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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT ON FORM 10-KSB
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
for the year ended December 31, 2006.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from______ to ______.
Commission File No. 000-50508
NUVIM(R), INC.
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(Name of Small Business Issuer in its Charter)
Delaware 13-4083851
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(State of Incorporation) (I.R.S. Employer Identification Number)
12 North State Route 17 07652
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(Address of Principal Executive Offices) (Zip Code)
201.556.1010
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(Issuer's Telephone Number)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.0001
par value per share.
Check whether the issuer (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or 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 SB is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10SKB or any other
amendment to this Form 10SKB. [ ]
The issuer's revenues for its most recent fiscal year were $1,292,155.
The aggregate market value of the voting stock held by non-affiliates of the
issuer on April 11, 2007, based upon the $0.51 per share average bid and asked
prices of such stock on that date, was $6,005,345, based upon 11,775,187 shares
held by non-affiliates of the issuer.
Check whether the issuer has filled all documents and reports required
to be filed by section 12, 13, or 15(d) of the Exchange Act after distribution
of securities under a plan confirmed by a court.
Yes [ ] No [ ]
The total number of issuer's shares of common stock outstanding held by
affiliates and non- affiliates as of April 11, 2007 was 14,406,782.
Documents Incorporated by Reference: Items 9, 10, 11, 12 and 14 are incorporated
from the Information Statement included in Schedule 14C to be filed within 120
days of the end of the fiscal year. See also Item 13, Exhibits.
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FORWARD-LOOKING STATEMENTS
Statements that are not historical facts, including statements about our
prospects and strategies and our expectations about growth contained in this
report are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These forward-looking statements represent our present
expectations or beliefs concerning future events. We caution that such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, the uncertainty as to our future profitability; the
uncertainty as to whether our new business model can be implemented
successfully; the accuracy of our performance projections; and our ability to
obtain financing on acceptable terms to finance our operations until
profitability.
PART I
ITEM 1. DESCRIPTION OF THE BUSINESS
INTRODUCTION
We produce, market, and distribute NuVim(R) dietary supplements in
beverage and powder mix form. In the first quarter of 2007, NuVim introduced
NutraFlora(R), manufactured by GTC Nutrition into all its refrigerated
beverages. NutraFlora(R) short chain fructooligosaccharides is the most
effective prebiotic fiber available. Derived from cane or beet sugar,
NutraFlora(R) is uniquely capable of promoting health by supporting the growth
of beneficial (probiotic) bacteria which in turn provide health benefits such as
improved calcium and mineral absorption for better bone health and a strong
immune system. Studies also show that NutraFlora(R) helps improves digestive
functions, contributes to a healthy cholesterolmetabolism, and bone health.
NuVim(R) has an exclusive agreement with GTC Nutrition for beverages and powder
products that are mixed with liquids for reconstitution that benefit the
consumer in immune enhancement and joint health.
When NutraFlora(R) was introduced, the reformulation included a much
higher level of whey protein concentrate. Whey concentrate that has been
credited with bringing increased physical performance, building and repairing
muscle tissue, cardiovascular health, and immune defense. The reformulation also
eliminates hi-fructose corn syrup and reduces the calories per 8 ounce serving
from 70 to 45.
NuVim(R) dietary supplement beverages are formulated to meet many of
the preferences of health conscious consumers. They are low in sugar, with
approximately 6 grams per 8 ounce serving, compared to 40-50 grams for some soft
drinks. There are 9 grams of carbohydrates per 8 ounces. NuVim(R) is virtually
lactose-free, fortified with the anti-oxidant vitamins A, C, and E, contains
100% of the daily recommended requirement of zinc, has all 9 essential amino
acids, and calcium.
Our first ready to drink product line was introduced in May 2000. This
product line currently consists of three flavors of refrigerated dietary
supplement beverages: Orange Tangerine, Fruit Symphony and Strawberry Vanilla.
All are available in 64-ounce juice type cartons. Orange Tangerine and
Strawberry Vanilla are also available in 16-ounce bottles. We have introduced
NuVim(R) ready to use powder in January 2006. The powder is available in three
varieties; Chocolate, Vanilla, and Strawberry. NuVim(R) powder supplement can be
mixed with the consumer's favorite beverage such as juice or milk or added to
yogurt or cereal. The powder is sold in 30 individual servings in a box and is
currently available through the NuVim(R) web
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store at www.NuVim.com. In March, 2007, we signed an agreement with General
Nutrition Centers ("GNC") to sell NuVim(R) in their stores in the Tampa, Florida
market as a test of its customer appeal. At this time GNC will be the only
nutritional supplement retailer that will be selling NuVim(R) in the powder mix
form. NuVim(R) will support the initial test stores with 60 second television
advertising tagging the commercials that NuVim(R) is now available at GNC. In
addition to the television advertising, NuVim(R) will provide in-store programs
that communicate to consumers the immune and bone health benefits provided by
our beverages. We are also planning a sampling program for all of the GNC stores
in the test.
NuVim(R) beverages are currently available in 13 states and the
District of Columbia. Our 64-ounce cartons are currently sold in over 2,100
supermarkets as of December 31, 2006. Chains carrying NuVim(R) include ShopRite
Supermarkets, Publix Super Markets, Pathmark Supermarkets, Giant Supermarkets,
A&P Supermarkets, Food Emporium, Waldbaums, Mars Super Markets, SuperValue
Supermarkets, Acme Markets, and Wal-Mart supercenters in Virginia, North
Carolina, South Carolina, Florida, Georgia and Alabama. In March of 2007 we
introduced NuVim 64 ounce size to 137 Kroger stores as a test in the Kroger
Detroit Division. Our 16-ounce bottles accounted for less than 5% of our sales
and are sold in selected retail locations, including small grocery stores,
delicatessens and a limited number of chain supermarkets including Acme Markets
in Philadelphia and Giant Markets in Harrisburg who also sell the 64 ounce.
In the future we plan to introduce one new flavor of the 64-ounce size
beverage. Possible new flavors like chocolate, vanilla, and peach or perhaps an
iced tea with the same NuVim(R) health benefits. We expect to test market a new
item within the next 12 months.
INDUSTRY BACKGROUND
NuVim(R), as a dietary supplement in beverage form, is considered part
of the "functional foods" category of the nutrition industry. Functional foods
are defined as foods and beverages that promise health benefits beyond their
inherent nutritional value. The largest segment of the functional foods category
is beverages according to Business Communications Company, Inc. ("BCC").
Functional beverages include a variety of drinks, such as sports drinks, energy
drinks, enhanced fruit drinks, soy beverages, ready-to-drink tea and bottled
water.
The functional beverage market in the United States has developed
beyond being a niche category of drinks meant for better health and well-being.
The wide variety of functional beverages makes available options that can appeal
to many types of consumers who have become taste- and ingredient-conscious as
well as more sophisticated about their overall food consumption. In its 2004
report on the United States functional beverages market, Frost & Sullivan cites
the following trends in the functional beverages market:
o physical fitness and mental well-being are the core needs driving the
functional beverage industry;
o the variety of functional beverages has grown to appeal to almost all
demographics of consumers;
o the growing ethnic population in the United States influences beverage
consumption patterns with their use of novel ingredients; and
o while still a small segment of the competitive and already crowded
beverage industry, functional beverages have splintered into many
subcategories with their own consumer target markets.
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BCC estimates that the functional beverage segment of the industry will
grow from approximately $8.7 billion in 2002 to approximately $11.5 billion in
2007, despite a decline in overall beverage industry growth rate. BCC estimates
that the chilled juice market will increase from approximately $3.0 billion to
approximately $4.2 billion from 2002 to 2007 and that sports drinks will
increase from approximately $2.0 billion in 2002 to approximately $2.6 billion
in 2007.
According to "New Nutrition Business," a journal for healthy eating,
functional foods, and nutraceuticals, in recent years there has been a trend
toward increased consumption of dietary supplements, as well as foods and
beverages that assist the human body in preventing and controlling certain
diseases. We believe that the growing demand and awareness for functional
beverages will increase consumer acceptance of dietary supplements and enlarge
this category's share of the total beverage market.
We believe growth in the functional foods market is driven by the
following trends:
o increasing medical acceptance and recommendation of supplements,
vitamins and health foods;
o increasing consumer desire to avoid prescription drugs and seek
non-medical treatment options;
o growing number of consumers seeking health benefits in food and
beverages;
o growing number of consumers seeking to avoid certain unhealthy
attributes in foods and beverages;
o growing scientific interest in the problems of inflammation and a
compromised immune system; and
o better nutritional educational practices being taught at all levels in
the school system.
Many of these trends are a result of the fact that the U.S. population
over 35 years of age is growing 20% faster than the overall population.
Therefore, these issues are of concern to an increasing proportion of the
population.
OUR STRATEGY
Our objective is to become a leading provider of good-tasting,
nutritional beverages and beverage products designed to promote health using the
best technologies that become available. The elements of our business strategy
include the following:
o Increasing brand awareness, trial and repeat purchases of the NuVim(R)
products through brand building activities including sampling,
advertising, promotion and other marketing activities.
o Expanding sales for our existing product line in our current markets.
o Introducing new products into our current markets including the
NuVim(R) shelf stable single serve and the powder version.
o Expand with Wal-Mart, Kroger and military commissaries and troop
feeding.
o Expanding our distribution channels beyond the current concentration
in supermarkets, to club warehouses, convenience stores, schools,
business cafeterias, drug stores, fast food outlets and other
locations using the 64 ounce size, 16-ounce plastic bottle
single-serving size.
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o Expand the powder version through e-commerce, retail outlets and fund
raising organizations.
o Building the brand, growing revenues and achieving profitability in
order to position NuVim(R) as a possible joint venture or merger
partner, because NuVim(R)'s brand as well as its marketing strengths
could contribute to the combined venture. NuVim(R) is also a possible
acquisition candidate for one of the 13 multi-national food and
beverage companies that might seek to add healthy product choices to
their product offerings.
OUR PRODUCTS
We have developed NuVim(R) beverages to provide consumers with
good-tasting beverages that help strengthen the immune system, support muscle
flexibility and promote athletic performance. All of our refrigerated products
contain the proprietary, patented and exclusive micronutrient NutraFlora(R) and
substantial amounts of Whey Protein.
Current Products
Ready to Drink Beverages
This product line consists of natural, fruit-flavored, refrigerated
dietary supplement beverages available in three flavors: Strawberry Vanilla,
Orange Tangerine and Fruit Symphony. The 64-ounce cartons are currently is sold
primarily in refrigerated juice section of major supermarkets. We also sell
single-serving, 16-ounce bottles, which are available in Strawberry Vanilla and
Orange Tangerine flavors. This smaller size in plastic bottles is currently
marketed primarily to small grocery stores, some major supermarket chains, and
delicatessens.
NuVim has been reformulated to eliminate its dependence on the SBMI
whey protein and utilize NutraFlora(R) and an increased amount of whey protein
concentrate (first item on the ingredient statement after water) to achieve its
benefits, particularly enhanced immunity and joint health. Whey protein,
NuVim(R)'s largest ingredient, other than water, has been credited with
increased physical performance, building and repairing muscle tissue, enhanced
cardiovascular health, promoting wound healing, and strengthening immune
defense. NutraFlora(R) is uniquely capable of promoting health by supporting the
growth of beneficial (probiotic) bacteria which in turn provide health benefits
such as improved calcium and mineral absorption for better bone health and a
strong immune system. Almost 200 studies also show that NutraFlora(R) helps
improve digestive functions and bone and joint health and contributes to a
healthy cholesterol metabolism. The reformulation will retain the vitamins and
minerals but will include a much higher level of whey protein concentrate. The
reformulation will also eliminate hi-fructose corn syrup and reduce the calories
per 8 ounce serving from 70 to 45.
In addition to containing the prebiotic micronutrient NutraFlora(R),
NuVim(R) refrigerated beverages are also fortified with vitamins and minerals.
An eight-ounce serving offers 100% of the minimum daily requirement of Vitamins
E, C, B-12, and zinc, smaller portions of Vitamin A, protein, and all nine
essential amino acids. The beverage is readily digestible, is virtually
lactose-free and contains no fat, cholesterol, or caffeine. An eight-ounce
serving contains 45 calories, 6 grams of sugar and 9 grams of carbohydrates.
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An additional benefit of the new formulation is that it can be
pasteurized without reducing the ability of the ingredients to enhance our
customers health.
The 64-ounce size of NuVim(R) is typically priced from $2.78 to $3.99,
depending on the supermarket. This is approximately the same price as the
everyday price of a 64-ounce carton of a nationally branded orange juice. The
16-ounce bottle is typically priced from approximately $1.29 to $1.59.
NuVim(R) Powder
In January 2006 we introduced NuVim(R) powdered supplements to be added
to beverages, cereals, or yogurt. It is available in three flavors, Vanilla,
Chocolate, and Strawberry. NuVim(R) powder currently provides the same SMBI
micronutrients, vitamins and minerals as our ready to drink beverages did prior
to the reformulation. It is sold in 30 serving boxes and is currently available
on our online store for $49.95 per box, with discounts for larger quantities.
The powder form allows us to market our product on a nationwide basis without
the distribution costs associated with the refrigerated ready to drink line.
Sales to date have not been material.
In March, 2007, NuVim entered into an agreement with General Nutrition
Company ("GNC") to sell NuVim(R) in their stores on a test in the Tampa, Florida
market. At this time GNC will be the only nutritional supplement retailer that
will be selling NuVim(R) in the powder mix form. NuVim(R) will support the
initial test stores with 60 second television advertising tagging the
commercials that NuVim(R) is now available at GNC. In addition to the television
advertising, NuVim(R) will provide in-store programs that communicate to
consumers the immune and bone health benefits NuVim(R) provides.
NuVim(R) powder continues to contain its other two proprietary
micronutrients, MunePro(R) and AccuFlex(R) and will so do until existing stocks
are exhausted.
New Product Development
We intend to develop a product line that does not need to be
refrigerated throughout the distribution system. This new line of shelf stable
beverages will be in a single serve size of 12 or 14 ounces and sold potentially
sold to the 1,500 non-Coke/Pepsi shelf stable distributors in the country. These
distributors will in turn sell the product to schools, colleges, hospitals,
convenience stores, and bodegas. It is unlikely that the shelf stable products
will be sold in the major supermarkets. We expect to launch at least a test of
the shelf stable products in the first half of 2007.
SALES AND MARKETING
We target consumers seeking specific health benefits in foods or
beverages, people taking vitamins or other supplements, healthy, active people
and weight conscious consumers. The health profile of our consumers includes
people with health concerns, people trying to boost their immune capacity and
people with restrictive diets, such as diabetics or lactose-intolerant
consumers.
Approximately 95% of our current sales are to refrigerated supermarket
warehouses that then deliver our product and other brands of refrigerated
products to individual supermarkets. Some of these supermarket warehouses are
owned by the supermarket chains that stock our product, while other warehouses
that we sell to have contracts with a supermarket chain to
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warehouse and then deliver refrigerated products to their stores. For
the year ended December 31, 2005, Wal-Mart, a retailer of our product in the
southeast accounted for 21% of our sales, Publix, a retailer of our product
primarily in Florida and Georgia accounted for 14% of our sales, C&S New Jersey
warehouse that supplies the Pathmark supermarket chain accounted for 11%, and
Wakefern Foods, which supplies Shop Rite Supermarkets in the New York/New Jersey
area, accounted for approximately 10% of our total gross sales. In 2006 we
shipped 17 different warehouses that in turn ship to individual supermarket
stores. Seven of the 17 warehouses are Wal-Mart distribution centers. The
combined seven Wal-Mart distribution centers accounted for 52% of our business
last year. One Wal-Mart distribution center accounted for 14.5 % of the business
and another one accounted for 10.7%. In addition, the warehouse servicing
Pathmark stores accounted for 8.4% of the total business and the Shoprite
warehouse 8.0%.
Our 64-ounce refrigerated beverage product is primarily sold to
consumers through supermarkets. We also sell the 16-ounce refrigerated beverage
product to refrigerated food warehouses. Some of these warehouses sell their
refrigerated products to independent smaller grocery stores or to large
supermarkets that have only one or two stores. In addition, our 16-ounce
beverage product is sold to distributors who only sell to foodservice outlets,
such as cafeterias, schools, hospitals and convenience stores. We plan to expand
the number of distributors we sell and the categories of customers to include
club stores, nutrition centers and health food outlets.
During 2006 our limited marketing programs included in-store sampling,
television advertising, print advertising, and reduced supermarket price
features. We used these programs to build consumer brand awareness and trial and
repeat purchases, particularly to support our product introduction in the new
Wal-Mart stores in North and South Carolina, Virginia, Alabama and Georgia. In
August of 2004 we began serving one Wal-Mart distribution center servicing 44
stores in northern Florida. We distributed two flavors of our refrigerated
product this one distribution center servicing approximately 44 supercenter
stores. In August 2005 Wal-Mart increased our distribution to three flavors and
a total of three distribution centers servicing approximately 120 stores. In
April 2006, we increased our distribution to the entire southeast region,
encompassing approximately 300 supercenters and six Wal-Mart distribution
centers that service Wal-Mart supercenters in 6 states. In late 2006 we added
the seventh distribution center. We believe Wal-Mart operates approximately
3,500 supercenters across the United States.
We also made use of supermarket advertising and consumer promotions,
and internet advertising. During the year we also used direct mail programs
through the supermarket data base to identify and deliver advertising and coupon
incentives to our targeted audience.
Dick Clark was our public spokesperson until 2005 and has appeared in
past NuVim(R) television and radio commercials, point of sale materials and on
our website. Because Dick Clark suffered a stroke and has not completely
recovered, we used him in a limited way in 2006 and do not anticipate that we
will be using him in advertising or promotion in 2007. We have signed actress
and model Ashleigh Howard as our new spokesperson. We have produced and aired
three television spots with Ms. Howard.
Beginning in December 2005 and continuing into 2007, we began a print
media campaign through News USA. The program creates and distributes a series of
news articles addressing a wide range of consumer health concerns for which
NuVim(R) is beneficial. Topics include staying heart healthy, ways to combat
fatigue, why the immune system is key to good health, and the right way to
maintain sound nutrition when dieting. This campaign is designed to build brand
awareness and educate the consumer about NuVim(R)'s benefits in an informational
and credible format.
