.
During the year ended December 31, 2003, the Company issued warrants to purchase
2,545,000 shares of common stock exercisable at $.20 per share and expiring five
years from date of issue. The warrants were issued in connection with the
conversion of $823,119 of convertible notes payable and accrued interest to
common shares of the Company, and non-cash expense of $183,855 was recorded
relating to these warrants.
During the year ended December 31, 2004, NutraCea issued 6,998,493 warrants with
exercise prices between $.001 and $5.00 per share to consultants. The warrants
expire at varying times between six months and five years. A total of $7,761,515
in non-cash compensation expense was recorded relating to the issue of these
warrants.
F-23
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On July 9, 2004, NutraCea issued 25,000 stock options with an exercise price of
$.20, expiring in five years, to an employee of the Company. Non-cash
compensation expense of $21,000 was recorded relating to the issue of these
options.
During the quarter ended December 31, 2004, Nutracea issued 2,400,000 warrants
with an exercise price of $0.30, in conjunction with notes payable issued by the
Company during the quarter. The warrants are immediately exercisable and expire
in seven years from the date of issuance. A total of $786,371 of accrued debt
discount expense was recorded relating to the issue of these warrants and is
being amortized over the term of the notes payable.
During the quarter ended December 31, 2004, Nutracea issued 8,000,000 stock
options with an exercise price of $0.30, expiring in 10 years to officers of the
Company. Non-cash compensation expense of $800,000 was recorded relating to the
issue of these options.
Modification of Employee Awards Accounted for Under APB 25
----------------------------------------------------------
NutraCea granted 1,000,000 options in 2003 to an employee where the option
agreement contained a provision whereby neither the number of options nor the
exercise price would be adjusted by reverse splits. Effective November 12,
2003, NutraCea authorized a 1 for 10 reverse split. This triggered variable
accounting for this award. As of November 12, 2003, 500,000 options had been
exercised and only 500,000 remained. Variable accounting requires any intrinsic
value at the modification date in excess of the amount measured at the original
measurement date shall be recognized as compensation cost over the remaining
future service period if the award is unvested, or immediately if the award is
vested, for any employee who could benefit from the modification. The award
vested 75% in 2003 and 25% in 2004. The award will be marked to market each
balance sheet date with the changes charged to compensation expense and
additional paid in capital. As of December 31, 2003, the additional intrinsic
value on the vested portion totaled $303,750.
Modification of Non-Employee Awards Accounted for Under FAS 123
---------------------------------------------------------------
Nutracea granted 5,725,000 warrants to outsiders in 2003 where the warrant
agreements contained a provision whereby neither the number of warrants nor the
exercise price would be adjusted by reverse splits. Effective November 12,
2003, NutraCea authorized a 1 for 10 reverse split. This triggered a
modification for this award. A modification of the terms of an award that makes
it more valuable shall be treated as an exchange of the original award for a new
award. In substance, the entity repurchases the original instrument by issuing
a new instrument of greater value, incurring additional compensation cost for
that incremental value. The incremental value shall be measured by the
difference between (a) the fair value of the modified option determined in
accordance with the provisions of this section and (b) the value of the old
option immediately before its terms are modified, determined based on the
shorter of (1) its remaining expected life or (2) the expected life of the
modified option. As of December 31, 2003, the additional value totaled
$9,811,002 which was recorded as non-cash compensation expense.
F-24
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes all of the Company's stock option transactions:
EMPLOYEES
--------------------------------------------
Year Ended Year Ended
--------------------- ---------------------
December 31, 2004 December 31, 2003
--------------------- ---------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares Price Shares
--------- ---------- --------- ----------
Options Outstanding, Beginning of Period $ 0.56 764,700 $ 0.41 1,090,564
Options Granted $ 0.30 8,025,000 $ 0.11 1,371,285
Options Expired $ 0.00 0 $ 6.60 (24,361)
Reverse Split $ 0.00 0 $ 4.17 (981,503)
Options Exercised $ 0.01 (500,000) $ 0.02 (691,285)
--------- ---------- --------- ----------
Options Outstanding, End of Period $ 0.34 8,289,700 $ 0.56 764,700
========= ========== ========= ==========
Options Exercisable, End of Period $ 0.34 8,289,700 $ 0.56 764,700
========= ========== ========= ==========
CONSULTANTS
----------------------------------------------
Year Ended Year Ended
---------------------- ----------------------
December 31, 2004 December 31, 2003
---------------------- ----------------------
Weighted Weighted
Average Average
Exercise Number of Exercise Number of
Price Shares Price Shares
--------- ----------- --------- -----------
Options Outstanding, Beginning of Period $ 0.98 3,196,819 $ 0.90 2,096,890
Options Granted $ 0.62 9,598,493 $ 0.29 6,989,105
Options Expired $ 4.94 (220,833) $ 5.31 (76,182)
Reverse Split $ 0.00 0 $ 8.42 (1,884,951)
Options Exercised $ 0.43 (6,479,323) $ 0.12 (3,928,043)
--------- ----------- --------- -----------
Options Outstanding, End of Period $ 0.85 6,095,156 $ 0.98 3,196,819
========= =========== ========= ===========
Options Exercisable, End of Period $ 0.85 5,845,156 $ 0.98 3,196,819
========= =========== ========= ===========
Other information regarding stock options outstanding at December 31, 2004 is as
follows:
Options Outstanding Options Exercisable
---------------------------------------------------------------
Weighted Weighted
Range of Exercise Remaining Life Number of Average Average Exercise
Price (Years) Shares Exercise Price Number of Shares Price
----------------------------------------------------------------------------------------------------
.001-1.20 3-10 13,846,234 $ .40 13,596,230 $ .38
2.50-5.00 4-10 493,259 $ 4.30 493,259 $ 4.34
10.00 10 45,363 $ 10.00 45,363 $ 10.00
F-25
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of the stock options granted during 2004 and
2003 was $0.69 and $1.04 respectively. Variables used in the Black Scholes
option-pricing model include (1) 2.0% risk-free interest rate, (2) expected
option life is the actual remaining life of the options as of each year-end, (3)
expected volatility ranged from 77% to 251%, and (4) zero expected divdends.