Since the third quarter of 2006 we have used a television 5 minute
infomercial to communicate the benefits of NuVim(R) in powder forms. In the
fourth quarter of 2006 we introduced
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a 30 second television commercial, a 60 second commercial emphasizing the powder
version and a 5 minute commercial also focusing just on the powder version to
build awareness, trial and repeat purchases of our products.
DISTRIBUTION
We first introduced NuVim(R) refrigerated beverages in the New York,
New Jersey and Connecticut metropolitan area during the second quarter of 2000.
We then expanded the distribution of our products into the Philadelphia,
Baltimore, Washington, D.C., Harrisburg, Scranton, Wilkes-Barre and the State of
Delaware marketing areas during the first quarter of 2001. In 2002 we further
expanded into Virginia, Pittsburgh, Cleveland and upstate New York. In September
2004, began selling to Publix Super Markets, located in Florida. As of December
31, 2006, our refrigerated beverages are available in approximately 2,100
supermarkets in all or part of 13 states (New York, New Jersey, Connecticut,
Maryland, Pennsylvania, Delaware, Virginia, Ohio, Florida, Alabama, Georgia, and
North and South Carolina) and the District of Columbia. These accounts are
serviced by a network of eight food brokers. The brokers present the promotional
programs to the supermarket chain account headquarter buyers and the brokers
also have a retail force that call on each individual supermarket to maintain
product rotation, correct pricing and maintain or improve shelf location and the
amount of space allocated to the NuVim(R) products. We handle the headquarters
for Wal-Mart and the test launch at Kroger in house. We do have a retail
organization that calls on the Wal-Mart stores to assist in rotating the
products and managing out of stocks and proper in store signage.
SUPPLY, MANUFACTURING AND ORDER PROCESSING
Our products are now manufactured solely at Mountainside Farms in
Roxbury, New York, using whey protein concentrate, NutraFlora(R) supplied by GTC
Nutrition, and a blend of customized flavors, as well as other ingredients
purchased from major domestic and international companies. We provide annual
contract purchase orders and maintain inventories of select ingredients and
supplies unique to our process; these annual contracts result in more favorable
prices and better service. Mountainside Farms purchases selected ingredients and
stores them for us at their plant. We practice just in time inventory methods to
provide maximum beneficial cash flow. Our refrigerated nutritional beverage is
then packaged in 64-ounce juice cartons and 16-ounce plastic single-serving
bottles. NuVim(R) beverages have an 83-day shelf-life from the date of
production. This compares favorably with fresh juice, juice made or not made
from concentrate and pasteurized milk which have a shelf life of between 14 to
39 days. We expect that the processing, ingredient, storage, and distribution
costs for the reformulated product at Mountainside Farms will be improved as we
move to higher volumes.
Mountainside Farms will also store the finished product until shipment
to our customers. Mountainside Farms' more flexible processing schedule enables
us to more closely schedule production to our customers needs, thereby enhancing
cash flow.
NuVim(R) beverages are produced under a strict quality assurance
program. The product formulation and process steps for the production of
NuVim(R) products are documented in the NuVim(R), Inc. Quality Manual. This
manual contains production formula and process instructions, as well as quality
assurance testing required on a daily, batch basis, including, without
limitation, daily microbiological testing. The HACCP (Hazard Analysis Critical
Control Point), which is in place at Mountainside Farms and is a requirement for
all dairy operations in the United States, will be implemented at any new
production site.
If Mountainside cannot meet our needs, we believe there are numerous
qualified dairies throughout the United States that have sufficient capacity to
meet our needs. This strategy allows
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us to operate without investing in plant and production equipment thereby
keeping our fixed capital cost for manufacturing as well as warehousing and
freight at virtually zero.
We use eight food broker organizations to obtain product orders from
our major supermarket accounts which they send to us for fulfillment. These
broker organizations also provide retail coverage in the supermarkets to insure
that our products are stocked properly, priced correctly and rotated as needed.
Each broker organization is paid on a commission basis for cases sold in their
territory.
Upon receiving an order, our products are shipped directly from the
Mountainside facility to customer warehouses, enabling "just in time" inventory
levels for our finished products. Customers typically receive the product with a
minimum of 60 days of shelf life. We control inventory management, production
and invoicing.
PATENTS AND TRADEMARKS
NuVim(R) was awarded a manufacturing process patent for milk protein
concentrate beverages; the patent expires in March 2021.
We own the NuVim(R), MunePro(R), AccuFlex(R), MuneFlex(R), and Fruit
Symphony(R) trademarks.
NuVim also owns the manufacturing process patent.
We are responsible for maintenance of our trademarks and for protecting
those trademarks against infringement.
COMPETITION
In a broad sense, all beverages are competitive with all other
beverages including our dietary supplement beverages. When consumers buy
NuVim(R), they most likely are not purchasing some alternative beverage choice,
which could be any beverage, from bottled water to carbonated soda to milk or
juice. Competition in the nutritional beverages market, in particular, which
includes all of our existing and currently planned products, is intense, always
growing and evolving. The industry trend has moved from small start-up companies
to industry participants that are large beverage companies or food
conglomerates. These companies often have better cost control, product promotion
and distribution networks than we are able to generate.
Competition is based primarily on product benefits, price, quality,
customer satisfaction and marketing support. Our competition includes national,
regional and local producers and distributors. Most of our competitors have
significantly greater financial, managerial and technical resources than we do,
which may put us at a competitive disadvantage. For instance, channels of
distribution for our products often require the expenditure of significant and
ongoing capital, which may put us at a disadvantage to better capitalized
competition.
We believe that our current products are best positioned as a
nutritional beverage and placed in supermarkets or other retail outlets in the
refrigerated juice section. Competition
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is particularly intense among products in these nutritional beverage market
segments. We believe our direct beverage competition in this market segment
includes national, regional and local beverage manufacturers. We compete within
the refrigerated fruit drink category, which includes national and regional
brands such as Tropicana (owned by PepsiCo, Inc.), Minute Maid (owned by The
Coca-Cola Company) and Florida's Natural (a division of Citrus World, Inc.). In
addition, a number of major supermarkets and other retail outlets market their
own brand of fresh juices that compete with our products. Significant
competitive pressure from these or other companies could negatively impact our
sales and results of operations. In many supermarkets and in Wal-Mart
supercenters NuVim(R) is placed on the refrigerated juice shelf between Minute
Maid and Tropicana products
NuVim(R) dietary supplement beverages are the only beverages containing
NutraFlora(R) sold in the United States marketed specifically for the dual
benefits of "Enhanced Immunity and Joint Health". Other companies sell milk and
whey protein concentrate or products containing milk or whey protein
concentrate, but they do not support the growth of beneficial (probiotic)
bacteria which in turn provide health NuVim(R)'s health benefits. Studies also
show that NutraFlora(R) helps improve digestive functions and bone health an in
the NuVim(R) products. Therefore, we believe our products provide health
benefits to consumers that are not available in other products that contain
milk-derived antibodies. We believe that NuVim(R) is the only beverage product
on the market using NutraFlora(R) to support the growth of beneficial
(probiotic) bacteria.
Although we have an exclusive licensing agreement with GTC Nutrition
for 2007 for ready to drink beverages and powder products for reconstitution
into beverages when marketed specifically for the dual benefits of "Enhanced
Immunity and Joint Health", and are aware of no other beverage brands that are
positioned as dietary supplements with claims promoting healthy joints and
immune enhancement, it is possible that another larger, established company
might enter the dietary supplement market and offer a product similar to ours
with comparable benefits. Such a potential competitor may have a longer
operating history and substantially greater financial, technical support and
other assets and resources and may be able to respond more quickly to new or
changing business situations. If such a company were to enter the segment of the
beverage market we currently occupy, this could have a material adverse effect
on our business and prospects.
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GOVERNMENT REGULATION
The FDA has primary regulatory authority over dietary supplements. In
1976, the FDA's ability to regulate the composition of dietary supplements was
restricted in several material respects by the Proxmire Amendment to the Federal
Food, Drug and Cosmetic Act. Under this Amendment, the FDA is precluded from
establishing maximum limits on the potency of vitamins, minerals and other
dietary supplements, from limiting the combination or number of any vitamins,
minerals or other food ingredients in dietary supplements and from classifying a
vitamin, mineral or combination of vitamins and minerals, or dietary supplements
as drugs solely because of their potency. However, the Proxmire Amendment did
not affect the FDA's authority to determine that a vitamin, mineral or other
dietary supplement is a new drug on the basis of disease claims made in the
product's labeling. This determination would require deletion of the disease
claims or submission and FDA approval of a new drug application, which entails
costly and time-consuming clinical studies over successive phases.
In October 1994, the Dietary Supplement Health and Education Act
("DSHEA") was enacted, which introduced a new statutory framework governing the
composition and labeling of dietary supplements. Under this law, dietary
supplements are permitted to make "statements of nutritional support" without
FDA pre-approval. These statements may describe how particular dietary
ingredients affect the structure, function or general well-being of the body, or
the mechanism of action by which a dietary ingredient may affect body structure,
function or well-being, but may not state that a dietary supplement will
diagnose, mitigate, treat, cure, or prevent a disease. Nor can a claim be made
that would be interpreted as a health claim. A company making a statement of
nutritional support must possess adequate substantiating scientific evidence for
the statement, disclose on the label that the FDA has not reviewed the statement
and that the product is not intended to mitigate, treat, cure, or prevent
disease, and notify the FDA of the statement within 30 days after its initial
use. Although the FDA has been notified of the statements of nutritional support
made for our products, there can be no assurance that, at some time in the
future, the FDA will not determine that a given statement of nutritional support
which we make is a disease claim rather than an acceptable nutritional support
statement relating to body function or structure. This determination would
require deletion of the disease claim or, if it is to be used at all, our
submission and the approval by the FDA of a new drug application (which would
entail costly and time-consuming clinical studies) or revision to a health
claim, which would, as noted above, require demonstration of significant
scientific agreement and prior FDA approval. An expert panel determined that the
Stolle milk whey concentrate and NutraFlora(R) are considered Generally
Recognized As Safe and therefore the whey received a Certificate of Generally
Recognized As Safe Approval.
We believe that we currently meet the requirements of DSHEA. Our
structure/function claims are that the product helps build a strong total immune
system, supports muscle flexibility, and promotes sturdy joints. We believe that
we are currently compliant with all material laws and that we maintain all
material permits and licenses relating to our operation based on the current
food labeling requirements under DSHEA.
EMPLOYEES
As of March 17, 2007, we had five employees: our Chief Executive and
Chief Financial Officer, credit manager, consumer affairs manager, accounts
payable manager, and operations
11
manager. We out source auditing, accounting, investor relations, and public
relations. Our sales organization consists of all commission sales brokers. Our
corporate secretary and general counsel is a part-time consultant. We also use
part time consultants to assist in operations, legal negotiations, Federal Trade
Commission advice, all of whom are members of our advisory committee.
RISK FACTORS RELATED TO OUR BUSINESS
An investment in our securities involves a high degree of risk. You
should carefully consider the following risks, as well as the other information
in this report, before purchasing our securities. If any of the possibilities
described as risks below actually occur, our business, operating results,
financial condition, and liquidity would likely suffer. In that event, the
trading price of our securities could fall, causing you to lose some or all of
your investment in our company. The following is a description of what we
consider our key challenges and material risks.
We Will Need to Raise Additional Capital.
We are currently operating at a loss and expect our expenses to
continue to increase as we expand our product line as well as our geographic
presence throughout the United States. To date, we have relied primarily on
financing transactions to fund operations. We could face unforeseen costs such
as an increase in transportation costs resulting from the recent significant
increases in the cost of fuel; or our revenues could fall short of our
projections because retail outlets discontinue ordering our products or for
reasons unrelated to our products, such as a revenue decline due to changes in
consumer habits and preferences or we may achieve lower margins than planned on
our products due to cost increases or competitive pricing pressure. We will need
another infusion of capital to continue to fund our operations in 2007. During
2006 Paulsen Investment Company, Inc. privately placed 2,970,000 restricted
shares of our common stock at a price of twenty cents per share. A total of
$594,000 was received less offering costs paid of 60,125 for a net amount of
$533,875.
In addition, during 2006 several creditors agreed to accept 331,453
shares of common stock at a price of $0.35 per share to settle an aggregate of
approximately $110,534 of current or past due trade debt and seven people and
organizations have agreed to accept approximately 695,412 shares of common stock
for services valued at approximately $216,065. Four officers agreed to accept
661,500 shares of common stock in lieu of their 2005 executive cash bonuses.
In April 2006 our former CFO and a former officer agreed to accept a
total of 192,955 shares of common stock for a portion of their 2006 salary and
accepted bonus due them.
During the second quarter of 2006 the holders of $67,600 of secured
debentures agreed to accept 335,000 shares of common stock in exchange for their
notes and warrants.
During the third quarter on August 23, 2006, the holders of all
$500,000 of NuVim(R)'s Senior Secured Notes, Richard Clark, the entertainer, and
Stanly Moger, one of NuVim(R)'s directors, agreed to extend their maturity from
November 2006 to January 2009. Interest will accrue at an annual rate of eight
(8%) percent. Neither principal nor interest will be due until that date. As
compensation, each received a warrant to purchase 100,000 shares of NuVim's
common stock for $0.35 per share. The warrant may be exercised from February
2007 through August 15, 2015. As a result of this extension, the maturity of an
additional $150,000 of debt which is subordinated to the Senior Secured Notes is
automatically extended to January 2009. The loan agreement with Clark and Moger
provides that, if NuVim raises additional capital, they have the
12
right to demand prepayment of their Notes.
On August 25, 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the
holder of an $120,000 unsecured note agreed to extend its maturity from November
2006 to January 2009. Interest will accrue at an annual rate of eight (8%)
percent. Neither principal nor interest will be due until that date. In
connection with this transaction, NuVim issued warrants entitling the holder to
purchase up to 50,000 shares of common stock at a price of $0.35 per share until
August of 2015.
In June and November 2006, the holders of a $75,000 subordinated notes
agreed to accept approximately 290,614 shares of common stock in settlement of
their note and all remaining accrued interest.
At the end of 2006, Mr. Kundrat, NuVim's CEO, agreed to accept 392,188
shares of common stock in lieu of cash payment of part of his executive bonus
for 2006 of $125,500 and 218,750 shares of common stock in lieu of cash payment
of his $43,750 of unpaid 2005 salary. Also, at that time, Mr. Siegel, NuVim's
corporate Secretary, agreed to accept 50,000 shares of common stock in lieu of
any cash fee in connection with a registration statement.
We will still continue to need additional funds to continue our
operations. New sources of capital may not be available to us when we need it or
may be available only on terms we would find unacceptable. If such capital is
not available on satisfactory terms, or is not available at all, we will be
unable to continue to fully develop our business and our operations and our
financial condition will be materially and adversely affected. Such a lack of
additional funding could force us to cease operations altogether. Debt
financing, if obtained, could increase our expenses and would be required to be
repaid regardless of operating results. In addition, if we raise additional
funds through the issuance of equity, equity-related or convertible debt
securities, these securities may have rights, preferences or privileges senior
to those of the rights of our ordinary shares and our shareholders may
experience additional dilution. Any such developments can adversely affect your
investment in our company, harm our financial and operating results, and cause
our share price to decline.
Our Auditors Have Substantial Doubt About Our Ability To Continue As A Going
Concern.
In their report in connection with our 2006 and 2005 financial
statements, our auditors included an explanatory paragraph stating that, because
we have incurred net losses and have a net capital deficiency for the years
ended December 31, 2005 and 2006, there is substantial doubt about our ability
to continue as a going concern. The extension of all debt to a payable date of
January 15, 2009 does alleviate the immediate debt concerns. Our continued
existence will depend in large part upon our ability to successfully secure
additional financing to fund future operations. Our initial public offering was
not sufficient to completely alleviate these concerns; recent stock sales have
brought us closer to that goal, but it has not been reached. The proceeds have
been adequate to fund operations to date, but we will need to raise additional
funding to continue operations. If we are not able to achieve positive cash flow
from operations or to secure additional financing as needed, we will continue to
experience the risk that we will not be able to continue as a going concern.
13
Our Limited Operating History Makes Evaluation Of Our Business Difficult.
We have a limited operating history and have encountered, and expect to
continue to encounter, many of the difficulties and uncertainties often faced by
early stage companies. We commenced our business operations in 1999 and began
marketing our initial products in 2000 on a limited basis. Accordingly, we have
only a limited operating history with which you can evaluate our business and
prospects. An investor in our units must consider our business and prospects in
light of the risks, uncertainties and difficulties frequently encountered by
early stage companies, including limited capital, delays in product development,
possible marketing and sales obstacles and delays, inability to gain customer
acceptance or to achieve significant distribution of our products to customers
and significant competition. We cannot be certain that we will successfully
address these risks. If we are unable to address these risks, our business may
not grow, our stock price may suffer and/or we may be unable to stay in
business.
We Have A History Of Losses And We Expect To Continue To Operate At A Loss For
The Foreseeable Future.
Since our inception in 1999, we have incurred net losses in every year,
including net losses of $2,396,902 for the year ended December 31, 2005 and
$1,778,959 for the year ended December 31, 2006. We had a working capital
deficit of $506,292 at December 31, 2006 and have negative cash flows from
operations. As a result of ongoing operating losses, we also had an accumulated
deficit of $22,024,020 and a stockholders' deficit of $1,534,232 at the same
date. We expect to incur losses until at least through 2007 and may never become
profitable. We also expect that our expenses will increase substantially for the
foreseeable future as we seek to expand our product line and sales and
distribution network, implement internal systems and infrastructure and comply
with the legal, accounting and corporate governance requirements imposed upon
public companies.
Our Continued Progress Depends Of Consumer Acceptance Of The Reformulated
Beverage
In the first quarter of 2007, NuVim introduced a reformulated beverage
and began producing it at a new plant. Although the new formulation maintains
the same taste, reduces calories per serving from 70 to 45, eliminates High
Fructose Corn Syrup, as an ingredient, and introduces NutraFlora(R) an active
ingredient with more, and more recent, clinical support for its improvement of
mineral absorption, particularly the calcium and magnesium necessary for bone
strength, reinforcing the immune system, our consumers may not all continue to
enjoy the NuVim(R) beverages and new customers attracted by the reduced sugar
and calories and the improved health benefits may not replace all the old
customers lost because of the changes.
Our Business Depends On The Acceptance Of Our Products In Both Existing And New
Marketing Areas.
We intend to expand into new geographic areas and broaden our product
offerings to generate additional sales. Our refrigerated beverage products are
currently available from southern Connecticut to Miami and as far West as
Pittsburgh including such supermarket chains as ShopRite, Pathmark, A&P,
Gristedes, Food Emporium, Walbaums, Acme, Giant,
14
Giant Eagle, Publix and Wal-Mart. Although marketing funds have been limited,
but we have been able to maintain distribution due to our loyal consumer base
who have felt the NuVim difference and continue to buy NuVim on a regular basis.
The supermarket chain accounts see NuVim as a one of a kind product that offers
the consumer a healthily choice to high sugar and high caffeine carbonated and
non- carbonated beverages. We do not know whether the level of market acceptance
we have received in our current markets for our products will be matched or
exceeded in the geographic locations we are newly serving or in other areas of
the country as we expand our distribution in the future. We also will need to
raise additional financing to support this expansion.
We can give no assurance that we will expand into new geographic areas.
It is unlikely that we will achieve profitability in 2007, but possibly could
achieve profitability on a monthly basis toward the end of next year.
Consumers Who Try Our Products May Not Experience The Health Benefits We Claim,
Which May Cause Them To Discontinue Using Our Products.
Although there is substantial clinical evidence showing that NuVim(R)`s
ingredients produce the desired results, there have been no studies of our
specific formulation. Therefore, we currently cannot confirm that the health
benefits of our products will be evident to casual consumers of our products.
Consumers may determine that drinking 12 ounces of NuVim per day for a minimum
of 30 days requires more discipline and expense than they are willing to devote.
If consumers do not use our product in the quantity or for the duration we
recommend, they may not achieve the health benefits we claim, which may cause
them to make alternative nutritional beverage and/or dietary supplement
purchasing decisions.
Our Business May Suffer From Lack Of Diversification.
Our business is centered on nutritional beverages. The risks associated
with focusing on a limited product line are substantial. If consumers do not
accept our products or if there is a general decline in market demand for, or
any significant decrease in, the consumption of nutritional beverages, we are
not financially or operationally capable of introducing alternative products
within a short time frame. As a result, such lack of acceptance or market demand
decline could cause us to cease operations.
Expansion Of Our Business Is Dependent On Our Ability To Expand Production.
We currently manufacture our refrigerated product line at Mountainside
Farms in Roxbury, New York. Our ability to expand beyond our current marketing
areas depends on, among other things, the ability to produce our product in
commercial quantities sufficient to satisfy the increased demand. Although our
present production capacity is sufficient to meet our current and short-term
future production needs, production capacity may not be adequate to supply
future needs. If additional production capacity becomes needed, it will be
necessary to engage additional co-packers or to expand production capacity at
our present co-packer facility. If we expand production at Mountainside Farms
Dairy, we risk having to pay significantly greater transportation costs to
transport our products to warehouses in other regions of the United States. Any
new co-packing arrangement raises the additional risk of higher marginal costs
than we currently enjoy since we would be required to negotiate new terms with
any new co-packer. We
15
may not be able to pass along these higher costs to our customers. If we are
unable to pass along the higher production costs imposed by new co-packers to
our customers, we either will suffer lower gross margins and lower
profitability, once achieved, or we may be unable to expand our business as we
have planned, which could disappoint our stockholders.
Our Business Contains Risks Due To The Perishable Nature Of Our Product.
Our current refrigerated product is a perishable beverage that has a
limited shelf-life of approximately 83 days. This restricted shelf life means
that we do not have any significant finished goods inventory and our operating
results are highly dependent on our ability to accurately forecast near term
sales in order to adjust our raw materials sourcing and production needs. When
we do not accurately forecast product demand, we are either unable to meet
higher than anticipated demand or we produce excess inventory that cannot be
profitably sold. Additionally, our customers have the right to return products
that are not sold by their expiration date. Therefore, inaccurate forecasts that
either mean that we are unable meet higher than anticipated demand or that
result in excess production, or significant amounts of product returns on any of
our products that are not sold by the expiration date could cause customer
dissatisfaction, unnecessary expense and a possible decline in profitability.
Government Regulation May Adversely Affect Our Business.
Our business is subject to government regulation, principally the
United States Food and Drug Administration (the "FDA"), which regulates the
processing, formulation, packaging, labeling and advertising of dietary
products, and to a lesser extent, state governments, where state attorneys
general have authority to enforce their state consumer protection acts.
Specifically, we are subject to the Dietary Supplement and Health Education Act
("DSHEA"). Under DSHEA, dietary supplements are permitted to make "statements of
nutritional support" with notice to the FDA, but without FDA pre-approval. The
FDA does not allow claims that a dietary product may mitigate, treat, cure or
prevent disease. There can be no assurance that at some future time the FDA will
not determine that the statement of nutritional support we make on our packaging
is a prohibited claim rather than an acceptable nutritional support statement.
Such a determination by the FDA would require deletion of the treatment, cure or
prevention of disease claim, or, if it is to be used at all, submission by our
company and the approval by the FDA of a new drug application, which would
entail costly and time-consuming clinical studies, or revision to a health
claim, which would require demonstration of substantiated scientific evidence to
support such claim and would also consume considerable management time and
financial resources.
Our advertising of dietary supplement products is also subject to
regulation by the Federal Trade Commission (the "FTC") under the Federal Trade
Commission Act, which prohibits unfair or deceptive trade practices, including
false or misleading advertising. The FTC in recent years has brought a number of
actions challenging claims made by companies that suggest that their products
are dietary supplements. No assurance can be given that actions will not be
brought against us by the FTC or any other party challenging the validity of our
product advertising claims.
Our Business May Be Subject To Product Liability Claims Relating To Consumer Use
Of Our Products.
16
As a marketer of beverages that are ingested by consumers, we face an
inherent risk of exposure to product liability claims if the use of our products
results in injury or our labeling contains inadequate warnings concerning
potential side effects. With respect to product liability claims, we have
obtained a $2.0 million liability insurance policy ($2.0 million per
occurrence), which we believe is adequate for our kind of business activity. The
policy contains certain exclusions that would pertain to food products such as
the additional products exclusion for bodily injury or property damage arising
out of the manufacture, handling, distribution, sale, application or use of
certain specified products (e.g., silicone, latex, and dexfenfluramine, among
others), the intended injury and the willful and intentional acts exclusions.
There can be no assurance that such insurance will continue to be available at a
reasonable cost, or, if available, that it will be adequate to cover potential
liabilities. If we are found liable for product liability claims that exceed our
coverage or are subject to a policy exclusion, such liability could require us
to pay financial losses for which we have not budgeted and may not have adequate
resources to cover. If the uninsured losses were significantly large enough to
impact our ability to continue our then-existing level of operations, we might
experience a decline in net income and earnings per share, and our stock price
might suffer. In an effort to limit any liability, we generally obtain
contractual indemnification from parties supplying raw materials or marketing
our products. Such indemnification is limited, however, by the terms of each
related contract and, as a practical matter, by the creditworthiness of the
indemnifying party.
Despite the insurance coverage that we plan on maintaining, it is
possible that we may be sued if one or more consumers believe our products have
caused them harm. While no such claims have been made to date, the results of
any such suit could result in significant financial damages to us, as well as
serious damage to the reputation and public perception of our company, even if
we are ultimately found not to be at fault.
ITEM 2 - DESCRIPTION OF PROPERTY
We currently lease approximately 2,200 square feet of office space in
Paramus, New Jersey under a two-year lease that expired on December 31, 2006. As
of December 31, 2006, the company does not have a lease agreement with the
landlord and is operating on a month to month basis. The lease space is used as
our executive offices, which we use for marketing and administrative needs.
Since we use off-site co-packing and warehousing arrangements for the
manufacture and distribution of our products, we do not require extensive
facilities. We believe that our current leased property is more space then we
currently need and will be negotiating a smaller space for the future. We expect
that we will be able to stay in the same building at 12 route 17 north in
Paramus, NJ.
ITEM 3. - LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
ITEM 4. - SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None in the fourth quarter 2006
17
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Common stock market price
Of the 11,622,867 shares of common stock outstanding as of December 31, 2006,
all but approximately 8,500,000 shares can be traded on the over- the-counter
trading on the OTC Electronic Bulletin Board, which trading commenced July 24,
2005. Of this amount, 2,631,595 shares are held by affiliates. The following
quarterly quotations for common stock transactions on the OTC Bulletin Board
reflect inter-dealer prices, without retail mark-up, markdown or commissions and
may not represent actual transactions. The company completed an initial public
offering of its common stock on June 24, 2005. The shares initially traded only
as part of a unit, under the symbol NUVMU, with each unit consisting of one
share of common stock, one "Class A" warrant to purchase common stock, and one
"Class B" warrant to purchase common stock. Each unit was sold by the Company at
a price of $1.00 per share as described in a prospectus dated June 21, 2005. The
shares of common stock, Class A warrants, and Class B Warrants began trading
separately as NUVM, NUVMW, and NUVMZ, respectively, on July 24, 2006.
High Bid Low Bid
--------- ---------
2007
First Quarter
(Through March 30, 2007) $ 0.55 $ 0.13
2006
First Quarter $ 0.73 $ 0.50
Second Quarter $ 0.53 $ 0.27
Third Quarter $ 0.40 $ 0.16
Fourth Quarter $ 0.32 $ 0.16
2005
First Quarter N/A N/A
Second Quarter N/A N/A
Third Quarter $ 1.00 $ 0.49
Fourth Quarter $ 0.70 $ 0.33
The last sale price of the Company's Common Stock on March 29, 2007,
was $ 0.45 as reported on the over-the-counter Electronic Bulletin Board. As of
March 30, 2007, there were 188 shareholders of record of the Company's Common
Stock. The Company has been informed that approximately 200 shareholders hold
their Common Stock in nominee name.
Dividends
The Company has never paid cash dividends on its Common Stock. The
Company
18
presently intends to retain future earnings to finance the expansion of its
business and does not anticipate that any cash dividends will be paid in the
foreseeable future. The future dividend policy will depend on the Company's
earnings, capital requirements, expansion plans, financial condition and other
relevant factors.
RECENT SALES OF UNREGISTERED SECURITIES
Stock Sales in the Fourth Quarter 2006 and in 2007 to date
Sales for Cash
On March 1 and 8, 2007, NuVim sold a total of 433,333 shares to an
unrelated accredited investor for $130,000 or $.30 per share. No commissions or
fees were paid in connection with this sale. He agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
At the same time as the second purchase, three of NuVim's outside
directors, Doug Scott, Peter DeCrescenzo, and Cal Hodock purchased 50,000,
33,333, and 16,667 shares respectively at the same price totaling $$30,000 or
$0.30 per share. Each director agreed in writing to restrictions on resale
placed with the NuVim's transfer agent and the printing of a legend on its
certificate. Because of these factors, this sale was exempt from registration
under the Securities Act as not involving a public distribution under section
4(2) and 4(6).
At the end of the first quarter, NuVim received $300,000 to purchase
1,000,000 shares of common stock from Julius Baer Multistock SICAV US Stock
Fund, a European Institutional Investor, at a price of $.30 per share. NuVim
paid a commission of $30,000 to Continental Advisors SA in connection with this
sale. In addition, Continental Advisors SA received $9,000 for its expenses
without accounting for it. The purchaser represented in writing that it was an
accredited investor and it agreed in writing to restrictions on resale placed
with the NuVim's transfer agent and the printing of a legend on its certificate.
Because of these factors, this sale was exempt from registration under the
Securities Act as not involving a public distribution under section 4(2) and
4(6).
In April five investors represented by Paulsen Investment Company, Inc.
and an additional private investor purchased a total of 872,667 shares of common
stock for $261,800 or $0.30 per share. Paulson will receive a commission of
$22,680 on the 772,667 shares sold to its clients. Each purchaser represented in
writing that it was an accredited investor and it agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
All cash raised in these sales has been applied to working capital.
Debt and Unpaid Compensation Conversions
On December 1, 2006, NuVim issued a total of 182,983 shares of common
stock to the holder of a $50,000 note in complete settlement of his note and all
interest accrued since June 1, 2005. The shares have a value of approximately
$59,000. He agreed in writing to restrictions on resale placed with the NuVim's
transfer agent and the printing of a legend on its certificate. Because of these
factors, this sale was exempt from registration under the Securities Act as not
involving a public distribution under section 4(2) and 4(6).
On December 29, 2006, Richard Kundrat, NuVim's CEO, agreed to accept
218,750 and 392,188 shares of common stock in lieu of cash for his unpaid 2005
salary of approximately $43,750 and part of his 2006 bonus of approximately
$125,750, respectively. In March 2007, an additional 100,000 shares were issued
to settle the remaining $32,000 of his 2006 bonus. He agreed in writing to hold
all the shares for at least one year and to the additional restrictions on
resale placed with the NuVim's transfer agent and the printing of a legend on
its certificate. Because of these factors, this sale was exempt from
registration under the Securities Act as not involving a public distribution
under section 4(2) and 4(6).
On January 30, 2007, NuVim issued 72,915 shares of common stock in lieu
of cash for unpaid 2006 salary of approximately $14,600 due to Michael Vesey,
NuVim's former CFO. He agreed in writing to restrictions on resale placed with
the NuVim's transfer agent and the printing
19
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Common Stock Issued for Services
On December 1, 2006, NuVim agreed with a production and operations
expert to provide various services for a total of 100,000 shares of common
stock. The services have a value of approximately $32,000. He agreed in writing
to restrictions on resale placed with the NuVim's transfer agent and the
printing of a legend on its certificate. Because of these factors, this sale was
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
On the same date, NuVim agreed to issue a total of 79,000 shares to two
individuals for their services in seeking strategic partners and merger
candidates. The services have a value of approximately $25,280. They agreed in
writing to restrictions on resale placed with the NuVim's transfer agent and the
printing of a legend on its certificate. Because of these factors, this sale was
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Also on that date, NuVim issued 15,000 shares to its new spokesperson
for services valued at $4,800. She agreed in writing to restrictions on resale
placed with the NuVim's transfer agent and the printing of a legend on its
certificate. Because of these factors, this sale was exempt from registration
under the Securities Act as not involving a public distribution under section
4(2) and 4(6).
On December 29, 2006, NuVim agreed with its Secretary and General
Counsel to issue 50,000 shares of common stock in exchange for his services in
connection with the filing of the Company's SB-2 Registration Statement. The
services have a value of approximately $8,000. He agreed in writing to hold the
shares for at least one year and to the additional restrictions on resale placed
with the NuVim's transfer agent and the printing of a legend on its certificate.
Because of these factors, this sale was exempt from registration under the
Securities Act as not involving a public distribution under section 4(2) and
4(6).
On January 29, 2007, NuVim agreed with its Secretary and General
Counsel to issue 100,000 shares of common stock as additional compensation for
his services during 2007. The services have a value of approximately $16,000. He
agreed in writing to hold the shares for at least one year and to the additional
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6).
Also on that date, NuVim agreed with its operations director to issue a
total of 50,000 shares of common stock as additional compensation for his
services. The shares have a value of approximately $8,000. He agreed in writing
to restrictions on resale placed with the NuVim's transfer agent and the
printing of a legend on its certificate. Because of these factors, this sale was
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6)
20
January 30, 2007 NuVim agreed with a communications expert to provide
various services for a total of 40,000 shares of common stock. The services have
a value of approximately $6,400. He agreed to restrictions on resale placed with
the NuVim's transfer agent and the printing of a legend on its certificate.
Because of these factors, this sale was exempt from registration under the
Securities Act as not involving a public distribution under section 4(2) and
4(6).
March 14, 2007 NuVim issued 15,000 shares of common stock for services
relating to its corporate presentation materials. The services have a value of
approximately $5,700. He agreed to restrictions on resale placed with the
NuVim's transfer agent and the printing of a legend on its certificate. Because
of these factors, this sale was exempt from registration under the Securities
Act as not involving a public distribution under section 4(2) and 4(6).
Warrants
In connection with its debt extensions, NuVim issued warrants entitling
the holder to purchase up to 250,000 shares of common stock at a price of $0.35
per share until August of 2015. The Warrant evidencing this right bears a
restrictive Securities Act legend and provides that any shares issued upon
exercise shall be restricted, be subject to stop orders with NuVim's transfer
agent, and bear a legend to that effect. Because of these factors, this sale was
exempt from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6)
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We produce, market, and distribute NuVim(R) beverage dietary
supplements in Ready-to-drink and powder mix forms NuVim utilizes the
micronutrient NutraFlora(R) and whey protein to provide important health
benefits to its consumers. Whey protein, NuVim(R)'s largest ingredient, other
than water, enhances physical performance, enhances cardiovascular health, and
promotes well being. NutraFlora(R) is uniquely capable of promoting health by
supporting the growth of beneficial (probiotic) bacteria which in turn provide
health benefits such as improved calcium and mineral absorption for better bone
health and a strong immune system. Studies also show that NutrFlora(R) helps
improves digestive functions, contributes to a healthy cholesterol, and
metabolism.
We focus on developing the NuVim(R) brand through a mix of advertising
and promotional programs that build consumer awareness, trial and repeat
purchases. The marketing consists of television advertising newspaper
advertising/advertorials, product sampling, coupon distribution, and promotional
price discounts. These marketing expenditures are essential to build the
NuVim(R) brand. We continue to test various ways to find the most cost efficient
means to use these marketing funds to increase consumer awareness, trial and
repeat purchases. We believe that these advertising and promotional activities
are critical to the growth of our business and expect to continue these programs
in the future.