NOTE 12 - RELATED PARTY TRANSACTIONS
In November 2004 the Board of Directors resolved to purchase a new automobile
valued at $73,096 for use by the Chief Executive Officer. The CEO waived a car
allowance in exchange for use of the automobile. At December 31, 2004, the
Company has booked a payable to related party for $73,096.
RiceX Company is a publicly owned company. The spouse of our majority
stockholder owns approximately 5% of RiceX and is the former CEO and the
current Chairman of the Board and a current director of Ricex. RiceX is
NutraCea(R)'s sole supplier for rice bran derivatives, which are integral to
NutraCea(R)'s sales strategy and which account for about 72% of NutraCea(R)'s
total cost of sales.
On December 12, 2001, NutraCea agreed with RiceX to be their exclusive
distributor of rice solubles and rice bran fiber concentrate in the United
States of America and to have the exclusive rights to various patents and
trademarks owned by RiceX under a 15-year agreement. Under the terms of this
agreement, RiceX agreed to cancel certain indebtedness by NutraCea in exchange
for 130,000 shares of Series A preferred stock and payment of $41,335 in
interest, agreed to new minimum purchase requirements, and agreed to extend the
term of the agreement for five years, with two additional renewal periods of
five years each. The sales price to NutraCea will be the lower of RiceX's
published standard price or the price negotiated by other customers for like
quantities and products.
In January 2002, NutraCea revised this 15-year agreement with RiceX. To
maintain rights under this revised agreement, NutraCea was to purchase $250,000
of product from RiceX by April 2002, $500,000 by July 2002, $750,000 by October
2002, $1,250,000 by January 2003, $1,500,000 by July 2003, $2,250,000 by January
2004, $6,000,000 by January 2005, and increasing thereafter by 10% per annum
through the remaining term of the agreement. During 2002, NutraCea received
notice from RiceX, stating that NutraCea was in default under the terms of this
distribution agreement with RiceX. On July 9, 2002, RiceX exercised its right
to terminate the exclusive distribution agreement and the related license
agreements with NutraCea due to NutraCea's default. However, RiceX has agreed
that NutraCea has a license to use the patents in its business pursuits.
NOTE 13 - 401(K) PROFIT SHARING PLAN
Effective April 2000, NutraCea adopted a 401(k) profit sharing plan (the "Plan")
for the exclusive benefit of eligible employees and their beneficiaries.
Substantially all employees are eligible to participate in the Plan. Matching
contributions to the Plan are 3% of the employees' gross salary, not to exceed a
certain percentage. For 2004 and 2003, NutraCea made matching contributions of
$16,064 and $12,616, respectively.
NOTE 14 - BUSINESS SEGMENTS
For internal reporting purposes, management segregates NutraCea into two
segments as follows for 2004 and 2003:
F-26
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEGMENT INFORMATION
--------------------
TWELVE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
DECEMBER 31, 2004 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
----------------------------------- ------------ ------------- ---------- -------------- -------------
NutraStar Technologies Incorporated $ 408,753 $ 84,431 $ 27,602 $ 3,302,018 $ 38,057
NutraGlo Incorporated 600,976 213,023 - 35,867 -
Unallocated corporate overhead - (23,848,816) - - -
------------ ------------- ---------- -------------- -------------
Total, NutraCea $ 1,009,729 $(23,551,362) $ 27,602 $ 3,337,885 $ 38,057
============ ============= ========== ============== =============
TWELVE MONTHS ENDED (LOSS) FROM INTEREST TOTAL DEPRECIATION/
DECEMBER 31, 2003 NET SALES OPERATIONS EXPENSE ASSETS AMORTIZATION
----------------------------------- ------------ ------------- ---------- -------------- -------------
NutraStar Technologies Incorporated $ 251,157 $ (1,946,352) $4,292,109 $ 482,089 $ 98,787
NutraGlo Incorporated 1,284,996 541,091 18,687 58,992 -
Unallocated corporate overhead - (6,821,743) - - -
------------ ------------- ---------- -------------- -------------
Total, NutraCea $ 1,536,153 $ (8,227,004) $4,310,796 $ 541,081 $ 98,787
============ ============= ========== ============== =============
NOTE 15 - SUBSEQUENT EVENTS (UNAUDITED)
Effective January 1, 2005, NutraCea entered into a four month consulting
agreement with an individual to act as the interim Chief Financial Officer of
the Company. Minimum monthly compensation is $6,250 payable in cash monthly.
On January 25, 2005 the Company entered into a three year employment agreement
with its Senior Vice President whereby the Company is to pay the officer a base
salary of $150,000 per year. The agreement also provides that the officer is
entitled to a one-time initial bonus of $25,000 and will be eligible for future
incentive bonuses based solely on the discretion of the Chief Executive Officer
or President of the Company and to be approved by the Company's Compensation
Committee. Warrants to purchase 1,000,000 shares of the Company's common stock
at an exercise price of $0.30 per share were issued and will vest 500,000 at
signing of the employment agreement and 500,000 on January 25, 2006. Warrants
to purchase 1,000,000 shares of the Company's common stock at an exercise price
of $0.30 per share were also issued and will vest upon the achievement of
NutraCea obtaining "Gross Sales over $25,000,000" and the Company reports a
positive EBITDA for the period. All warrants expire in ten years from the date
of issuance.
On January 26, 2005 the Company entered into a non-exclusive distribution
agreement to distribute the Company's rice based nutraceutical products in the
United States. An initial order for $25,000 was made concurrently with the
signing of the agreement. The term of the agreement is for three years.
Products are sold to the distributor at NutraCea's standard price schedule;
purchases above certain annual minimum requirements will then receive a 5%
discount. Additionally, failure to meet these minimum purchase requirements is
cause for termination of the agreement at the Company's option. NutraCea may
also at its option terminate the agreement upon 60 days written notice to the
distributor.
On February 9, 2005, NutraCea issued 200,000 stock options with an exercise
price of $0.45 per share, vesting in three years, expiring in ten years, to two
employees of the Company with each receiving 100,000 options. Non-cash
compensation expense of $2,000 was recorded relating to the issue of these
options.