We have distributed our refrigerated beverages since the year 2000 and
are in approximately 2,100 Supermarkets in the Eastern United States. In 2002
company revenues were
21
$3.5 million. However, we eliminated most advertising and marketing support for
our product in the second half of 2002 due to a lack of funding. We
recapitalized our company in June 2005 through the conversion of approximately
$7.7 million of debt into common stock and an initial public offering of our
common stock. Since that time we have concentrated our limited financial
resources on developing and supporting distribution opportunities that we
believe will provide the greatest profitable sales expansion potential. We also
developed a powder version of our product to be sold through direct distribution
such as the internet as well as retail outlets. Sales of the product to date
have not been material. We have begun to sell the powder mixes in retail stores
in 2007.
We have launched an equity funded print news media campaign to educate
consumers about the benefits of NuVim(R) and create market awareness for our
product. The media program which began in January 2006 and will continue for
approximately eighteen months or until the contracted amount of the newspaper
features has been completed.
We have produced a 30 second television commercial for the refrigerated
products, a 60 second television commercial for the powder product and a 5
minute educational video for the product and will air these commercials
throughout 2007 through Platinum Television Group headquartered in Deerfield
Beach Florida.
During 2006 we continued to have had limited funding to support product
sampling and advertising programs, which we believe are critical to maintain and
increase sales of our products. Therefore, we have focused our spending on
promotions in accounts that we believe will offer the greatest potential for
sales growth and expansion opportunities until we are able to raise funding for
additional marketing programs.
In late 2003 we began a test program with a single Wal-Mart
supercenter. In late 2004 the test was expanded to 43 supercenters (one Wal-Mart
distribution center) and then further expansion to 120 supercenters (two
additional distribution centers) in late 2005 that covered most of the Wal-Mart
supercenters in the State of Florida. During the 2005 expansion the number of
NuVim(R) varieties carried by the supercenters was increased from two to three.
First quarter 2005 Wal-Mart sales were 8% of the total 2005 first quarter sales.
In April 2006, we increased our distribution to the entire southeast region,
encompassing approximately 300 supercenters (seven total distribution centers)
servicing all or part of 7 states. Same store sales for Wal-Mart in 2006 were up
161% compared with 2005.
UNIT CASE VOLUME/CASE SALES
The table set forth below discloses selected data regarding sales for
the years ended December 31, 2006 and 2005. The data is not necessarily
indicative of continuing trends.
Sales of beverages are expressed in unit case volume. A "unit case"
means a unit of measurement equal to 512 U.S. fluid ounces of finished beverage
(eight 64-ounce containers). Unit case volume means the number of unit cases (or
unit case equivalents) of beverages directly or indirectly sold by us. Gross
cases sold to the customer represent the number of cases shipped to the customer
prior to any returned cases containing product that has not been sold by its
expiration date.
22
Twelve Months Ended December 31
-------------------------------
2006 2005
------------- -------------
Gross Cases Sold 70,542 65,982
Gross Sales $ 1,292,155 $ 1,208,279
Net Sales $ 943,978 $ 721,381
Gross sales are the amount invoiced to customers, while net sales
deduct from gross sales any payment or discount terms, promotional allowances,
slotting fees, warehouse damage and returned goods in accordance with the
Financial Accounting Standards Board Emerging Issues Task Force Issue No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. In some accounts
we pay slotting fees when our products are initially introduced to a new account
and run price feature promotions to encourage trials of our product. As brand
loyalty grows in a market, we anticipate that we will be able to run fewer price
promotions and will not incur the one time additional slotting fees to gain new
distribution. 70,542 cases sold represents an increase of 4,560, or almost 7%,
for the twelve months ended December 31, 2006. This increase for the year
represents a strong last nine months. In the first quarter of 2006 sales were
29% or 6,032 cases behind the first quarter of 2005. Sales for the last three
quarters of 2006 exceeded the last three quarters of 2005 by 10,592 cases or
nearly 23%. We believe that the strong performance in the last 9 months is due
to the increase in the number of Wal-Mart supercenters carrying the product
because of the expansion to seven distribution centers during 2006 from three
serviced in mid-May of 2005.
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2005
Gross Sales For the year ended December 31, 2006, gross sales were
$1,292,155 an increase of $83,876, or 7% above gross sales of $1,208,279 for the
twelve months ended December 31, 2005. The increase in gross sales for the year
represents a rebound in the last nine months of the year from the first quarter
2006 gross sales decrease of 29% below 2005. The overall increase occurred
because sales during the last three quarters exceeded sales during the same
period last year by 23%.
Discounts, Allowances and Promotional Payments Even though sales rose
7% for the twelve months ended December 31, 2006, promotional allowances,
returns and discounts were $348.177, a decrease of $104,393 or 21%, from the
promotional allowances and discounts of $486,898 for the year ended December 31,
2005. This decrease is primarily attributable to not couponing, discounting the
price as heavily as 2005 and better sales at regular price. We record the price
reductions, which are reimbursed by us to the retailers, in accordance with
Financial Accounting Standards Board Emerging Issues Task Force, No. 01-09,
Accounting for Consideration Given by a Vendor to a Customer. We expect to
continue to use price promotions and coupon distribution selectively as a means
to promote consumer sampling and trial of our product into the foreseeable
future. As the product matures and a higher percentage of users of our product
are repeat purchasers, we expect coupon expense, relative to gross sales, to
decline.
23
Year Ended December 31
---------------------------------------------------------
Increase
2006 2005 (Decrease) Percentage
------------ ------------ ------------ ------------
Discounts for timely payment $ 16,930 $ 15,908 $ 1,022 6%
Product returned after its expiration date 139,927 142,852 (2,925) (2)%
Promotional price allowances, coupons and other
incentives 190,468 295,665 (105,197) (36)%
Slotting fees 852 32,473 (31,621) (100)%
------------ ------------ ------------ ------------
Total Discounts, Allowances and Promotional Payments $ 348,177 $ 486,898 $ (138,721) (28)%
============ ============ ============ ============
Net Sales Net sales for the year ended December 31, 2006 were $943,978
an increase of $222,597, or 31% higher than net sales of $721,381 for the twelve
months ended December 31, 2005, despite a decline of 16% during the first
quarter. The increase in net sales is primarily attributable to the increase in
case sales and lower consumer price discount promotion spending as discussed
above. This also means that there were higher sales at regular price, an
indication that consumer loyalty to the brand increased.
Cost of Sales For the twelve months ended December 31, 2006, cost of
sales was $702,492, an increase of $15,325, or 2.2% higher on a case sales
increase for the year of 7%. Cost of sales as a percentage of gross sales
decreased to 54% for the year ended December 31, 2006, compared to 57% for the
twelve month ended December 31, 2005. The decrease in cost of sales as a
percentage of gross sales was primarily the result of slightly lower cost of
materials.
Gross Profit Gross profit was $241,486 for the year ended December 31,
2006, an increase of $207,272 from $34,214 for the year ended December 31, 2005.
Gross profit as a percentage of gross sales was 18.7% for the year ended
December 31, 2006 compared to 2.8% for the twelve months ended December 31,
2005. The increase in gross profit as a percentage of gross sales was primarily
due to the lower price discounts and the lower cost of goods.
Selling, General and Administrative Expenses Selling, general and
administrative expenses were $2,407,253 for the year ended December 31, 2006,
including $546,881 of non-cash expense recorded under FAS 123R because of the
grant of options under the Company's employee stock option plans. Selling,
general, and administrative expenses during the twelve months ended December 31,
2005 were $2,392,996. The option expense in 2006 is included because of FAS 123R
governing valuation of option grants and the timing of their application. If the
option expense is excluded, other selling, general, and administration expense
decreased $546,881 or 22% from selling, general and administrative expenses for
the twelve months ended December 31, 2005. The last year includes five months
without a full time CFO, four months without a full time Vice President for
operations and 2 months without a full time Vice President of Sales. Out
sourcing the financial and operations management functions have decreased cost
without decreasing effectiveness. Changing the sales organization to 100%
commission based also helped decrease the total administrative costs. The
decrease in selling, general and administrative expenses also reflects decreases
in product sampling expenses. These improvements were entirely offset by the
increased option expense.
24
Loss from Operations Loss from operations was $2,165,767 for the year
ended December 31, 2006 compared to $2,358,782 for the year ended December 31,
2005. The decrease of the loss by $193,015 in 2006 versus 2005 is due to the
improvements in the gross profit and decreased operating expenses described
above. The $546,881 of the option expense calculated as required under FAS 123R,
mostly occurring in the third and fourth quarters is included in the $2,165,767
loss. Excluding this non-cash items the loss would be $1,618,886.
Interest Expense Interest expense was $115,823 for the year ended
December 31, 2006; a decrease of $314,393 or 73%, from interest expense of
$430,216 for the year ended December 31, 2005. The decrease in interest expense
is primarily attributable to the retirement of indebtedness. On June 24, 2005,
in connection with the closing of our initial public offering, we extinguished
approximately $7.7 million of indebtedness through the issuance of common stock.
Net Loss Net loss was $1,778,959 for the year ended December 31, 2006
compared to $2,396,902 for the year ended December 31, 2005. The $617,943
decrease in net loss was primarily attributable to the improved operating
results and the lower interest expense discussed above offset by the option
expense.
LIQUIDITY AND CAPITAL RESOURCES
Our operations to date have generated significant operating losses that
have been funded through the issuance of common stock and external borrowings.
We will require additional sources of outside capital to continue our
operations. During 2006, all of NuVim(R)'s short term debt, other than accounts
payable, were either converted into stock or extended by their holders so that
they do not mature until 2009.
Debt Extensions and Conversions
We began the year with secured convertible promissory notes with a face
amount of $67,600 due on June 23, 2006 and senior secured promissory notes with
a principal amount of $500,000 due in November 2006. All the notes due June 23,
2006 (and the warrants issued with them) were converted into 335,000 shares of
common stock. In August, the holders of all $500,000 of NuVim(R)'s Senior
Secured Notes, Richard Clark, the entertainer, and Stanly Moger, one of
NuVim(R)'s directors, agreed to extend their maturity from November 2006 to
January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be due until that date. As compensation,
each received a warrant to purchase 100,000 shares of NuVim's common stock for
$0.35 per share. The warrant may be exercised from February 2007 through August
15, 2015. The loan agreement with Clark and Moger provides that, if NuVim raises
additional capital, they have the right to demand prepayment of their Notes. As
a result of the extension of the $500,000 loan, additional stockholder loan debt
in the principal amount of $150,000 which is subject to subordination agreements
with the holders of the debt, the maturity of this debt was also extended to
January 2009.
In June 2006 a note holder agreed to accept 107,631 shares of
restricted common stock for approximately $38,000 in principal and interest.
In August 2006 Kirkpatrick & Lockhart Nicholson Graham LLP, the holder
of an $120,000 unsecured note agreed to extend its maturity from November 2006
to January 2009. Interest will accrue at an annual rate of eight (8%) percent.
Neither principal nor interest will be
25
due until that date. In connection with this transaction, NuVim issued warrants
entitling the holder to purchase up to 50,000 shares of common stock at a price
of $0.35 per share until August of 2015.
In December 2006, the holder of a $50,000 subordinated stockholder note
agreed to accept approximately 183,000 shares of common stock in settlement of
his note and all remaining accrued interest.
Compensation, services and trade debt paid in shares of common stock
In March 2006 the board and compensation committee authorized a total
of 661,500 shares of common stock in lieu of the executive cash bonuses for 2005
and agreed with these executives to defer the payment of their 2005 accrued
salaries until 2007 and established the parameters for settling these accruals
in common stock. Also in March 2006, 50,000 shares of common stock were issued
to the new corporate secretary for a portion of his 2006 fees. Also, in March
2006, NuVim(R) issued 7,850 shares of common stock to SmallCapVoice.com, for
investor relations services.
In April 2006 Paulsen Investment Company, Inc. privately placed
2,970,000 restricted shares of our common stock at a price of twenty cents per
share. A total of $594,000 was received less offering costs paid of $60,125 for
a net amount of $533,875.
Also in April 2006, our former CFO and a former officer agreed to
accept a total of 192,955 shares of common stock for a portion of the salary
remaining due to them on the date of his resignation and in lieu of this 2005
bonus.
In May and June 2006, several creditors agreed to accept 331,453 shares
of restricted common stock at a price of $0.35 per share to settle an aggregate
of approximately $110,500 of current or past due accounts payable obligations
and several organizations agreed to accept 443,562 shares of common stock for
future services valued at approximately $162,000.
During the fourth quarter, four additional individuals agreed to
provide services aggregating approximately $62,000 in value for a total of
194,000 shares of common stock.
At the end of 2006, Mr. Kundrat, NuVim's CEO, agreed to accept 492,188
shares of common stock in lieu of cash payment of his executive bonus for 2006
of which 392,188 were issued in December 2006 for $125,500 of the unpaid bonus
and 218,750 shares of common stock in lieu of cash payment of his $43,750 of
unpaid 2005 salary. The remaining 100,000 shares for the remaining $32,000 of
unpaid bonus were issued in 2007. Also, at that time, Mr. Siegel, NuVim's
corporate Secretary, agreed to accept 50,000 shares of common stock in lieu of
any cash fee in connection with a registration statement.
We will still need to raise additional financing to pay our past due
obligations, fund operating losses and to support sales and marketing programs
to increase sales of our products. If we are not able to identify additional
sources of financing, we may not be able to continue operations beyond December
2007. We have participated in the New Jersey Economic
26
development Authority Tax Transfer program for the past 4 years and will again
this year. The funds from this program were received in December and amounted to
approximately $442,000.
Net cash used in operating activities for the year ended December 31,
2006 was $727,846, compared to cash used in operating activities of $1,932,719
during all of 2005. The decrease in cash used by operating activities during the
year ended December 31, 2007 of $1,204,837 was primarily attributable to lower
administrative expenses, less promotional spending, and higher contributions
from product sales.
A net amount of $470,850 was provided by financing activities during
2006, compared to $1,925,980 provided for the year 2005. The excess of
$1,455,130 in 2005 was mainly due to the impact of that year's Initial Public
Offering of NuVim Common Stock and Warrants.
APPLICATION OF RECENT AND CRITICAL ACCOUNTING POLICIES AND PRONOUNCEMENTS
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements, and ("SFAS No. 157"), which defines fair value, establishes a
framework for measuring fair value, and expands disclosures about fair value
measurements. SFAS No. 157 will be effective for the Company beginning January
1, 2008. Management is currently evaluating the effect SFAS No. 157 will have on
the Company's financial condition or results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting
for Defined Benefit Pension and Other Postretirement Plans -- an amendment of
FASB Statements No. 87, 88, 106, and 132(R) ("SFAS No. 158"). SFAS No. 158
requires companies to recognize the over-funded or under-funded status of their
defined benefit postretirement plans as an asset or liability and to recognize
changes in that funded status in the year in which the changes occur through
comprehensive income. The Company will adopt SFAS No. 158 on December 31, 2006.
The adoption of SFAS No. 158 is not expected to have a material effect on the
Company's financial condition or results of operations.
In July 2006, the Financial Accounting Standards Board ("FASB") has
published FASB Interpretation No. 48 ("FIN No. 48"), Accounting for Uncertainty
in Income Taxes, to address the non-comparability in reporting tax assets and
liabilities resulting from a lack of specific guidance in FASB Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, on
the uncertainty in income taxes recognized in an enterprise's financial
statements. FIN No. 48 will apply to fiscal years beginning after December 15,
2006, with earlier adoption permitted. The adoption of FIN 48 is not expected to
have a material effect on the Company's financial condition or results of
operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Correction ("SFAS 154"), which replaces Accounting Principles Board
Opinions No. 20 "Accounting Changes" and SFAS No 3, "Reporting Accounting
Changes in Interim Financial Statements - An Amendment of APB Opinion No. 28."
SFAS 154 provides guidance on accounting for and reporting of accounting changes
and error corrections. It establishes retrospective application, or the latest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after
27
December 15, 2005 and is required to be adopted by the Company in the first
quarter of fiscal 2006. The adoption of SFAS 154 did not have an impact on the
Company's financial statements.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations" in March 2005. FIN 47 clarifies that
an entity must record a liability for a conditional asset retirement obligation
if the fair value of the obligation can be reasonably estimated. This
Interpretation also clarifies the circumstances under which an entity would have
sufficient information to reasonably estimate the fair value of an asset
retirement obligation. This Interpretation is effective no later than the end of
fiscal years ending after December 15, 2005. This guidance did not have a
material affect on the Company's financial statements.
CRITICAL ACCOUNTING ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amount of assets and
liabilities, revenues and expenses, and related disclosure on contingent assets
and liabilities at the date of our financial statements. Actual results may
differ from these estimates under different assumptions and conditions.
Critical accounting policies are defined as those that are reflective
of significant judgments, estimates and uncertainties and potentially result in
materially different results under different assumptions and conditions. For a
detailed discussion on the application of these and other accounting policies,
see Note 2 to our annual financial statements for the year ended December 31,
2006.
Placement and Promotional Allowances and Credits for Product Returns
As an inducement to our customers to promote our products in preferred
locations of their stores, we provide placement and promotional allowances to
certain customers. We also provide credits for customer coupon redemptions,
consumer price reductions, and product which has not been sold by its expiration
date. These allowances and credits are reflected as a reduction of revenue in
accordance with Emerging Issues Task Force ("EITF") No. 01-9, which requires
certain sales promotions and customer allowances previously classified as
selling, general and administrative expenses to be classified as a reduction of
sales or as cost of goods sold. Provisions for promotional allowances are
recorded upon shipment and are typically based on shipments to the retailer
during an agreed upon promotional period. We expect to offer promotional
allowances at historical levels in the near future as an incentive to our
customers. Slotting or placement fees are deducted from revenue in the period
paid. Provisions for coupon redemptions and product returned that has reached
its expiration date are based on historical trends. Information such as the
historical number of cases returned per unit shipped, product shelf life,
current sales volume, and coupons distributed during the period are used to
derive estimates of the required allowance. As we expand production and
introduce new products, we may incur increased levels of returned goods. Also,
our estimates assume we will continue as a going concern and maintain
distribution with wholesalers and supermarkets that currently carry our product.
If a supermarket or wholesaler discontinues our product, we may experience
return rates in excess of our historical trend. This could result in material
charges to future earnings for
28
reimbursements to our customers for returned, unsold product.
Accounts Receivable
We evaluate the collectibility of our trade accounts receivable based
on a number of factors. Accounts receivable are unsecured, non-interest bearing
obligations that are typically due from customers within 30 days of the invoice
date. However, with incentives to pay early we normally receive payment for
invoices on average of 17 days. We apply collections in accordance with customer
remittance advices or to the oldest outstanding invoice if no remittance advice
is presented with payment.
We estimate an allowance for doubtful accounts and revenue adjustments
based on historical trends and other criteria. Further, as accounts receivable
outstanding are deemed uncollectible or subject to adjustment, these allowances
are adjusted accordingly. In circumstances where we become aware of a specific
customer's inability to meet its financial obligations to us, a specific reserve
for bad debts is estimated and recorded which reduces the recognized receivable
to the estimated amount we believe will ultimately be collected. In addition to
specific customer identification of potential bad debts, bad debt charges are
recorded based on our recent past history and an overall assessment of past due
trade accounts receivable outstanding. We also estimate the amount of credits
for product placement, promotion and expired product that are expected to be
issued for product sold based on an evaluation of historical trends and record
an allowance when the sale is recorded.
INFLATION
We do not believe that inflation had a significant impact on our
results of operations for the periods presented.
OFF-BALANCE SHEET TRANSACTIONS
At December 31, 2006, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes.
29
ITEM 7. FINANCIAL STATEMENTS.
The financial statements for the years ended December 31, 2005 and 2006 are
contained on pages F-1 to 37, which follow the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The principal accountants' reports on our financial statements for the past two
years contained an explanatory paragraph regarding going concern uncertainty.
No disagreement with the auditors occurred during the two most recent fiscal
years or the subsequent interim period on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of the accountants, would
have caused them to make reference to the subject matter of the disagreements in
connection with their reports.
Item 8A CONTROLS AND PROCEDURES.
The Company's Chief Executive Office, Chief Financial Officer, and the
accounting firm of Hendel & Hendel evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as defined in Exchange Act
Rule 13a-15(e). The term "disclosure controls and procedures," as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended, (the Exchange Act) means controls and other procedures of a company
that are designed to ensure that this information is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms. Disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is accumulated and
communicated to the company's management, including its principal executive and
principal financial officers, as appropriate to allow timely decisions regarding
required disclosure. Based upon their evaluation of its disclosure controls and
procedures, the Company's chief executive, chief financial officer, and the
Hendel firm had concluded that, as of December 31, 2006 and as of the date of
filing, the controls and procedures were designed to be and actually are
effective at a reasonable assurance level and will continue to operate as
designed.
NuVim maintains certain internal controls over financial reporting that
are appropriate in their design and implementation, consistent with cost-benefit
considerations, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. The
retention of the accounting firm, a change in our internal control over
financial reporting, occurred during the fiscal quarter ended June 30, 2006 has
materially affected, and is reasonably likely to continue to affect, the
Company's internal control over financial reporting in a positive manner. No
change effecting NuVim's internal controls occurred during the fourth quarter.
30
ITEM 8B OTHER INFORMATION
None
31
PART III
Item 9, 10, 11, 12, and 14 are incorporated from the Proxy Statement included in
Schedule 14A to be filled within 120 days of the end of NuVim's fiscal year.
ITEM 13. - EXHIBITS
EXHIBIT INCORP. FILED
NUMBER DESCRIPTION OF EXHIBIT BY REF. NOW
-------------- --------------------------------------------------------------------------- ---------- ---------
3.1 Registrant's Certificate of Incorporation, as amended (2)
3.2 Registrant's Certificate of Amendment of Certificate of Incorporation (2)
3.3 Registrant's Second Amended and Restated Designation and Description of
Series A Preferred Stock (4)
3.4 Registrant's Amended and Restated Designation and Description of Series C
Preferred Stock (4)
3.5 Registrant's By-laws (2)
4.1 Revised Form of Common Stock Certificate (4)
4.2 Revised Form of Class A Public Warrant (4)
4.3 Revised Form of Class B Public Warrant (4)
4.4 Revised Form of Unit Certificate (4)
4.5 Revised Form of Warrant Agreement between the Registrant and American
Stock Transfer & Trust Company (1)
4.6 Revised Form of Representative's Purchase Warrant (1)
5.1 Legal Opinion (11)
10.1 Employment Agreement between the Registrant and Richard P. Kundrat, dated
as of September 9, 2004 (2)
10.2 Employment Agreement between the Registrant and John L. Sullivan, dated as
of September 9, 2004 (2)
10.3 Employment Agreement between the Registrant and Paul J. Young, dated as of
September 9, 2004 (2)
10.4 Employment Agreement between the Registrant and Michael Vesey, dated as of
December 1, 2004 (3)
10.5 Form of Indemnification Agreement between the Registrant and its directors (2)
10.6 Revised 2005 Incentive Stock Option Plan (4)
10.7 Revised 2005 Directors' Stock Option Plan (4)
10.8 2000 Employee Stock Option Plan (2)
10.9 2001 Employee Stock Option Plan (2)
10.10 2002 Employee Stock Option Plan (3)
10.11 2000 Employee Equity Incentive Plan (2)
10.12 Amended and Restated License Agreement between the Registrant and Stolle
Milk Biologics, Inc., dated as of May 1, 2004 (2)
10.13 Amended and Restated Supply Agreement between the Registrant and Stolle
Milk Biologics, Inc., dated as of May 1, 2004 (2)
10.14 Loan Agreement between the Registrant and Dick Clark dated as of July 26,
2004 (2)
10.14.1 Letter Agreement dated November 3, 2004 amending certain terms of the
Amendment to Services Agreement and Convertible Promissory note each dated
July 26, 2004 and Second Amendment to Services Agreement and Warrant, each
dated September 14, 2004 (3)
10.14.2 Letter Agreement dated March 28, 2005 amending certain terms of the
Amendment to Services Agreement and Convertible Promissory note each dated
July 26, 2004 and Second Amendment to Services Agreement and Warrant, each
dated September 14, 2004 (4)
10.14.3 Letter Agreement dated April 30, 2005 amending certain terms of the
Amendment to Services Agreement and Convertible Promissory note each dated
July 26, 2004 and Second Amendment to Services Agreement and Warrant, each
dated September 14, 2004 (5)
32
10.14.4 Letter Agreement dated May 31, 2005 amending certain terms of
the Amendment to Services Agreement and Convertible
Promissory note each dated July 26, 2004 and Second Amendment
to Services Agreement and Warrant, each dated September 14,
2004 (1)
10.15 Security Agreement between the Registrant and Dick Clark dated as of July
26, 2004 (2)
10.16 Form of Secured Promissory Notes Up to $1 Million (Bridge Financing) (2)
10.17 Convertible Note dated as of July 26, 2004 payable to Dick Clark (2)
10.18 Warrant to Purchase $650,000 of Common Stock dated as of September 14,
2004 (2)
10.19 Warrant to Purchase up to 9.9% of the Outstanding Capital Stock, dated as
of July 26, 2004 (2)
10.20 Services Agreement between the Registrant and Olive Enterprises, Inc.,
dated February 20, 2000 (2)
10.21 Amendment to Services Agreement between the Registrant and Olive
Enterprises, Inc., dated as of July 26, 2004 (2)
10.22 Second Amendment to Services Agreement between the Registrant and Olive
Enterprises, Inc., dated as of September 14, 2004 (2)
10.23 Form of Subordination Agreement (Bridge Financing) (2)
10.24 Consent to Grant Security Interest, Waiver, Subordination and Amendment
Agreement between Registrant and Stolle Milk Biologics, Inc., dated August
5, 2004 (2)
10.25 Processing and Packing Agreement between the Registrant and Clover Farms
Dairy Company, dated June 27, 2000 (2)
10.26 Amendment to Processing and Packing Agreement between the Registrant and
Clover Farms Dairy Company, effective April 1, 2003 (2)
10.27 Second Amended and Restated Stockholders Agreement dated as of August 2,
2004 (2)
10.28 Amended and Restated Registration Rights Agreement, dated as of August 2,
2004 (2)
10.29 Wachovia line of credit documents (4)
10.30 Lease between the Registrant and Paramus Plaza IV Associates, dated
December 8, 1999 and Addendum II to Lease, dated December 8, 1999 (2)
10.31 First Amendment to Lease between the Registrant and Paramus Plaza IV
Associates, dated November 5, 2002 (2)
10.32 Second Amendment to Lease between the Registrant and Paramus Plaza IV
Associates, dated November 23, 2004 (2)
10.33.1 Letter Agreements dated December 31, 2004 between Spencer Trask Private
Equity Fund I LP, Spencer Trask Private Equity Fund II LP, Spencer Trask
Specialty Group LLC and Kevin Kimberlin Partners LP, on the one hand, and
the registrant on the other, with respect to the debt extinguishment
transactions between the parties, as amended by agreements of March 28,
2005 (4)
10.33.2 Agreement dated May 2, 2005 further amending the agreements with Spencer
Trask (5)
10.33.3 Agreement dated May 18, 2005 further amending the agreements with Spencer
Trask (1)
10.34 Security Agreement between the Registrant and Spencer Trask Specialty
Group LLC, dated January 31, 2002 (4)
10.35.1 Modification and Extension Agreement between Stolle Milk Biologics, Inc.
and the Registrant dated March 28, 2005 (4)
10.35.2 Amendment of March 28, 2005 Modification and Extension Agreement (1)
10.36.1 Conversion Agreement dated April 30, 2005 between the Registrant and Dick
Clark (5)
33
10.36.2 Amended and Restated Conversion Agreement between the Registrant and Dick
Clark, dated May 31, 2005 (1)
10.36 Proposal/Memorandum of Understanding between the Registrant and Global
Media Fund, LLC (6)
10.37 Form of Secured Convertible Promissory note between the Registrant and
Lenders (6)
10.38 Form of Warrant Agreement between the Registrant and Lenders (6)
10.39 Form of Warrant Agreement between the Registrant and Midtown Partners (6)
10.40 Placement Agent Agreement between the Registrant and Midtown Partners (6)
10.40.1 Letter Terminating Placement Agent Agreement between the Registrant and
Midtown Partners (6)
10.41 Dick Clark/Stanley Moger Consent to Secured Convertible Note financing (6)
10.42 Warrant issued in connection with acquisition of 24% interest in NuVim
Powder LLC (7)
10.43 Placement Agent Agreement (7)
10.44 2006 Employee Stock Option Plan (8)
10.45 Note Extension Letter with Richard Clark and Stanley Moger (9)
10.46 Note Extension Letter with Kirkpatrick &Lockhart Nicholson Graham LLP (9)
21 Subsidiaries of the Registrant X
23.2 Consent of WithumSmith+Brown, P.C., Independent Registered Public
Accounting Firm (11)
23.3 Consent of Attorney (included in Exhibit 5.1) (11)
24 Power of Attorney (10)
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X
31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 X
32.1 Certification of the Chief Executive pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. X
----------
(1) Previously filed as part of Pre-effective Amendment No. 6 to the
Registration Statement filed on June 6, 2005.
(2) Previously filed as part of the Registration Statement filed on December 2,
2004.
(3) Previously filed as part of Pre-effective Amendment No.1 to the
Registration Statement filed on February 3, 2005.
(4) Previously filed as part of Pre-effective Amendment No.3 to the
Registration Statement filed on March 31, 2005.
(5) Previously filed as part of Pre-effective Amendment No.5 to the
Registration Statement filed on May 4, 2005.
(6) Previously filed as part of the 2005 Annual Report on Form 10-KSB
(7) Previously filed as part of the Current Report on Form 8-K filed April 21,
2006
(8) Previously filed as part of the Current Report on Form 8-K filed May 30,
2006
(9) Previously filed as part of the Current Report on Form 8-K filed August 28,
2006
(10) Previously filed as part of the Registration Statement filed on October 10,
2006.
(11) Previously filed as part of Pre-effective Amendment Number 1 to the
Registration Statement filed on December 18, 2006.
34
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NUVIM, INC.
Date: April 11, 2007
By: /s/ Richard Kundrat
------------------------
Richard Kundrat,
Chief Executive Officer
In accordance with the Exchange Act, this report has been signed bellow
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
SIGNATURE TITLE DATE
-------------------------- -------------------------- ---------------
/s/ Richard Kundrat Chief Executive Officer April 11, 2007
--------------------------
Richard Kundrat
/s/ Richard Kundrat Chief Financial April 11, 2007
-------------------------- and Accounting Officer
Richard Kundrat
35
NUVIM INC.
----------
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2006
----------
INDEX TO FINANCIAL STATEMENTS
Page
-----
Report of Independent Registered Public Accounting Firm F - 2
Balance Sheets - December 31, 2005 and 2006 F - 3
Statements of Operations - Years ended December 31, 2005 and December 31, 2006 F - 4
Statements of Cash Flows - Years ended December 31, 2005 and December 31, 2006 F - 5
Statements of Stockholders' Deficit - Years ended December 31, 2005 and December 31, 2006 F - 6
Notes to Financial Statements F - 7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of
NuVim, Inc.:
We have audited the accompanying balance sheets of NuVim, Inc. (the "Company")
as of December 31, 2005 and 2006, and the related statements of operations,
stockholders' deficit, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2005 and 2006, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2J to the accompanying financial statements, effective
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R), "Share-Based Payments".
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1B to the
financial statements, the Company has suffered recurring losses from operations
and has a net working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
/s/ WithumSmith+Brown, P.C.
Somerville, New Jersey
April 11, 2007
F-2
NUVIM, INC.
BALANCE SHEETS
DECEMBER, 31
--------------------------------
2005 2006
-------------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 270,468 $ 55,472
Accounts receivable, net 35,399 55,827
Inventory 172,714 166,929
Prepaid expenses and other current assets 328,915 191,053
-------------- --------------
Total Current Assets 807,496 469,281
-------------- --------------
Equipment and furniture, net 1,502 598
Deferred offering costs -- 57,025
Deposits and other assets 8,547 8,147
Distribution rights -- 90,400
-------------- --------------
TOTAL ASSETS $ 817,545 $ 625,451
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Current portion of accounts payable $ 881,345 $ 443,426
Accounts payable and accrued expenses to related parties 231,328 57,606
Accrued expenses 269,968 119,597
Accrued compensation 420,100 336,024
Rescinded series B offering payable 18,920 18,920
Secured convertable promissory notes, net of unamortized discount of $14,629
at December 31, 2005 52,971 --
-------------- --------------
TOTAL CURRENT LIABILITIES 1,874,632 975,573
Other Liabilities:
Accounts payable, net of current portion -- 242,430
Senior notes payable - related parties, net of unamortized discount of
$36,667 at December 31, 2006 500,000 463,333
Accrued interest - senior notes payable - related parties 119,160 169,160
Stockholder loans - subordinated covertable promissory notes 225,000 150,000
Accrued interest stockholder loans 28,691 21,770
Other notes payable, net of unamortized discount of $8,500 at
December 31, 2006 133,000 111,500
Accrued Interest - other notes payable 14,467 25,917
-------------- --------------
TOTAL OTHER LIABILITIES 1,020,318 1,184,110
-------------- --------------
TOTAL LIABILITIES 2,894,950 2,159,683
Commitments and Contingencies
Stockholders' Deficit:
Common Stock, 120,000,000 shares authorized, $.00001 par value, 5,034,995
and 11,622,867 shares issued and outstanding at December 31, 2005 and 2006
respectively 51 116
Additional paid-in capital 18,167,605 20,489,672
Accumulated deficit (20,245,061) (22,024,020)
-------------- --------------
Total Stockholders' Deficit (2,077,405) (1,534,232)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 817,545 $ 625,451
============== ==============
The notes to financial statements are an integral part of these
statements.
F-3
NUVIM, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
2005 2006
------------ ------------
Gross Sales $ 1,208,279 $ 1,292,155
Less: Discounts, Allowances and
Promotional Payments 486,898 348,177
------------ ------------
Net Sales 721,381 943,978
Cost of Sales 687,167 702,492
------------ ------------
Gross Profit 34,214 241,486
Selling, General and Administrative
Expenses 2,392,996 2,407,253
------------ ------------
Loss from Operations (2,358,782) (2,165,767)
Other Income (Expense):
Interest Expense (430,216) (115,823)
Interest Income 7,000 46
Gain on Sale of Assets 42,000
Gain on forgiveness of accounts payable 151,995 18,498
------------ ------------
Total Other Income (Expense) - Net (271,221) (55,279)
------------ ------------
Net Loss Before Income Tax Benefit (2,630,003) (2,221,046)
Income Tax Benefit 233,101 442,087
------------ ------------
Net Loss $ (2,396,902) $ (1,778,959)
============ ============
Basic and Diluted Loss Per Share $ (0.82) $ (.20)
============ ============
Weighted Average Number of Common Shares
Outstanding - Basic and Diluted 2,940,987 8,953,184
The notes to financial statements are an integral part of these
statements.
F-4
NUVIM, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2006
2005 2006
------------ ------------
Cash Flow From Operating Activities:
Net Loss $ (2,396,902) $ (1,778,959)
Adjustment to reconcile net loss to net cash used in operating
activities:
Depreciation 19,960 904
Amortization of debt discount on notes payable 70,000 14,029
Accrued incentive stock grant 332,600 --
Gain on forgiveness of accounts payable (151,995) (18,498)
Gain on sale of equipment -- (42,000)
Stock issued for services 24,500 266,065
Employee stock based compensation -- 546,881
Stock issued for compensation -- 125,750
Interest expense accrued in connection with warrants for debt
discount -- 7,333
Provision for sales returns 486,898 348,177
Bad debt expense 4,109 --
Changes in Operating Assets and Liabilities:
Accounts receivable (492,682) (368,605)
Inventory (88,230) 5,785
Prepaid expenses and other current assets (10,789) 171,862
Accounts payable 151,487 (73,407)
Accounts payable and accrued expenses to related parties (427,672) (173,722)
Accrued expenses (15,763) (150,371)
Accrued compensation 210,997 315,215
Accrued interest - senior notes payable - related parties -- 50,000
Accrued interest - stockholder loans 350,763 14,265
Accrued interest - other note payable -- 11,450
------------ ------------
Net Cash Used in Operating Activities (1,932,719) (727,846)
------------ ------------
Cash Flow From Investing Activities:
Purchase of equipment and furniture (442) --
Proceeds from sale of equipment and furniture -- 42,000
------------ ------------
Net Cash Provided by (Used in) Investing Activities (442) 42,000
------------ ------------
Cash Flow From Financing Activities:
Net proceeds from issuance of common stock 1,604,237 533,875
Reimbursement of, (payments for) deferred offering costs 346,243 (57,025)
Proceeds from secured convertable notes 63,580 --
Repayment of stockholder loan (35,000) --
Payment of note payable (17,000) (6,000)
Payment of Series B Advances (23,080) --
Proceeds of related party advances - net (13,000) --
Proceeds from underwriter advance-related party 200,000 --
Repayment of underwriter advance-related party (200,000) --
Proceeds from related party advances -- 160,000
Repayment of related party advances -- (160,000)
------------ ------------
Net Cash Provided by Financing Activities 1,925,980 470,850
Decrease in Cash and Cash Equivalents (7,181) (214,996)
Cash and Cash Equivalents at Beginning of Year 277,649 270,468
------------ ------------
Cash and Cash Equivalents at End of Year $ 270,468 $ 55,472
============ ============
The notes to financial statements are an integral part of these
statements.