F-27
NUTRACEA AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 10, 2005 NutraCea entered into a one year consulting agreement with
a financial relations company. Compensation shall be $10,000 per month and the
issuance of 700,000 warrants to purchase shares of common stock at a price of
$.45 per share; 700,000 warrants to purchase shares of common stock at a price
of $.65 per share; and 700,000 warrants to purchase shares of common stock at a
price of $.85 per share. In conjunction with this agreement the Company agreed
to pay a finder's fee to a consulting company consisting of stock options to
purchase 135,000 shares of common stock at a price of $0.45 per share.
On February 28, 2005 the Company terminated an existing consulting agreement
with a retired employee that was entered into on April 19, 2004. At the
Company's sole discretion it may retain the services of the consultant on a
monthly basis at a rate of $80 per hour, not to exceed 10 hours per month for
the first three months following the termination of the agreement.
Additionally, for each patent granted to the Company whereby the consultant is
listed as inventor, the consultant shall receive 15,000 shares of restricted
common stock; however the maximum value of the stock grant shall not exceed
$15,000 based on the closing bid price of the Company's common stock on the date
the patent is granted, with the total shares granted reduced accordingly.
On March 1, 2005, NutraCea amended and restated a consulting agreement (with
Company options to extend on an annual basis) with a retired employee of
NutraCea. Under the terms of the agreement, monthly compensation of $7,500 is
payable. In addition, the consultant received warrants to purchase 10,000 shares
of common stock at $.43 a share. The 10,000 warrants are valued at $3,131 and
expire in three years. Either party can cancel this agreement with 30-day
written notice. If the agreement is extended past the first year then monthly
compensation will be increased to $8,333 with additional warrants to purchase
15,000 shares of common stock at the market price per share at the date of
extension. Additionally, for each patent granted to the Company whereby the
consultant is listed as inventor, the consultant shall receive 15,000 shares of
restricted common stock; however the maximum value of the stock grant shall not
exceed $15,000 based on the closing bid price of the Company's common stock on
the date the patent is granted, with the total shares granted reduced
accordingly.
On March 23, 2005, NutraCea agreed to pay $15,000 of unpaid fees to a
consultant. NutraCea also agreed to issue 26,786 shares of common stock, valued
at $15,000, to the consultant as payment in full
During the quarter ended March 31, 2005, Nutracea issued 33,067 shares of common
stock to consultants for services rendered valued at $15,000.
During the quarter ended March 31, 2005, Nutracea issued 6,000 shares of common
stock pursuant to the exercise of warrants for cash totaling $432.
F-28
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
The Company has adopted and implemented internal disclosure controls and
procedures designed to provide reasonable assurance that all reportable
information will be recorded, processed, summarized and reported within the time
period specified in the SEC's rules and forms. Under the supervision and with
the participation of NutraCea's management, including NutraCea's President and
Chief Executive Officer and NutraCea's Controller and Principal Financial
Officer, NutraCea has evaluated the effectiveness of the design and operation of
its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e)
as of the end of the year covered by this report. Based on that evaluation, the
President and Chief Executive Officer and the Controller and Principal Financial
Officer have concluded that these disclosure controls and procedures are
effective. There were no changes in NutraCea's internal controls or in other
factors during or since the end of the fiscal year covered by this report that
have had a material affect or are reasonably likely to have a material affect on
internal controls subsequent to the end of the year covered by this report.
ITEM 8B. OTHER INFORMATION
On January 26, 2005 the Company entered into a non-exclusive distribution
agreement to distribute the Company's rice based nutraceutical products in the
United States. An initial order for $20,000 was made concurrently with the
signing of the agreement. The term of the agreement is for three years.
20
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
PATRICIA MCPEAK Ms. McPeak, 63, has been our Chairman of the Board and Chief Executive Officer since the
Chairman of the Board and Exchange Transaction with NutraStar Technologies Incorporated on December 14, 2001.
Chief Executive Officer She was the founder of NutraStar Technologies Incorporated and was the Chief Executive
Director since 2001 Officer, President and a director of NutraStar Technologies Incorporated since its formation
in February 2000. From May 1989 until February 2000 she was the President and a
director of The RiceX Company, which she co-founded. From 1981 to 1989, Ms. McPeak
was an executive officer of Brady International, Inc. a company engaged in providing
stabilized rice bran, which she also co-founded. Ms. McPeak has extensive experience in
the field of protein and ingredient production, having served as an executive in the industry
for 25 years.
BRADLEY EDSON Mr. Edson, 45, was named President and member of the Board of Directors of NutraCea on
President and December 17, 2004. Mr. Edson was formerly the Chairman and CEO of Vital Living Inc.
Director since 2004 (OTC BB: VTLV) a company that primarily developed and marketed Nutraceuticals. Prior
to Vital Living, Mr. Edson spent a decade developing a nationwide insurance agency
focused on distribution channels for specialty products for the retail market. Prior to that,
Mr. Edson was a former principal and officer of a "NASD broker/dealer firm. Mr. Edson
received his Bachelor of Science Degree in Finance from Arizona State University.
JOHN HOWELL Mr. Howell, 58 was named President and a member of the Board of Directors of NutraCea
Former President and on April 15, 2003. Prior to joining NutraCea, he served as the Executive Vice President
Director * and a member of the Board of Directors of Kingdom Ventures (OTCBB; KDMV), a
marketing company for the Christian community. From 2000 until October of 2002 he
served as Executive Vice President and remains a member of the Board of Directors of New
Visual Corporation (OTCBB:NVEI), a late development stage fabless communications
semiconductor company. From January 1998 until October 1998 Mr. Howell was Vice
President of TeraGLOBAL Communications Corp., a manufacturer of telecommunication
hardware. From 1997 to 1998 he was Chief Executive Officer of EVERSYS Corporation, a
manufacturer of computer equipment. Mr. Howell received his Bachelor's Degree from
Oregon State University in Aerospace Engineering.
ELIOT DRELL Dr. Drell, 52, has been Chief of Gastroenterology at Mercy Hospital, Folsom, California
Director since 2004 since 1984. Dr. Drell's past medical appointments including acting as a Director of the
Endoscopic unit at Mercy Hospital of Folsom, California and Marshall Hospital; Chief of
Medicine at Mercy Hospital; Member of the Medical Executive Committee at both Mercy
Hospital and Marshall Hospital; and Assistant Professor at U.C. Davis Medical Center. Dr.
Drell is an active speaker and lecturer for major pharmaceutical companies.
ERNIE BODAI, M.D. Dr. Bodai, 54, is Director of Breast Surgical Services at Kaiser Permanente in Sacramento,
Director since 2004 California. He is also Clinical Professor at the University of California at Davis, and has
authored over 250 medical articles, clinical guidelines for practitioners and a surgical
textbook. He holds a number of medical device patents, is a member of numerous
prestigious surgical societies and is the recipient of many prominent national awards.
DAVID BENSOL Mr. Bensol, 49, was the former CEO of Critical Home Care, which recently merged with
Director since March 2005 Arcadia Resources, Inc. (OTC BB: ACDI). Mr. Bensol was the Executive Vice President
and Director of Arcadia Resources from May 2004 until his resignation from those
positions in December 2004. In 2000 Mr. Bensol founded what eventually became Critical
Home Care, through a series of acquisitions and mergers. From 1979 to 1999 Mr. Bensol
founded several companies which became successful companies in the areas of home
medical equipment providers, acute care pharmacy providers and specialty support surface
providers. Mr. Bensol became a registered pharmacist in 1979.
21
MARGIE ADELMAN Ms. Adelman, 45, was appointed Senior Vice President in January 2005 and Secretary of
Senior Vice President the Company in February 2005. From 2000 to 2004 Adelman owned and operated Adelman
and Secretary Communications a full service public relations firm based in Boca Raton, Florida. Prior to
that, from 1994 to 2000 Adelman was President of TransMedia Group, the largest public
relations firm in Florida. Adelman holds a doctorate in Naturopathic Medicine from the
Clayton School of Natural Medicine and attended college at Florida International
University where she studied communications and journalism
EDWARD G. NEWTON Mr. Newton, 67, is NutraCea's Vice President-Sales. He has held this position since the
Vice President Exchange Transaction with NutraStar Technologies, Incorporated on December 14, 2001.
He has been the Vice President-Sales and a director of NutraStar Technologies,
Incorporated since its formation in February 2000 and the Secretary of NutraStar
Technologies, Incorporated since October 2000. Mr. Newton resigned as a Director of
NutraCea in 2003. From 1996 to February 2000, Mr. Newton served as Director of Sales
for RiceX. Prior to February 2000, Mr. Newton worked in various sales and management
capacities for General Mills, an international consumer foods company. His positions at
General Mills included Purchasing Director of Ingredients from 1974 to 1977, Director of
Personnel and Sales Training from 1977 to 1986, and Manager of Military Sales from 1986
to 1993.
JAMES KLUBER Mr. Kluber, 54, joined NutraCea as interim Chief Financial Officer in January 2005. From
Interim Chief Financial Officer December 2001 until September 2003 Mr. Kluber also served as NutraCea's Chief
Financial Officer. From February 2000 until the present Mr. Kluber has also served as the
Chief Financial Officer and a Director of Newgold, Inc., a public company engaged in the
mining of precious metals and industrial minerals. From 1980 to 2000 Mr. Kluber served
as Chief Financial Officer for several different public and private companies. From 1973 to
1980 he was in public accounting with Ernst & Ernst, one of the predecessor firms to what
is now Ernst & Young.
JOANNA HOOVER Ms. Hoover, 54, joined NutraCea as acting Chief Financial Officer in October 2003. From
Former Chief 2000 until the present Ms. Hoover has also served as the Chief Financial Officers of ITIS
Financial Officer ** Holdings, Inc., a public company engaged in providing database management services to
attorneys for research and litigation support. Ms. Hoover is a certified public accountant
and from 1973 to 2000 was engaged in public accounting. From 1985 until 2000 she was a
partner in the accounting firm of Nommensen, Hoover & Williams.
22
DR. RUKMINI CHERUVANKY Dr. Cheruvanky, 69, became NutraCea's Chief Science Officer on February 1, 2002 and
Chief Science Officer was the Chief Science Officer of NutraStar Technologies Incorporated from March 2000.
As of March 31, 2004, Dr. Cheruvanky ceased being an officer of NutraCea and became a
consultant to NutraCea. Prior to joining NutraStar Technologies Incorporated, she served
as the Director of Research and Development for The RiceX Company from April 1996
until March 2000. From January 1996 to April 1996, Dr. Cheruvanky served as the
Laboratory Supervisor for Certified Analytical Laboratories, a company specializing in
food analysis. From November 1994 until December 1995, she was a Research Chemist in
the Research and Development Department of DuPont Merck Pharmaceutical Company.
From May 1967 until she retired in February 1994, Dr. Cheruvanky was the Deputy
Director of the National Institute of Nutrition located in Hyderabad, India, heading the
Food Toxicology and Environmental Carcinogenic Division of the Institute. Dr.
Cheruvanky is a Fellow of the American College of Nutrition and has more than 80 peer-
reviewed scientific publications to her credit.
* Mr. Howell resigned as President and Director of the Company on July 20, 2004.
** Ms. Hoover was terminated as the Company's Chief Financial Officer on November 17, 2004.
The current Directors will serve and hold office until the next annual
shareholders' meeting or until their respective successors have been duly
elected and qualified. Our executive officers are appointed by the Board of
Directors and serve at the discretion of the Board.
FAMILY RELATIONSHIPS
There are no family relationships between any director and executive officer.
BOARD OF DIRECTORS AND COMMITTEES
The Board of Directors of NutraCea held 8 meetings and acted by written consent
100 times during the year ended December 31, 2004. The Board does not currently
have an Audit, Executive Compensation or Nominating Committee. All of the
functions of the Audit, Executive, Compensation and Nominating Committees are
performed by the Board of Directors as a whole.