F-5
NUVIM, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2005 and 2006
Preferred Stock Preferred Stock
Series A Series C
------------------------------ ------------------------------
Shares Amount Shares Amount
------------- ------------- ------------- -------------
Balance at December 31, 2004 4,875,850 $ 49 3,623,000 $ 36
Common stock issued in payment of convertible
promissory notes-related parties
Common stock issued in payment of
accrued salaries
Common stock issued in payment of senior notes
payable related parties
Common stock issued in payment of stockholder
loans, subordinated convertible promissory notes
payable and accrued interest
Common stock issued in payment of
advances-realted party
Common stock issued in payment of accounts
payable
Common stock issued upon conversion of
convertible promissory notes-related party
Common stock issued, conversion of Series A
preferred stock (4,875,850) (49)
Common stock issued, conversion of Series C
preferred stock (3,623,000) (36)
Commmon stock and Warrants issued in payment
for media campaign
Warrants issued in connection with secured
convertible notes
Issuance of common stock, initial public
offering
Net loss for the year ended December 31, 2005
------------- ------------- ------------- -------------
Balance at December 31, 2005 -- -- -- --
Stock sold to accredited investors, net
Stock issued for services
Stock cancellation for services not rendered
Stock issued for accounts payable
Stock issued for accrued compensation
Stock issued for accrued compensation
Stock issued for secured convertible
promissory notes
Stock issued for stockholder loans
and accrued interest
Stock issued for purchase of Nuvim Powder, LLC
Employee stock based compensation
Stock issued for employee compensation
Warrants issued for note
extension - senior notes payable
Warrants issued for note
extension - other notes payable
Warrants issued for services
Net Loss
------------- ------------- ------------- -------------
Balance at December 31, 2006 -- $ -- -- $ --
============= ============= ============= =============
Common Stock Additional Total
----------------------------- Paid-In Accumulated Shareholders'
Shares Amount Capital Deficit Deficit
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2004 414,073 $ 4 $ 8,377,140 $ (17,848,159) $ (9,470,930)
Common stock issued in payment of convertible
promissory notes-related parties 461,700 5 6,141,522 $ 6,141,527
Common stock issued in payment of
accrued salaries 250,696 3 593,747 593,750
Common stock issued in payment of senior notes
payable related parties 250,000 2 499,998 500,000
Common stock issued in payment of stockholder
loans, subordinated convertible promissory notes
payable and accrued interest 88,882 1 118,113 118,114
Common stock issued in payment of
advances-realted party 23,000 69,000 69,000
Common stock issued in payment of accounts
payable 197,031 2 251,404 251,406
Common stock issued upon conversion of
convertible promissory notes-related party 245,000 2 244,998 245,000
Common stock issued, conversion of Series A
preferred stock 88,732 1 48 --
Common stock issued, conversion of Series C
preferred stock 65,881 1 35 --
Commmon stock and Warrants issued in payment
for media campaign 250,000 3 249,997 250,000
Warrants issued in connection with secured
convertible notes 17,366 17,366
Issuance of common stock, initial public
offering 2,700,000 27 1,604,237 1,604,264
Net loss for the year ended December 31, 2005 (2,396,902) (2,396,902)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2005 5,034,995 51 18,167,605 (20,245,061) (2,077,405)
Stock sold to accredited investors, net 2,970,000 30 533,845 533,875
Stock issued for services 762,554 9 272,056 272,065
Stock cancellation for services not rendered (17,142) (6,000) (6,000)
Stock issued for accounts payable 331,453 3 110,581 110,584
Stock issued for accrued compensation 854,455 9 355,532 355,541
Stock issued for accrued compensation 392,188 4 125,746 125,750
Stock issued for secured convertible
promissory notes 335,000 3 66,997 67,000
Stock issued for settlement of stockholder
loans and accrued interest 290,614 3 96,183 96,186
Stock issued for purchase of Nuvim Powder, LLC 450,000 3 89,997 90,000
Employee stock based compensation 546,881 546,881
Stock issued for employee compensation 218,750 1 43,749 43,750
Warrants issued for note
extension - senior notes payable 44,000 44,000
Warrants issued for note
extension - other notes payable 8,500 8,500
Warrants issued for services 34,000 34,000
Net Loss (1,778,959) (1,778,959)
------------- ------------- ------------- ------------- -------------
Balance at December 31, 2006 11,622,867 $ 116 $ 20,489,672 $ (22,024,020) $ (1,534,232)
============= ============= ============= ============= =============
The notes to financial statements are an integral part of this
statement.
F-6
NUVIM, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
A. Business
NuVim, Inc. (the "Company") markets and distributes dietary supplement
beverages, which enhance the immune system, promote sturdy joints and muscle
flexibility. The Company distributes its products through supermarkets in
approximately 13 states, predominately on the East Coast, and the District of
Columbia.
B. Going Concern
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in the accompanying financial
statements, the Company incurred net losses of $2,396,902 and $1,778,959 for the
years ended December 31, 2005 and 2006, respectively. Management also expects
operating losses to continue in 2007. The Company's continued existence is
dependent upon its ability to secure adequate financing to fund future
operations and commence profitable operations. To date, the Company has
supported its activities through equity investments, the sale of common stock,
and a line of credit through a bank of $50,000 of which there is currently none
used. During 2006, the Company addressed these concerns by selling common stock
to raise approximately $534,000, settling approximately $274,000 of principal
and interest on note and supplier debt with common stock, and issuing stock
worth approximately $266,000 to secure services. In addition, during 2006 the
Company has negotiated extended terms on approximately $987,000 of notes
payable, stockholder loans, and accrued interest until January 2009. To date the
Company has already raised an additional gross amount of 721,800 through stock
sales.
It is the Company's intention to raise additional capital through additional
sales of its common stock. No assurance can be given that these funding
strategies will be successful in providing the necessary funding to finance the
operations of the Company. Additionally, there can be no assurance, even if
successful in obtaining financing, the Company will be able to generate
sufficient cash flows to fund future operations. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets or amounts and
classification of liabilities that might be necessary related to this
uncertainty.
F-7
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
A. Cash Equivalents
Cash equivalents consist of highly-liquid investments with an original maturity
of three months or less when purchased.
B. Accounts Receivable
Accounts receivable are unsecured, non-interest bearing obligations that are
typically due from customers within 30 days of the invoice date. Management
applies collections in accordance with customer remittance advices or to the
oldest outstanding invoice if no remittance advice is presented with payment.
Accounts receivable are recorded at their net realizable value. The Company
estimates an allowance for doubtful accounts, sales returns and allowances based
on historical trends and other criteria. At December 31, 2005 and 2006, these
allowances approximated $27,700 and $26,100, respectively. No bad debt expense
was incurred in 2006 as all allowances represented sales returns or promotional
allowances compared to approximately $4,100 for the year ended December 31,
2005.
C. Inventories
Inventories, which are predominantly raw materials, are stated at the lower of
cost (first-in, first-out method) or market. A provision for excess or obsolete
inventory is recorded at the time the determination is made. For finished goods,
inventory that is within 30 days of its expiration date is charged to cost of
sales.
D. Deferred Offering Costs
During 2006, the Company incurred $57,025 in deferred offering costs in regard
to their SB-2 filing during the year to register securities as of December 31,
2006. The registration statement is not effective as it is still under review by
the Securities and Exchange Commission, (SEC). Upon the SEC declaring the
registration statement effective, these costs will be reclassified as a
reduction to additional paid in capital. In the event it is not declared
effective, such costs will be charged to operations.
The Company incurred deferred costs incurred in connection with an initial
public offering of its common stock. Amounts deferred were offset against the
gross proceeds (recorded as additional paid in capital) upon consummation of the
offering on June 24, 2005.
F-8
E. Debt Extinguishments
The Company accounts for debt extinguishments in accordance with Financial
Accounting Standards Board Statement 15 "Accounting by Debtors and Creditors for
Troubled Debt Restructurings". Related party debt extinguishments are recorded
as increases to additional paid in capital in accordance with Accounting
Principles Board Opinion 26.
F. Revenue Recognition
The Company records revenue at the time the related products are received by the
customer from the public warehouse used by the Company and the risk of ownership
has passed to the customer. A provision for estimated product returns,
promotional allowances and cash discounts based on the Company's historical
experience is recorded during the period of sale.
G. Promotional Allowances
As an inducement to its customers to display the Company's products in preferred
locations of their stores, the Company provides placement and promotional
allowances to certain customers. The Company also reimburses retailers for
coupon redemptions, and provides credits for product which has not been sold by
its expiration date. These allowances and credits are reflected as a reduction
of gross sales in accordance with Emerging Issues Task Force ("EITF") No. 01-09
"Accounting for Consideration Given by a Vendor to a Customer".
H. Freight Costs
In accordance with EITF No. 00-10, "Accounting for Shipping and Handling Fees
and Costs," reimbursement of freight charges are recorded in net sales and the
Company is disclosing that unreimbursed freight costs are recorded as selling
general and administrative expenses. For the years ended December 31, 2005 and
2006, freight-out costs approximated $251,000 and $270,000, respectively, and
have been recorded in selling, general and administrative expenses.
I. Equipment and Furniture
Equipment and furniture is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets (3-5 years).
J. Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123R (revised 2004),
"Share-Based Payment" which revised Statement of Financial Standards No. 123,
"Accounting for
F-9
Stock-Based Compensation" This statement supersedes Opinion No. 25, "Accounting
for Stock Issued to Employees." The statement addresses the accounting for
share-based payment transactions with employees, eliminates the ability to
account for share-based compensation transactions using the intrinsic value
method pursuant to APB 25 and requires that the compensation costs relating to
such transactions be recognized at fair value in the statement of operations.
The revised statement has been implemented by the Company effective January 1,
2006. The Company continued to account for stock awards issued to non-employees
under the fair value method as described in EITF 96-18 "Accounting for Equity
Investments that are issued to Other than Employees for Acquiring or in
Conjunction with Selling Goods or Services."
The initial adoption of SFAS 123R on January 1st, 2006 did not have a
significant effect on the Company's operations. The implementation of SFAS No.
123R has the following effect on the statement of operations for the year ended
December 31, 2006:
Per Share
---------
Increase in selling, general and administrative
expense $ 547,000 $ .19
Stock based compensation before income taxes 547,000 .19
Income tax benefit -- --
---------- ---------
Stock based compensation after income taxes $ 547,000 $ .19
========== =========
For the 2005 year, the Company accounted for its employee incentive stock option
plans using the intrinsic value method in accordance with the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." (See Note 18E for pro forma
disclosures for 2005)
Effective January 1, 2006, the Company adopted FAS No. 123R utilizing the
modified prospective method. FAS No. 123R requires the recognition of stock
based compensation expense in the financial statements.
Under the modified prospective method, the provisions of FAS No. 123R apply to
all awards granted or modified after the date of adoption. In addition, the
unrecognized expense of awards not yet vested at the date of adoption,
determined under the original provisions of FAS 123, "Accounting for Stock Based
Compensation", shall be recognized in operations in the periods after the date
of adoption. Stock based compensation consists primarily of stock options. Stock
Options are granted to employees at exercise prices equal to the fair market
value on the dates of grant. Stock options generally vest over three years and
have a term of seven years. Compensation expense for stock options is recognized
over the period for each separate vesting portion of the stock option award.
The fair value for options issued prior to January 2006 was estimated at the
date of grant using a Black-Scholes option-pricing model. The risk free rate was
derived from the U.S. Treasury yield curve in effect at the time of the grant.
The volatility factor was determined based on a comparison to companies with
similar characteristics. The Black-Scholes option-pricing model was developed
for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition,
F-10
option-pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Because the Company's employee
stock options have characteristics significantly different from those of traded
options and because changes in the subjective input assumptions can materially
affect the fair value estimate, in management's opinion the existing models do
not necessarily provide a reliable single measure of the fair value of employee
stock options.
K. Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred. Advertising expenses,
including media advertising, in store sampling programs, and advertisements in
customer printed circulars were included in selling, general and administrative
expenses, with the exception of coupon expenses which were included as a
reduction of net sales. During the years ended December 31, 2005 and 2006,
advertising and promotion expense was approximately $477,000 and $268,000,
respectively.
L. Income Taxes
Deferred tax assets and liabilities are determined based on differences between
financial reporting and income tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Differences that give rise to significant
portions of the Company's deferred tax assets are net operating losses and
deferred stock compensation. A valuation allowance is recorded against deferred
tax assets in instances where the realization of the deferred tax asset is not
considered to be "more likely than not."
M. Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes including the disclosure of contingent assets and
liabilities. These estimates include, but are not necessarily limited to,
accounts receivable allowances, stock based compensation and depreciation and
coupon liability estimates. Actual results could differ from those estimates.
N. Net Loss Per Share
Basic loss per share has been calculated using the weighted average number of
common shares outstanding in accordance with FASB 128 "Earnings Per Share." All
potentially dilutive securities, including options, convertible notes,
convertible preferred stock and warrants have been excluded as common stock
equivalents and diluted loss per share has not been presented as such securities
are antidilutive due to the Company's net loss for all periods presented. At
December 31, 2006, the Company had warrants outstanding to purchase 7,522,514
shares of common stock (see note 18D) and employee
F-11
stock options to purchase 2,628,647 shares of common stock outstanding (see note
18E) which are not included in the calculation.
O. Impairment of Long Lived Assets
The Company reviews long-lived assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recovered. At December 31, 2005 and December 31, 2006 the Company has not
recognized any impairment charges for long lived assets.
P. Concentration of Risks
The Company maintains its cash balances in financial institutions located in New
Jersey, and periodically has cash balances in excess of Federal Deposit
Insurance Corporation limits. The Company distributes its products and grants
credit to its customers who are food distributors and retailers located
primarily in the eastern portion of the United States. The Company generally
does not require collateral or other security with regard to balances due from
customers. The Company extends credit to its customers in the normal course of
business and performs periodic credit evaluations of its customers, maintaining
allowances for potential credit losses.
Sales to four customers during the year ended December 31, 2005 approximated
21%, 14%, 11% and 10% of sales. Sales to two customers during the year ended
December 31, 2006 approximated 51% and 12% of sales. A loss of one of these
customers could have a significant adverse effect on the Company's results of
operations and cash flows.
Accounts receivable from four customers at December 31, 2005 approximated 35%,
13%, 12% and 10%, respectively and two customers at December 31, 2006
approximated 53% and 11% of accounts receivable.
One outside vendor manufactured all of the Company's finished goods. During the
years ended December 31, 2005 and 2006, manufacturing costs of approximately
$217,500 and $208,000 were incurred at this vendor. There was no amount due to
this vendor at December 31, 2005 and 2006.
See note 21a for other purchase concentrations.
Q. Value of Financial Instruments
The Company's financial instruments consist mainly of cash and cash equivalents,
accounts receivable, accounts payable and debt. The carrying amounts of these
financial instruments approximate fair value due to their short-term nature. The
carrying amount due to related party, notes payable and stockholder loans are
estimated to approximate their fair values as their stated interest rates
approximate current interest rates.
F-12
R. Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, and
("SFAS No. 157"), which defines fair value, establishes a framework for
measuring fair value using a market participant approach, and expands
disclosures about fair value measurements. SFAS No. 157 will be effective for
the Company beginning January 1, 2008. Management is currently evaluating the
effect SFAS No. 157 will have on the Company's financial condition or results of
operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans-- an amendment of FASB
Statements No. 87, 88, 106, and 132(R) ("SFAS No. 158"). SFAS No. 158 requires
companies to recognize the over-funded or under-funded status of their defined
benefit postretirement plans as an asset or liability and to recognize changes
in that funded status in the year in which the changes occur through
comprehensive income. The Company adopted SFAS No. 158 on December 31, 2006. The
adoption of SFAS No. 158 did not have any effect on the Company's financial
condition or results of operations.
In July 2006, the Financial Accounting Standards Board ("FASB") has published
FASB Interpretation No. 48 ("FIN No. 48"), Accounting for Uncertainty in Income
Taxes, to address the noncomparability in reporting tax assets and liabilities
resulting from a lack of specific guidance in FASB Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes, on the
uncertainty in income taxes recognized in an enterprise's financial statements.
FIN No. 48 will apply to fiscal years beginning after December 15, 2006, with
earlier adoption permitted. The adoption of FIN 48 is not expected to have a
material effect on the Company's financial condition or results of operations or
cash flows.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Correction ("SFAS 154"), which replaces Accounting Principles Board Opinions No.
20 "Accounting Changes" and SFAS No 3, "Reporting Accounting Changes in Interim
Financial Statements - An Amendment of APB Opinion No. 28." SFAS 154 provides
guidance on accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, or the latest practicable
date, as the required method for reporting a change in accounting principle and
the reporting of a correction of an error. SFAS 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005 and was adopted by the Company in the first quarter of fiscal 2006. The
adoption of SFAS 154 did not have an impact on the Company's financial
statements.