AUDIT COMMITTEE FINANCIAL EXPERT
NutraCea does not currently have an audit committee, nor an audit committee
financial expert. All of the functions of the Audit Committee, Compensation
Committee and Nominating Committee are performed by the Board of Directors as a
whole. Management intends to form an audit committee in 2005, and will attempt
to attract a qualified financial expert to serve on the committee.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934, as amended, requires
NutraCea's executive officers and directors, and persons who own more than 10%
of NutraCea's common stock to file reports of ownership on Form 3 and changes in
ownership on Form 4 with the Securities and Exchange Commission (the "SEC").
Such executive officers, directors and 10% stockholders are also required by SEC
rules to furnish NutraCea with copies of all Section 16(a) forms they file. The
following table contains information relating to the number of reports that were
not timely filed during the year ended December 31, 2004 by the officers and
directors of NutraCea.
23
OFFICER OR DIRECTOR REPORTS NOT TIMELY FILED TRANSACTIONS NOT REPORTED
TIMELY
------------------------------ ------------------------ -------------------------------------
Patricia McPeak Form 4 Issuance of Restricted Stock
Form 4 Issuance of Restricted Stock
Form 4 Conversion of Series A Preferred
Stock to Common Stock
Form 5 Annual Reconciliation of Transactions
------------------------------ ------------------------ -------------------------------------
John Howell (former President Form 4 Exercise of options
and Director) Form 4 Sales of Stock
Form 4 Issuance of Restricted Stock
Form 4 Exercise of options
------------------------------ ------------------------ -------------------------------------
Edward Newton Form 4 Issuance and exercise of options
------------------------------ ------------------------ -------------------------------------
Eliot Drell Form 3 Initial Ownership
Form 4 Issuance of Restricted Stock
Form 4 Issuance of Restricted Stock and
Issuance of Options
------------------------------ ------------------------ -------------------------------------
Balazs Bodai Form 3 Initial Ownership
Form 4 Issuance of Restricted Stock
Form 4 Issuance of Options and Issuance
of Restricted Stock
------------------------------ ------------------------ -------------------------------------
CODE OF ETHICS
NutraCea is currently developing an Executive Code of Ethics to be applied to
our Chief Executive Officer, President, Chief Financial Officer, Controller and
other members of our management team. The Board of Directors has not completed a
review of the best practices relating to the adoption of Codes of Ethics or
acted to adopt the Code of Ethics proposed by members of management. When
adopted, the code will be available for viewing on our Website,
www.nutracea.com. Upon request, a copy of the code of ethics will be provided
without charge upon written request to NutraCea, 1261 Hawk's Flight Court, El
Dorado Hills, CA 95762.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table shows the aggregate compensation paid
or accrued by NutraCea during each of the last three fiscal years to or for (i)
any individual that held the office of Chief Executive Officer during the year
ended December 31, 2004 and (ii) each of the other four highest compensated
executive officers, each of whom received compensation in excess of $100,000
during the year ended December 31, 2004 (the "Named Executive Officers").
24
SUMMARY COMPENSATION TABLE
FOR YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------- ---------------------------------
AWARDS PAYOUTS
----------------------- --------
NAME AND OTHER RESTRICTED SECURITIES ALL
PRINCIPAL ANNUAL STOCK UNDERLYING LTIP OTHER
POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
----------------------- ----- -------- -------- ------------- ----------- ---------- -------- -------------
Patricia McPeak 2004 $150,000 $100,000 $ 12,000 $ 53,200 2,000,000 $ - $ 8,360,000**
Chief Executive Officer 2003 $150,000 $100,000 $ 12,000 $ - - $ - $ -
2002 $150,000 $100,000 $ 12,000 $ - - $ - $ -
John Howell 2004* $106,412 $ 80,000 $ 4,154 $ - - $ - $ -
President 2003 $120,000 $101,284 $ 6,000 $ - 1,000,000 $ - $ -
Edward G. Newton 2004 $100,000 $ - $ - $ - - $ - $ -
Vice President and 2003 $100,000 $ - $ - $ - 50,000 $ - $ -
Secretary 2002 $100,000 $ - $ - $ - - $ - $ -
* Mr. Howell resigned from the Company on July 20,2004.
** Represents the market value of time of issuance of 5,500,000 issued to Ms.
McPeak for services rendered and stock reimbursements
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
NutraCea adopted the 2003 Stock Compensation Plan (the "Plan") on October 31,
2003. Under the terms of the Plan, NutraCea may grant up to 10,000,000
warrants, options, restricted common or preferred stock, or unrestricted common
or preferred stock to officers, directors, employees or consultants providing
services to NutraCea on such terms as are determined by the Board of Directors.
The Plan provides that the Board of Directors may also permit officers,
directors, employees or consultants to have their bonuses and/or consulting fees
payable in warrants, restricted common, unrestricted common and other awards, or
any combination thereof. In addition, NutraCea has granted options to certain
officers, directors and employees outside of the Plan.
The following table summarizes the options granted by NutraCea to its Named
Executive Officers during the year ended December 31, 2004. None of the options
granted to the Named Executive Officers during the year ended December 31, 2004
were granted pursuant to the Plan.
25
INDIVIDUAL GRANTS
% OF TOTAL
NUMBER OF OPTIONS
SECURITIES GRANTED TO EXERCISE
UNDERLYING EMPLOYEES PRICE
OPTIONS IN FISCAL PER EXPIRATION
NAME GRANTED YEAR SHARE DATE
--------------- ---------- ----------- --------- ----------
Patricia McPeak 2,000,000 25% $ 0.30 12/14/14
Bradley Edson 6,000,000 75% $ .30 12/14/14
The following table sets forth information regarding the stock options held by
the Named Executive Officers as of December 31, 2004.
AGGREGATED OPTION EXERCISES IN THE YEAR ENDED DECEMBER 31, 2004
AND FISCAL YEAR-END OPTION VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
ACQUIRED VALUE UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
NAME ON EXERCISE REALIZED OPTIONS AT 12/31/04 12/31/04
--------------- ----------- --------- ------------------------- -------------------------
exercisable/unexercisable exercisable/unexercisable
Patricia McPeak -0- - 2,000,000/2,000,000 2,000,000/2,000,000
John Howell 500,000 $ 454,500 0/0 0/0
Brad Edson -0- -0- 6,000,000/6,000,000 6,000,000/6,000,000
COMPENSATION OF DIRECTORS
NutraCea provides compensation to its directors for serving in such capacity in
the form of grants of common stock from the 2003 Stock Compensation Plan (the
"Plan") on October 31, 2003. NutraCea provides 35,000 shares of restricted
common stock to each board member, whether an employee or non-employee, for each
year of service on the board plus reimbursement of expenses.
COMMON STOCK GRANTS TO DIRECTORS IN THE YEAR ENDED DECEMBER 31, 2004
SHARES VALUE
NAME ACQUIRED REALIZED
--------------- -------- ---------
Patricia McPeak 35,000 $ 53,200
John Howell * 35,000 $ 53,200
Eliot Drell 35,000 $ 53,200
Ernie Bodai, MD 35,000 $ 53,200
* Mr. Howell resigned as President and Director on July 20, 2004.
26
EMPLOYMENT AGREEMENTS
Patricia McPeak has an employment contract with NutraStar Technologies
Incorporated that was assigned to and assumed by NutraCea (the "McPeak
Employment Agreement"). The McPeak Employment Agreement provides for the payment
of an annual base salary of $150,000, which will increase to $500,000 when
NutraCea achieves $25 million in annual gross sales or its Common Stock is
publicly traded and has a sales price of at least $25 per share for 90
consecutive days, and to $1 million when NutraCea achieves $50 million in annual
gross sales. Ms. McPeak also will be entitled to quarterly bonuses of $25,000
upon achievement of certain benchmarks that will be set and determined by
NutraCea's Board of Directors. The agreement provides that Ms. McPeak will be
allowed to participate in NutraCea's stock bonus plans, and that NutraCea will
provide Ms. McPeak with medical benefits, additional executive level benefits,
and an annual automobile allowance of $12,000. NutraCea may terminate the
agreement on 30 days' prior notice, but will remain liable for all base salary,
bonus, and benefits obligations throughout the remaining term of the agreement.
The McPeak Employment Agreement expires on October 31, 2009. On December 10,
2004 NutraCea entered into a revised employment agreement that expires December
31, 2007 with its Chief Executive Officer whereby NutraCea is to pay the officer
a base salary of $150,000 in year one; a base salary of $150,000 in year two;
and a base salary of $250,000 in year three. The agreement also provides that
the officer is entitled to an annual incentive bonus based upon performance and
to be provided a car of the employee's choice. The incentive bonus shall be paid
annually within 10 days of the completion of NutraCea's annual independent
audit. Such bonuses shall be one percent of NutraCea's "Gross Sales over
$25,000,000" on an annualized basis or $6,250,000 per quarter and NutraCea
reports a positive EBITDA for the period. The bonus amount shall be limited to a
maximum of $750,000 in any calendar year and shall continue so long as the
officer is an employee or consultant for NutraCea. In addition, the officer was
issued warrants to purchase 2,000,000 shares of NutraCea's common stock at an
exercise price of $0.30 per share. The warrants are immediately exercisable and
expire in ten years from the date of issuance.
In April 2003, NutraCea entered into a three-year employment agreement with John
Howell, NutraCea was to pay the Mr. Howell a base salary of $10,000 per month.
The agreement stated that the first four months salary would be deferred, except
for a 10% percentage bonus to be paid dependent upon certain reductions in
monthly operation costs or conversion of debt into equity. The agreement also
provides that Mr. Howell was entitled to an annual bonus based upon performance
and a monthly car allowance of $500, beginning on the seventh month of
employment. In addition, Mr. Howell was issued warrants to purchase 1,000,000
shares of NutraCea's common stock. This employment agreement was terminated on
July 20, 2004 upon Mr. Howell's resignation as President of NutraCea.
On December 17, 2004 NutraCea entered into an employment agreement that expires
December 31, 2007 with its current President, Bradley Edson, whereby NutraCea is
to pay the officer a base salary of $50,000 in year one; a base salary of
$150,000 in year two; and a base salary of $250,000 in year three. The
agreement also provides that the officer is entitled to an annual incentive
bonus based upon performance and to be provided a car allowance of $600 per
month. The incentive bonus shall be paid annually within 10 days of the
completion of NutraCea's annual independent audit. Such bonuses shall be one
percent of NutraCea's "Gross Sales over $25,000,000" on and NutraCea reports a
positive EBITDA for the period. The bonus amount shall be limited to a maximum
of $750,000 in any calendar year. In addition, the officer was issued warrants
to purchase 6,000,000 shares of NutraCea's common stock at an exercise price of
$0.30 per share. The warrants are immediately exercisable and expire in ten
years from the date of issuance.
27
The Company has entered into two employment agreements with key employees with
terms of three years. Minimum future payments under these agreements at December
31, 2004 were as follows:
Year Ending
December 31,
-------------
2005 $ 200,000
2006 300,000
2007 500,000
-----------
TOTAL $ 1,000,000
===========
Generally, if NutraCea terminates these agreements without cause or the employee
resigns with good reason, as defined, NutraCea will pay the employees' salaries,
bonuses, and benefits payable for the remainder of the term of the agreements.