The FASB issued FASB Interpretation No. 47 ("FIN 47"), "Accounting for
Conditional Asset Retirement Obligations" in March 2005. FIN 47 clarifies that
an entity must record a liability for a conditional asset retirement obligation
if the fair value of the obligation
F-13
can be reasonably estimated. This Interpretation also clarifies the
circumstances under which an entity would have sufficient information to
reasonably estimate the fair value of an asset retirement obligation. This
Interpretation is effective no later than the end of fiscal years ending after
December 15, 2005. This guidance did not have a material affect on the Company's
financial statements.
S. Distribution Rights
Intangible assets consist of distributions rights acquired in connection with
the acquisition of remaining shares of NuVim Powder, LLC. This intangible asset
does not have a finite useful life and in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"), such assets with are not amortized, but are subject to annual
impairment testing by applying a fair value based test. Management intends to
complete its first annual impairment testing of the distribution rights by the
anniversary date of the closing of this transaction. It has not been determined
whether an impairment adjustment will be required related to this test.
T. Accounts Payable
Accounts payable represent amounts due for obligations to creditors in
connection with the Company's operations and are recorded at the amount
transacted, which are generally not significantly different from their fair
value. In connection with an outstanding obligation to one of the Company's
advertising vendors, the Company negotiated an extension of this obligation
until the year 2013 and has reflected amounts due beyond one year as long-term
accounts payable. The Company has followed the principles of Statement of
Financial Accounting Standards No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings in recording the extension of this obligation.
U. Reclassifications
Certain reclassifications were made to the presentation of the 2005 financial
statements in order to conform to the 2006 financial statements. Such
reclassifications had no effect on the prior year's results of operations.
NOTE 3 - INITIAL PUBLIC OFFERING
In June 2005, the Company completed an initial public offering ("IPO") selling
2,700,000 units at a price of $1.00 per unit to the public. Each unit consisted
of one share of common stock, one Class A redeemable public warrant to purchase
one share of common stock, and one Class B non-redeemable public warrant to
purchase one share of common stock. The net proceeds from the sale of the
2,700,000 units were approximately $1,604,000 after deducting the underwriting
discount and offering expenses.
The common stock and Class A and Class B public warrants traded only as a unit
until July 21, 2005 when the unit separated, after which the common stock, the
Class A public warrants and the Class B public warrants began trading
separately.
Class A public warrants . The Class A public warrants included in the units
became exercisable on July 21, 2005. The exercise price of a Class A public
warrant is $1.50. The Class A public warrants expire on June 20, 2010, the fifth
anniversary of the effective date of the IPO.
The Company has the right to redeem the Class A public warrants at a redemption
price of $0.25 per warrant, subject to adjustment in the event of stock splits,
reverse stock splits and other similar events of recapitalization. The
redemption right arises if the last reported sale price of the Company's common
stock equals or exceeds $2.00 for five consecutive trading days ending prior to
the date of the notice of redemption. The Company is required to provide 30 days
prior written notice to the Class A public warrant holders of the Company's
intention to redeem the warrants.
Class B public warrants . The Class B public warrants included in the units
became exercisable on July 21, 2005. The exercise price of a Class B public
warrant is $2.00. The Class B public warrants expire on June 20, 2010, the fifth
anniversary of the closing of the IPO. The Company does not have the right to
redeem the Class B public warrants.
F-14
Underwriters warrants . The Company issued a warrant to purchase 270,000 shares
of common stock in connection with the offering. The exercise price of the
underwriter's warrants is $1.20. The warrant expires on June 20, 2010, the fifth
anniversary of the closing of the IPO.
NOTE 4 - DEBT EXTINGUISHMENTS CONCURRENT WITH INITIAL PUBLIC OFFERING
On June 24, 2005, the Company issued 1,116,611 shares of common stock in payment
of notes payable, accrued interest, accounts payable, and accrued salaries due
to executive officers at a debt conversion value per share of $1.00 to $13.00.
The debt conversion transactions were contingent on the Company completing a
public offering of its common stock. The shares issued were subject to lock-up
agreements with the Company's underwriter of six months to one year. The fair
market value of the shares issued is assumed to be equal to the initial public
offering price of one "Unit" in the initial public offering completed on June
24, 2005. The amount of indebtedness extinguished in excess of the fair value of
shares issued was recorded as gain on extinguishment of debt in accordance with
the provisions of SFAS No. 15, Accounting by Debtors and creditors for Troubled
Debt Restructurings. The amount of related party indebtedness extinguished in
excess of the fair value of shares issued was recorded as additional paid in
capital in accordance with APB 26, paragraph 20. The table below summarizes debt
extinguishments consummated concurrently with the initial public offering of the
Company's common stock.
Excess of
Extinguished Debt
Over Fair Value
---------------------------
Debt Additional
Shares Fair Extin- Paid In
Issued Value guishment Capital Gain
------------ ------------ ------------ ------------ ------------
Senior secured notes-related parties 461,700 $ 461,700 $ 6,141,527 $ 5,679,827 $ --
Accrued salaries 250,696 250,696 593,750 343,054 --
Senior secured notes payable-related
parties 250,000 250,000 500,000 250,000 --
Subordinated notes payable
and accrued interest 88,882 88,882 266,639 95,899 81,858
Related party advances 23,000 23,000 69,000 46,000
Accounts payable 42,333 42,333 109,000 -- 66,667
------------ ------------ ------------ ------------ ------------
Total 1,116,611 $ 1,116,611 $ 7,679,916 $ 6,414,780 $ 148,525
============ ============ ============ ============ ============
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NOTE 5 - INVENTORY
Inventory consists of the following:
December 31,
-----------------------
2005 2006
---------- ----------
Raw materials $ 93,665 $ 60,911
Work In Progress 22,087 --
Finished goods 56,962 106,018
---------- ----------
Total $ 172,714 $ 166,929
========== ==========
NOTE 6 - PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consists of the following:
December 31,
-----------------------
2005 2006
---------- ----------
Prepaid Advertising $ 250,000 $ 141,250
Prepaid Insurance 51,730 41,303
Debt Financing Costs 13,259 --
Other Prepaids and
Advance Payments 13,926 8,500
---------- ----------
Total $ 328,915 $ 191,053
========== ==========
The Advertising program began in January 2006, the amount is being
expensed as the advertising occurs or is broadcast thoughout 2007.
F-16
NOTE 7 - EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following:
December 31,
------------------------
2005 2006
---------- ----------
Equipment $ 155,431 $ --
Furniture and fixtures 54,964 54,964
---------- ----------
210,395 54,964
Less: accumulated depreciation (208,893) (54,366)
---------- ----------
Equipment and furniture, net $ 1,502 $ 598
========== ==========
Depreciation expense for years ended December 31, 2005 and 2006 was $19,960 and
$904, respectively.
During 2006 the Company sold its equipment that was fully depreciated that led
to a gain of $42,000.
NOTE 8 - SENIOR NOTES PAYABLE - RELATED PARTIES
On July 26, 2004, the Company entered into a loan agreement with a stockholder
of the Company who is also a Company spokesperson, and one of the Company's
directors. The loan agreement provided for borrowings up to $1,000,000 in the
form of Senior Notes Payable issued in four tranches, each of which was
conditioned upon completion of specified actions or events. As of December 31,
2004, the Company had received the full amount of $1,000,000 under the
agreement. The loan accrues interest at 12% per annum, unless it is in default,
in which case the interest increases to 18%. The loan is secured by all of the
assets of the Company, and certain Company creditors were required to execute
subordination agreements in favor of the lenders. The principal and accrued
interest were originally due and payable on the earlier of the consummation of
an initial public offering or January 1, 2005. The notes were not paid as of
January 1, 2005 which constituted an event of default under the agreement. Under
an event of default, the lenders had the right to, but did not make, a demand
for payment of the notes. In May 2005, the note holders agreed to convert
outstanding principal of $500,000, into 250,000 shares of common stock, upon
completion of the initial public offering of the Company's common stock on June
24, 2005. The holders of the notes agreed not to sell shares of stock received
in the transaction for a period of six months after the initial public offering.
The note holders also agreed to extend the maturity of the remaining notes
aggregating $500,000 and all accrued interest thereon to November 2006, bearing
interest at 12%.
Also in 2006, both holders agreed to extend the maturity of the $500,000 Note
and all the unpaid interest thereon until January 15, 2009 in consideration of
each receiving
F-17
warrants to purchase 100,000 shares of common stock for $0.35 per share until
2015. These warrants were valued under the black sholes method and were recorded
as debt discount in the amount of $44,000 and are being amortized over the note
extension period of 26 months.
The Company has recorded $97,514 and $50,000 as interest expense on the notes in
2005 and 2006, respectively. Accrued interest was $119,160 at December 31, 2005
and $169,160 at December 31, 2006.
As an additional condition of the loan agreement, the Company entered into a
second amended services agreement with the spokesperson. In connection with the
second amended services agreement, the Company issued 30,000 shares of common
stock, a warrant to purchase $650,000 of common stock, and a warrant to acquire
up to 9.9% of the Company's common stock under certain conditions. The common
stock issued, and stock underlying the warrants were to be forfeited by the
spokesperson if obligations under the service agreement were not met. Therefore,
no performance commitment had been met, as of December 31, 2005 and 2006, and no
value had been recorded for the shares and warrants in accordance with EITF No.
96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or In Conjunction with Selling Goods or Services.
The warrant issued to the spokesperson to acquire up to 9.9% of the total
fully-diluted issued and outstanding common stock of the Company under certain
circumstances see note 18 E.) was deemed to have no value. The warrant allowed
the holder, to acquire an additional number of shares of Common Stock, to bring
his total holdings to 9.9%, after the consummation of an initial public offering
of its common stock, at the initial public offering price, after deducting any
existing equity holdings at that date. After the completion of the Company's
initial public offering of its common stock on June 24, 2005, it was determined
that no shares were issueable under the warrant as the spokesperson owned
greater than 9.9%.
As an additional condition to the loan agreement the Company issued a
convertible note in lieu of payment of past due fees (see note 12). The loan
agreement also required the formation of NuVim Powder LLC, of which the Company
spokesperson was given a 12.5% ownership interest. During 2005 NuVim Powder LLC
was an inactive company. In 2006, the Company acquired the spokesperson's
interest in NuVim Powder LLC for 225,000 shares of common stock. (See Note 18L)
The spokesperson and one of the Company's directors participated in the loans
under the agreement equally. In 2004, the spokesperson and Company Director
entered into an agreement providing for an equal share in the warrants and
ancillary agreements issued in connection with the loan agreement. Therefore,
the Company Director was given a 12.5% interest in the NuVim Powder Company and
a 50% interest in both of the warrants issued in connection with the loan
agreement and second amended services
F-18
agreement. In 2006, the Company acquired this interest in NuVim Powder LLC for
225,000 shares of common stock as well. (see note 18L)
NOTE 9 - DEMAND NOTE PAYABLE - BANK
In 2001 the Company issued a note payable to a bank which was due on demand with
interest due monthly at the LIBOR Index plus 1.25% (3.53% at December 31, 2004).
The note was secured by all of the assets of the Company and guaranteed by a
stockholder. The Company had not paid monthly interest due on the note since
March 31, 2003 and was in default of the loan terms as of December 31, 2004. In
May of 2005, the loan and all unpaid interest thereon was assigned to the
guarantor by the lender. The guarantors agreed to exchange the $2,500,000
principal balance, accrued interest thereon, aggregating $179,498, and
$3,462,029 of outstanding principal and interest on Senior Convertible
Promissory Notes due to them in exchange for 461,700 shares of common stock, see
notes 4 and 11. The $5,679,827 excess of the amount of related party
indebtedness extinguished in excess of the fair value of shares issued was
recorded as additional paid in capital in accordance with APB 26.
Interest expense on the demand note was $49,558 for the year ended December 31,
2005.
NOTE 10 - SECURED CONVERTIBLE PROMISSORY NOTES PAYABLE
On December 23, 2005 the Company issued Secured Convertible Promissory Notes,
due June 24, 2006. The notes have a face amount aggregating $67,600, and were
discounted for the first six months of interest, resulting in net proceeds of
$63,580. The notes bear interest at a rate of 12% annually, and 18% annually
upon an event of default. Upon an event of default each note holder has the
option to convert the principal and accrued interest due, in whole or in part,
into a number of shares of common stock calculated by dividing the amount of
debt and accrued interest by $.40 per share. The notes are redeemable prior to
maturity at 110% of their face value and are collateralized by all the assets of
the Company. The Company calculated the value of the beneficial conversion and
determined it was insignificant to these financial statements.
The Company also issued warrants to purchase 67,600 shares of common stock to
the note holders and 24,950 shares of common stock to the placement agent. The
warrants have a three and five year term, respectively and are exercisable at
$.40. Upon an event of default, the Company has agreed to issue 33,800
additional warrants to the investors at an exercise price of $.375 and adjust
the exercise price on the existing 67,600 warrants to $.375. The $11,200 value
of the warrants for 67,600 shares was recorded as debt discount and was
amortized over the six month term of the notes. Additionally, the Company
recorded the $6,165 fair value of the warrant issued to the placement agent and
$7,630 in fees paid to the placement agent as debt issuance costs which were
amortized over the life of the note. The Company recognized $15,221
F-19
and $1,128 in interest expense, including amortization of discounts and fees
related to the notes, in 2005 and 2006, respectively.
In the second quarter of 2006, all of the notes were converted into a total of
335,000 shares of common stock and the warrants, other than the placement agent
warrants, were cancelled.
NOTE 11 - SENIOR CONVERTIBLE PROMISSORY NOTES PAYABLE - RELATED PARTY
Senior notes payable related party consisted of a series of notes aggregating
$2,480,000 issued to a group of related investors in the Company's common and
preferred stock, and guarantor of the Demand Note Payable - Bank. The notes bore
interest at a rate of 8% annually, and 14% annually upon an event of default.
Each note holder had the option to convert the principal and accrued interest
due, in whole or in part, into a number of shares of Series C preferred stock
calculated by dividing the amount of debt and accrued interest by $.20 per
share. The notes were collateralized by all the assets of the Company. The notes
had maturity dates from December 31, 2004 to September 3, 2005, and were in
default at December 31, 2004. In May of 2005, the noteholders agreed to accept
461,700 shares of common stock in full settlement of $2,480,000 in principal and
$982,029 in accrued interest due on the Senior Convertible Promissory Notes, and
$2,679,498 of Unpaid principal and accrued interest on the Demand Note Payable -
Bank (see note 4&9). The $5,679,827 excess of the amount of related party
indebtedness extinguished in excess of the fair value of shares issued was
recorded as additional paid in capital in accordance with APB 26.
Interest expense related to the notes was $168,778 for the year ended December
31, 2005. No expense was incurred in 2006.
NOTE 12 - CONVERTIBLE PROMISSORY NOTE - RELATED PARTY
On July 26, 2004, The Company issued a convertible promissory note in the amount
of $175,000 in payment of accounts payable owed to the Company spokesperson and
in consideration for his forbearance until a "maturity date," as defined in the
note. The note accrued interest at the rate of 10% per annum until its original
maturity date of January 1, 2005, and 15% thereafter. The note was automatically
convertible into $245,000 of common stock or unregistered units identical to the
units sold at the initial public offering price, provided the offering was
consummated on or before June 30, 2005 (original date of December 31, 2004 was
previously extended by agreement to March 31, 2005 and subsequently to April 30,
2005 and June 30, 2005). If the offering did not occur by June 30, 2005, the
convertible note became convertible into $245,000 of common stock, at the option
of the holder, at the conversion price of $1.00 per share, subject to certain
contingencies defined in the Services Agreement. In accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features on
Contingently Adjustable Conversion Ratios," the Company had not recorded the
F-20
beneficial conversion feature of the note as of December 31, 2004, because its
terms change based on the occurrence of future events outside the control of the
holder of the convertible note. The note automatically converted into 245,000
shares of common stock upon the closing of the Company's initial public offering
of common stock on June 24, 2005. Accordingly, $49,753 related to the beneficial
conversion was recorded as interest expense at that date.
NOTE 13 - STOCKHOLDER LOANS - SUBORDINATED CONVERTIBLE PROMISSORY NOTES
Stockholder Loans - Subordinated Convertible Promissory Notes consists of a
series of identical notes issued on September 13, 2002 in replacement of
outstanding demand notes, issued in June 2001, of the same principal amount. The
notes had a maturity date of December 31, 2002, based on certain factors and
bear interest at a rate of 8% and default interest at 14%. The notes are
subordinated in right of payment to the senior notes payable-related parties.
The holder of these notes may convert the notes (or a portion thereof) into a
number of shares of Company's Series C preferred stock, calculated by dividing
the amount of the debt being converted by $.20 per share rounded to the nearest
whole share.
At the holder's election, unless converted, the accrued interest on the notes
shall be paid to the holder in cash on the conversion date. The notes were in
default as of December 31, 2002. However, in May of 2005, the holders of notes
aggregating $225,000 that remain outstanding as of December 31, 2005, agreed to
not demand payment until a public offering of the Company's common stock,
subsequent to the initial public offering, or the Company achieving $1,000,000
in profits.
In April 2005, two holders of the Company's subordinated convertible promissory
notes agreed to convert outstanding principal and accrued interest at April 30,
2005, aggregating $179,813, into 59,939 shares of common stock, if the Company
completed an initial public offering of its common stock. The holders of the
notes agreed not to sell shares of stock received in the transaction for a
period of six months after the initial public offering.
In May 2005, three holders of the Company's subordinated convertible promissory
notes agreed to convert outstanding accrued interest at April 30, 2005,
aggregating $86,826, into 28,943 shares of common stock, and to extend the
maturity date of notes with an aggregate principal balance of $200,000 to the
earlier of a public offering of the Company's common stock subsequent to the
initial public offering or the Company generating an annual profit of
$1,000,000. The holders of the notes agreed not to sell the shares of stock
received in the transaction for a period of six months after the initial public
offering.
In April 2005, one holder of the Company's subordinated convertible promissory
notes agreed to forgive $10,671 of interest accrued on his note, if the Company
pays the
F-21
$25,000 outstanding principal balance of the note out of the proceeds of a
public offering of its common stock subsequent to this initial public offering.
The holder has agreed not to sell the shares received in the transaction for a
period of six months after the initial public offering.