On January 25, 2005 the Company entered into a three year employment agreement
with its Senior Vice President whereby the Company is to pay the officer a base
salary of $150,000 per year. The agreement also provides that the officer is
entitled to a one-time initial bonus of $25,000 and will be eligible for future
incentive bonuses based solely on the discretion of the Chief Executive Officer
or President of the Company and to be approved by the Company's Compensation
Committee. Warrants to purchase 1,000,000 shares of the Company's common stock
at an exercise price of $0.30 per share were issued and will vest 500,000 at
signing of the employment agreement and 500,000 on January 25, 2006, subject to
forfeiture under certain terms and conditions. Warrants to purchase 1,000,000
shares of the Company's common stock at an exercise price of $0.30 per share
were also issued and will vest upon the achievement of NutraCea obtaining "Gross
Sales over $25,000,000" and the Company reports a positive EBITDA for the
period. All warrants expire in ten years from the date of issuance
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Articles of Incorporation provide that it will indemnify its
officers and directors, employees and agents and former officers, directors,
employees and agents unless their conduct is finally adjudged as involving
intentional misconduct, fraud or a knowing violation of the law and were
material to the cause of action. This indemnification includes expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by these individuals in connection with such
action, suit, or proceeding, including any appeal thereof, subject to the
qualifications contained in California law as it now exists. Expenses
(including attorneys' fees) incurred in defending a civil or criminal action,
suit, or proceeding will be paid by NutraCea in advance of the final disposition
of such action, suit, or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount, unless
it shall ultimately be determined that he or she is entitled to be indemnified
by NutraCea as authorized in the Articles of Incorporation. This
indemnification will continue as to a person who has ceased to be a director,
officer, employee or agent, and will benefit their heirs, executors, and
administrators. These indemnification rights are not deemed exclusive of any
other rights to which any such person may otherwise be entitled apart from the
Articles of Incorporation. California law generally provides that a corporation
shall have the power to indemnify persons if they acted in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
NutraCea and, with respect to any criminal action or proceeding, had no
reasonable cause to believe the conduct was unlawful. In the event any such
person is judged liable for negligence or misconduct, this indemnification will
apply only if approved by the court in which the action was pending. Any other
28
indemnification shall be made only after the determination by NutraCea's Board
of Directors (excluding any directors who were party to such action), by
independent legal counsel in a written opinion, or by a majority vote of
stockholders (excluding any stockholders who were parties to such action) to
provide such indemnification.
NutraCea carries Officers and Directors insured through Admiral Insurance
Company. The aggregate limit of liability for the policy period (inclusive of
costs of defense) is $2,000,000. The policy period is from August 1, 2004 to
October 1, 2005.
Insofar as indemnification for liabilities arising under the Securities Act of
1993 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
enforceable.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth the number of shares of NutraCea's Common Stock
beneficially owned as of December 31, 2004 by, (i) each executive officer and
director of NutraCea; (ii) all executive officers and directors of NutraCea as a
group; and (iii) owners of more than 5% of NutraCea's Common Stock.
NUMBER OF SHARES
NAME AND ADDRESS OF BENEFICIALLY
BENEFICIAL OWNER POSITION OWNED PERCENT
------------------------------ --------------------- ----------------- --------
Patricia McPeak
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 Chairman and CEO 9,434,072(1) 24.7%
------------------------------ --------------------- ----------------- --------
Bradley Edson
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 President 6,000,000(2) 14.2%
------------------------------ --------------------- ----------------- --------
Eliot Drell
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 Director 838,335(3) 2.3%
------------------------------ --------------------- ----------------- --------
Ernie Bodai, MD
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 Director 215,000(4) *
------------------------------ --------------------- ----------------- --------
Margie Adelman
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 Senior Vice President 38,422 *
------------------------------ --------------------- ----------------- --------
Edward Newton
1261 Hawk's Flight Court
El Dorado Hills, CA 95762 Vice President 80,412(5) *
------------------------------ --------------------- ----------------- --------
James Kluber Chief
1261 Hawk's Flight Court Financial
El Dorado Hills, CA 95762 Officer 123,519(6) *
------------------------------ --------------------- ----------------- --------
All officers and directors as
a group (7 individuals) 16,729,760(7) 37.5%
------------------------------ ----------------- --------
29
*Less than 1%
(1) Dorothy Hanks, Ms. McPeak's mother, owns 33,320 shares of NutraCea's
common stock, of which Ms. McPeak disclaims any beneficial ownership.
Includes 2,002,229 shares issuable under options or warrants exercisable
within 60 days of December 31, 2004.
(2) Includes 6,000,000 shares issuable under options or warrants
exercisable within 60 days of December 31, 2004.
(3) Includes 304,282 shares owned by Drell-Pecha Partnership and 114,987
shares issuable under options or warrants exercisable within 60 days of
December 31, 2004.
(4) Includes 80,000 shares issuable under options or warrants exercisable
within 60 days of December 31, 2004.
(5) Includes 30,412 shares issuable under options or warrants exercisable
within 60 days of December 31, 2004.
(6) Includes 50,000 shares issuable under options or warrants exercisable
within 60 days of December 31, 2004.
(7) Includes 8,529,769 shares issuable under options or warrants
exercisable within 60 days of December 31, 2004.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRINCIPAL SUPPLIER - THE RICEX COMPANY
The RiceX Company ("RiceX") is our principal supplier of stabilized rice bran
products. Patricia McPeak, Chief Executive Officer, Chairman of the Board of
Directors and our principal shareholder, is a co-founder, a principal
shareholder, and the former President and a former director of RiceX. Daniel L.
McPeak, her husband, is a co-founder, the current Chairman of the Board and
Chief Executive Officer, a director, and a principal shareholder of RiceX.
Purchases during the year ended December 31, 2003 totaled $173,647 and
represented 5% of total sales by RiceX. Purchases during the year ended
December 31, 2004 totaled $434,562 and represented 10.8% of total sales by
RiceX. All such purchases were at standard prices established by RiceX.
On December 12, 2001, NutraCea entered into 15-year agreement with RiceX to be
the exclusive distributor of RiceX's rice solubles and rice bran fiber
concentrate in the United States and to have the exclusive rights to various
patents and trademarks owned by RiceX. The provisions provided for an exclusive
distribution of rice bran and rice bran products was terminated during fiscal
2003 as a result of the failure of NutraCea to meet certain minimum purchase
requirements. However, the provisions relating to the patents and trademarks
continue to be in force. Purchases subsequent to the termination of the
agreement have been at standard prices established by RiceX.
LOANS FROM OFFICER AND RELATED PARTIES
At December 31, 2002, NutraCea owed Ms. Patricia McPeak, Chief Executive Officer
of NutraCea, $175,800 on a demand note payable bearing interest at 10%. The
Company executed an additional demand note payable in the amount of $20,422,
bearing interest at 10%, to the Chief Executive Officer during 2003.
Additionally the Chief Executive Office and a related party made short-term
advances to NutraCea amounting to $210,000 during the year. All of this debt was
repaid prior to December 31, 2003. Cash payments retired $258,335 of the debt,
while $147,887 was retired by conversion to 344,956 shares of common stock.
30
The Company also executed notes payable in June and September 2003 in the amount
of $50,000 and $40,000, respectively, to a greater than 5% shareholder. The
notes were convertible at the option of the holder into shares of NutraCea's
common stock at a conversion price of $.20 per share, bearing interest at 10%
per annum and due in June and September 2004, respectively. Upon conversion of
the notes payable, the holder will be entitled to receive one warrant to
purchase common stock for each common share issued. The warrant will have an
exercise price of $.20 per share and will expire one year from the date of
issuance. In November 2003 the holder exercised the conversion option and
451,517 shares of common stock were issued in full satisfaction of the debt.
In November 2004 the Board of Directors resolved to purchase a new automobile
from the Chief Executive Officer in exchange for the CEO waiving a monthly car
allowance. At December 31, 2004, NutraCea has booked a payable to related party
for $73,096.
There outstanding debt due to related parties at December 31, 2004 was $73,096.
LEASE WITH RICEX
NutraCea leases its principal office space from RiceX pursuant to a five-year
sublease agreement that expires September 30, 2006. Current monthly lease
payments are $6,366. Management believes the terms of this sublease are at
least as favorable as terms that could have been obtained from an unaffiliated
third party.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 2(1) Plan and Agreement of Exchange.
Exhibit 3.1(2) Restated Articles of Incorporation filed March 28, 2001.
Exhibit 3.2(2) Bylaws
Exhibit 3.3(5) Restated and Amended Articles of Incorporation dated
December 11, 2001.
Exhibit 3.4(6) Certificate of Amendment of Restated Articles of
Amendment
Exhibit 10.1(5) Executive Employment Agreement between NutraCea and
Patricia McPeak.
Exhibit 10.1.1(5) Amended Executive Employment Agreement between NutraCea
and Patricia McPeak.
Exhibit 10.2(5) Executive Employment Agreement for Edward Newton.
Exhibit 10.3(7) 2003 Stock Compensation Plan
Exhibit 10.4 Executive Employment Agreement between NutraCea and
Bradley Edson.
Exhibit 10.5 Executive Employment Agreement between NutraCea and
Margie Adelman.
Exhibit 10.6 RiceX License Agreement.
Exhibit 10.7 W.F. Young Distribution Agreement (Confidential
Treatment Requested).
Exihibit 10.8 W.F. Young Technology Agreement (Confidential Treatment
Requested).
Exhibit 16.1(3) Letter on change in certifying accountant dated March
13, 2002.
Exhibit 16.2(4) Updated letter on change in certifying accountant dated
March 25, 2002.
Exhibit 16.3(4) Letter on change in certifying accountant dated March
21, 2002.
Exhibit 16.4(8) Letter on change in certifying accountant dated October
28, 2003.
31
Exhibit 31.1 Certification by CEO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 31.2 Certification by CFO pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.1 Certification by CEO and CFO pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
____________________
(1) Incorporated by reference to exhibits previously filed on Form 8-K filed on
November 19, 2001.
(2) Incorporated by reference to exhibits previously filed on Form 10-SB filed
on April 19, 2001.
(3) Incorporated by reference to exhibits previously filed on Form 8-K filed on
March 14, 2002.
(4) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on March 25, 2001.
(5) Incorporated by reference to exhibits previously filed on Form 10-KSB filed
on April 16, 2002.
(6) Incorporated by reference to exhibits previously filed on Form 10-QSB filed
on November 18, 2003
(7) Incorporated by reference to exhibits previously filed on Form S-8 filed
November 19, 2003.
(8) Incorporated by reference to exhibits previously filed on Form 8-K/A filed
on November 7, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by NutraCea's
independent public accountants for the audit of NutraCea's financial statements
for the fiscal year ended December 31, 2004 and 2003 and for the review of the
financial statements included in NutraCea's Quarterly Reports on Form 10-Q for
those fiscal years were approximately $42,000 and $31,554, respectively.
Audit-Related Fees
There were no fees billed for other audit-related services rendered by
NutraCea's independent public accountants for the fiscal years ended December
31, 2004 and 2003.
Tax Fees
The aggregate fees billed for tax services rendered by NutraCea's independent
public accountants for the fiscal years ended December 31, 2004 and 2003were
$2,870 and $5,901, respectively.
All Other Fees
The aggregate of all other fees billed for services rendered by NutraCea's
independent public accountant for the fiscal years ended December 31, 2004 and
2003 amounted to $0 and $9,159, respectively. These fees related to the
preparation and review of a registration statement and general accounting
assistance.
As stated elsewhere in this report, NutraCea does not have a separate Audit
Committee. All of the functions of the Audit Committee are performed by the
Board of Directors as a whole, including the review and authorization of all
non-audit fees incurred by NutraCea. All of the non-audit fees incurred by
NutraCea were authorized by the Board of Directors.
32
SIGNATURES
In accordance with Section 13 or 15 (d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NUTRACEA
Date: March 31, 2005 By: /s/ Patricia McPeak
----------------------
Patricia McPeak
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Patricia McPeak
---------------------
Patricia McPeak Director, Chairman of the
Board and Chief Executive
Officer March 31, 2005
/s/Bradley Edson
----------------
Bradley Edson Director and President March 31, 2005
/s/Eliot Drell
--------------
Eliot Drell Director March 31, 2005
/s/Ernie Bodai
---------------
Ernie Bodai Director March 31, 2005
/s/David Bensol
----------------
David Bensol Director March 31, 2005
/s/ Margie Adelman
--------------------
Margie Adelman Secretary March 31, 2005
/s/ James Kluber
------------------
James Kluber Chief Financial Officer March 31, 2005
(Principal Financial and
Accounting Officer)
33