In July 2005, the Company paid $35,000 in principal and $11,340 in accrued
interest due on one of the notes.
In June 2006, one holder agreed to convert his $25,000 note and approximately
$12,600 of unpaid interest into approximately 108,000 shares of common stock.
In December 2006, one holder agreed to convert his $50,000 note and
approximately $8,500 of unpaid interest into approximately 183,000 shares of
common stock.
Interest expense on stockholder loans was $33,877 and $17,000 for the years
ended December 31, 2005 and 2006, respectively. Accrued interest payable was
$28,691 and $21,770 as of December 31, 2005 and 2006, respectively.
NOTE 14 - ACCRUED COMPENSATION
Accrued compensation consists of unpaid salary and incentive stock grants to be
issued to certain officers of the Company. Compensation expense related to
accrued and unpaid salary and bonus approximated $420,100 and $336,024 for the
years ended December 31, 2005 and 2006, respectively. In 2005, three executive
officers converted accrued salaries owed to them through May 31, 2005,
aggregating $593,750, into 250,696 shares of common stock, concurrently with the
public offering the Company's common stock. The executive officers agreed not to
sell the shares of stock received in the transaction for a period of six months
after the initial public offering.
The Company has recorded the $343,054 excess of the accrued salaries settled
over the fair value of the stock issued as additional paid in capital in
accordance with APB 26, paragraph 20.
During 2005, three executives agreed to allow the Company to defer payment of a
portion of their salaries, aggregating $87,500 until December 31, 2005. At
December 31, 2005 the executives agreed to extend payment of the salaries until
January, 2007, and the Board agreed that if the executives and the board
mutually agree to convert their salary into restricted common stock in the
future, it will not be at a value higher than the fair value of similar equity
instruments at December 31, 2005, which is estimated to be $0.20. In December
2006, one of the executives agreed to accept approximately 218,750 shares of
stock in lieu of a total of about $43,750 of unpaid compensation and agreed not
to sell the shares before January 2008.
The Company did not adopt a cash bonus plan in 2005. In March of 2006, the Board
of Directors authorized the compensation committee to grant an aggregate of
746,500
F-22
shares of unregistered stock to four executives as an incentive and in lieu of a
2005 bonus plan. The Company has recorded the stock grant as accrued
compensation in 2005 at a value of $332,600 based on the quoted market price of
a share of common stock at December 31, 2005 in accordance with APB Opinion 25.
When these shares are issued, the liability and stockholders deficit will be
reduced. These shares were issued and recorded during 2006.
The Company did adopt a bonus plan for 2006. Under the plan, one executive was
awarded a bonus of $157,750. In December 2006, he agreed to accept 492,188
shares of common stock in lieu of cash payment of his bonus. He also agreed to
not sell the shares before January 2008. During December 2006, 392,188 shares
were issued to him as partial payment of his 2006 bonus. The remaining accrued
bonus at December 31, 2006 is $32,000. The remaining accrued bonus was also
settled for stock in 2007.
NOTE 15 - RESCINDED SERIES B OFFERING PAYABLE
Pursuant to a private placement memorandum, dated October 5, 2001, the Company
offered to sell shares of Series B convertible preferred stock. The Company,
however, did not have a sufficient amount of preferred stock authorized to issue
and sell the Series B convertible preferred stock and had not taken certain
legal steps to designate the terms of the Series B convertible preferred stock.
Accordingly, the Series B convertible preferred stock was invalidly issued and
holders thereof did not own an equity interest in the Company as a result of
their purported investment therein. As a result, the Company was legally
obligated to offer to rescind, or return, the payment made by such holders for
such shares, plus any interest required by applicable state law. Proceeds of
$647,100 were collected in the Series B offering and accounted for as offering
payable from the Company.
In November 2002, the Company consummated its offer to rescind the Series B
offering and refund the original purchase price, or issue replacement shares of
the Company's Series C convertible preferred stock at the proposed offering
price of $.20 per share, at the investors' option. Investors representing
$568,600 elected to receive, and were issued, 2,843,000 replacement shares of
the Series C convertible preferred stock, and investors representing $78,500
elected a cash refund. The Company paid an additional $23,080 of the refunded
proceeds due during 2005 and $0 during 2006, The liability remaining at December
31, 2006 and 2005 is $18,920.
NOTE 16 - RELATED PARTY ADVANCES
Related party advances consist of short term advances that are due to the lender
on demand. At December 31, 2004, the balance consisted of $20,000 due to the
Company's underwriter and $62,000 due to an executive officer of the Company.
The amount due to the underwriter accrued interest at 10% per annum. The amount
due to the executive officer did not accrue interest. During 2005, an additional
$31,000 was advanced to the Company by the officers of the Company. Also in 2005
one officer
F-23
agreed to accept 23,000 shares of common stock in settlement of $69,000 of
advances, and remaining advances of $24,000 were repaid. The $46,000 excess of
the debt retired over the fair market value of the common stock issued was
recorded as additional paid in capital in accordance with APB 26, paragraph 20
(see note 4).
Additionally, In May 2005, the Company borrowed $200,000 from the investment
bank that managed the initial public offering of its common stock. The note was
payable upon the closing of the stock offering if closed by May 31, 2005, or on
demand thereafter. The note did not bear any interest and was repaid upon
closing of the initial public offering on June 24, 2005.
During 2006, an officer advanced the Company working capital funds in
anticipation of the receipt of funds from the sale of the State of New Jersey
Tax losses. A total of $160,000 was advanced in increments beginning in August
and ending in December when the advances were fully repaid. The officer was also
paid approximately $1,600 in interest that was accrued at 8%.
NOTE 17 - OTHER NOTES PAYABLE
Other notes payable consists of notes payable issued to a law firm in payment of
past due legal fees and accrued interest thereon. On August 20, 2004, the
Company agreed to pay $30,000 and issue two promissory notes for $120,000 and
$30,000, respectively, payable the earlier of the consummation of the proposed
public offering or February 5, 2005, in payment of past due accounts payable of
$240,000. The notes bore interest at 5% and default interest at 7%. The Company
recognized a gain on the extinguishment of this debt in the amount of
approximately $60,000 during the year ended December 31, 2004. The notes had not
been paid as of their respective maturity dates. Therefore, on February 3, 2005
the Company agreed to issue a replacement $150,000 demand note, payable upon the
earlier of a demand by the lender or an initial public offering of the Company's
common stock. In June 2005, the holder of the note agreed to defer payment to
the next financing completed by the Company after the initial public offering,
provided the Company make a $5,000 payment upon an initial public offering of
common stock and pays $2,000 each month thereafter. The Company paid $17,000 and
$6,000 under the agreed payment schedule during 2005 and 2006, respectively.
During 2006, this note and accrued interest was again refinanced with the
Company recognizing a gain on debt extinguishment of $7,000. The new note has a
principal balance of $120,000 as of December 31, 2006 with an interest rate of
8% per annum. Interest expense related to the note was $11,925 and $11,450 for
2005 and 2006, respectively. Accrued interest was $14,467 and $25,917 at
December 31, 2005 and 2006.
The holder agreed to extend payment of the remaining balance of $120,000 and all
interest due there on until January 2009. In consideration for this note
extension, the Company issued warrants to purchase 50,000 shares of common stock
for $.35 per share and was valued at $8,500 and recorded as debt discount and is
being amortized over the note extension period of 30 months. This warrant
expires in 2015.
F-24
NOTE 18 - STOCKHOLDERS' DEFICIT
A. Capital Stock
The Company is authorized to issue 185,000,000 shares of all classes of capital
stock, including 120,000,000 as common. The Company has authorized 65,000,000
shares of all classes of preferred stock, of which 4,875,850 shares are
designated as Series A and 50,000,000 as Series C.
B. Preferred Stock Series A
In November 2000, the Company completed a private offering for the sale of
4,875,850 shares of Series A convertible preferred stock for $4,875,850. The
gross proceeds of this offering were reduced by $527,975 of placement agent
fees, legal fees and expenses incurred in connection with the private offering,
paid to a preferred stockholder. In connection with the private offering of
Series A convertible preferred stock, the Company issued to the placement agent,
who is a preferred stockholder and its representatives, warrants to purchase
17,730 shares of common stock.
Each 55 shares of Series A convertible preferred stock is convertible into one
share of common stock, at any time by the holder or automatically in the event
of a merger or firmly underwritten public offering of common stock and is
subject to anti-dilution provisions as defined in the instrument. Series A
convertible preferred stock votes on an as converted basis with common stock,
except as required by law. Holders of the Series A convertible preferred stock
are entitled to preferential non-cumulative dividends payable at the discretion
of the Board of Directors and have preference in liquidation of $1.00 per share.
No dividends were declared during any periods presented in these Financial
Statements.
The Series A preferred stock holders voted to convert their shares to common
stock upon effectiveness of the Company's initial public offering of its common
stock on June 21, 2005. There are no shares of Series A preferred stock
outstanding as of December 31, 2005 or 2006.
C. Preferred Stock Series C
In November 2002 and January 2003, the Company completed a private offering for
the sale of 3,523,000 and 100,000 shares, respectively, of Series C convertible
preferred stock for a total of $724,600, including $568,600 of advances from the
rescinded offering of Series B convertible preferred stock. The gross proceeds
of this offering were reduced by approximately $240,000 of placement agent fees,
legal fees and expenses incurred in connection with the private offering, paid
to a preferred stockholder.
Each 55 shares of Series C convertible preferred stock is convertible into one
share of common stock, at any time by the holder, or automatically in the event
of a merger or
F-25
public offering of common stock and is subject to anti-dilution provisions as
defined in the instrument. Series C convertible preferred stock votes on an as
converted basis with common stock. Holders of the Series C convertible preferred
stock are entitled to preferential non-cumulative dividends payable at the
discretion of the Board of Directors and have preference in liquidation of $.20
per share. No dividends were declared during any periods presented in these
financial statements.
The Series C preferred stock, with respect to dividend rights, rights on
liquidation, winding up and dissolution, ranked pari pasu with the Company's
Series A preferred stock to the extent set forth in the amended and restated
Certificate of Incorporation.
The Series C preferred stock holders voted to convert their shares to common
stock upon effectiveness of the Company's initial public offering of its common
stock on June 21, 2005. There are no shares of Series C preferred stock
outstanding as of December 31, 2005 or 2006.
D. Warrants
The following is a summary of warrants outstanding at December 31, 2006:
Number of Shares
Issue Date Expiration Date of Common Stock Price Basis for Warrant Issuance
----------- --------------- ---------------- --------- -------------------------------------
11/01/00 11/01/07 8,714 $ 55.00 Placement Agent Class A Prefd (a)
11/01/02 06/20/08 1,273 $ 11.00 Placement Agent Class C Prefd (a)
03/01/03 02/28/10 2,577 $ 11.00 Accrued Compensation
09/15/04 09/14/14 325,000 $ 1.00 Second Amend Service Agreement (a)
06/25/05 06/24/10 245,000 $ 1.50 Conversion of Note Payable
06/25/05 06/24/10 245,000 $ 2.00 Conversion of Note Payable
06/25/05 06/24/10 2,700,000 $ 1.50 Class A IPO Warrants (b)
06/25/05 06/24/10 2,700,000 $ 2.00 Class B IPO Warrants
06/25/04 06/24/10 270,000 $ 1.20 Underwriter's warrants
11/01/05 06/24/10 250,000 $ 1.50 Media Campaign
11/01/05 06/24/10 250,000 $ 2.00 Media Campaign
12/22/05 12/22/10 24,950 $ 0.40 Bridge Loan Agent
02/14/06 02/13/13 50,000 $ 1.00 25% of NuVim Powder LLC
04/06/06 04/06/10 200,000 $ 0.60 Investor Relation
08/23/06 08/15/15 100,000 $ 0.35 Secured Note Extension
08/23/06 08/15/15 100,000 $ 0.35 Secured Note Extension
11/07/06 08/15/15 50,000 $ 0.35 Note Extension
----------------
7,522,514
================
F-26
(a) Includes anti-dilution agreement and cashless exercise right.
(b) Callable at $.25 if common stock trades at $2.00 for five days.
E. Stock Options
The Company adopted six Stock Option Plans (the "Plans") in 2000, 2001, 2002,
two stock option plans in 2005, and one plan in 2006 under which incentive stock
options ("ISOs") and non-qualified stock options ("NQSOs") to acquire shares of
common stock that may be granted to employees, officers, directors and
consultants of the Company. When the 2006 plan was adopted, the prior plans were
terminated: all previously issued options will remain in effect in accordance
with their original terms but no new options will be issued under those plans.
Each Plan expires ten years from the date of adoption. Under the currently
operative plan, the Company is authorized to grant options for up to 2,000,000
common shares. Under each Plan, the option price of an ISO may not be less than
the fair market value of a share of common stock on the date of grant. An ISO
may not be granted to a "ten percent stockholder" (as such term is defined in
Section 422A of the Internal Revenue Code) unless the exercise price is at least
110% of the fair market value of the common stock and the term of the option may
not exceed five years from the date of grant. The maximum term of each stock
option granted to persons other than ten percent stockholders is ten years from
the date of the grant.
A summary of the activity in the Plans is as follows:
Weighted-
Average
Number of Exercise
Shares Price
------------ ------------
Outstanding December 31, 2004 15,316 $ 19.38
Cancelled (17,500) $ 24.25
Issued 1,645,500 .92
------------
Outstanding December 31, 2005 1,643,316 $ 1.01
Cancelled (954,669)
Issued 1,940,000 .32
------------
Outstanding at December 31, 2006 2,628,647 $ .58
============
Exercisable at December 31, 2004 13,116 $ 14.04
============
Exercisable at December 31, 2005 1,150,816 $ 1.01
============
Exercisable at December 31, 2006 2,465,318 $ .58
============
Grant date fair value per option of options issued in:
2005 - $ .76
========
2006 - $ .26
========
F-27
The options generally expire 10 years from the date of grant. However, in the
event a participant's employment is terminated for any reason other than the
result of death, disability or retirement, as defined, the options expire 90
days after termination.
If a participant's employment is terminated as a result of death, permanent
disability or retirement, the options expire one year from the date of
termination.
The weighted-average remaining contractual life of options outstanding was 8 and
8.9 years as of December 31, 2005 and December 31, 2006, respectively.
A summary of the status of the Company's nonvested shares as of December 31.
2006, and changes during the year ended December 31, 2006 is presented below:
Weighted-
Weighted- Average
Averag Remaining
Fair Contractual
Number of Value at Term
Shares Grant Date (in years)
------------ ------------ ------------
Non-vested shares at December 31, 2005 ...... 492,456 $ 1.00 9.5
Options granted ............................. 1,940,000 --- ---
Options vested .............................. (2,107,506) --- ---
Options forfeited or expired ................ (161,621) --- ---
------------ ------------ ------------
Non-vested shares at December 31, 2006 ...... 163,329 $ 1.00 8.5
============ ============ ============
As of December 31, 2006, no outstanding options had an exercise price that was
less than the fair value of the Company's common stock.
As of December 31, 2005, there was approximately $438,000 of unrecognized
compensation cost related to non-vested stock option awards, which is expected
to be recognized in future years.
At December 31, 2006, Pro-forma information regarding net loss required by SFAS
No. 123 and has been estimated at the date of grant using the fair value method
with the following assumptions:
F-28
Assumptions:
Risk-free rate 3.5%-4.85%
Dividend yield 0
Volatility factor of the expected market .10% to 90%
Price of the Company's common stock $.20 to 11.00
Average life 7 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
option, the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
For the Year Ended
December 31, 2005
------------------
Net loss - as reported $ (2,396,902)
Less: stock compensation reported in the financial
statements under an intrinsic value method --
Add: total stock based employee compensation expense
determined under fair value based methods (794,276)
Net loss - pro forma $ (3,191,178)
Net loss attributable to common stockholders per share:
Basic and diluted net loss per share as reported $ (0.82)
Pro forma and diluted basic loss per share $ (1.09)
F. Sales for Cash
On April 10, 2006, Paulsen Investment Company, Inc. the company that served as
underwriter of NuVim's recently completed initial public offering of securities,
and NuVim entered into a Placement Agent Agreement pursuant to which Paulsen
would attempt to place up to 2,500,000 shares (subject to additional allocations
with the consent of Paulsen and NuVim) of NuVim's common stock with accredited
investors. Under the agreement, a commission of seven percent would be paid to
the selling broker and Paulsen would receive an unaccountable expense allowance
of three percent of the total amount placed under the agreement. The agreement
also provided that NuVim would use its best efforts to register the shares to be
sold under the Securities Act of 1933, as amended within 120 business days of
the sale of 2,500,000 shares.
On April 18, 2006, Paulson Investment Company, Inc., the company that served as
underwriter of NuVim's recently completed initial public offering of securities,
purchased
F-29
500,000 shares of NuVim's common stock for $100,000.
On May 18, 2006, NuVim accepted twenty-two additional subscriptions resulting
from private placements arranged by Paulson Investment Company, Inc. The
investors purchased 2,470,000 shares of common stock for a total of $494,000. In
addition, Paulson purchased an additional 37,500 shares in exchange for the
cancellation of $7,500 of past due fees. The brokers placed each investment
received a 7% commission and Paulson received a 3% unaccountable expense
allowance. The net cash proceeds from the issuance the 2,970,000 shares of
common stock was $533,875.
All of the cash was used for working capital.
G. Common Stock Issued for Services
On November 3, 2005 the Company issued 250,000 shares of common stock and a
warrant to purchase 250,000 shares of common stock at $1.50 and 250,000 shares
of common stock at $2.00 with terms substantially the same as its Class A and
Class B warrants, in payment for a one year media advertising program. The fair
value of the advertising program was readily determinable as $250,000.
Therefore, the company recorded prepaid advertising and additional paid in
capital of $250,000 at December 31, 2005 in accordance with EITF Issue No.
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods and Services".
During 2006, NuVim issued a total of 175,000 shares of its Common Stock to
NuVim's Secretary as payment for his services for the year ended December 31,
2006. Mark Siegel's relationship to NuVim qualifies him as an accredited
investor. The services for which the shares were issued are valued, pursuant to
agreement between NuVim and Mr. Siegel at approximately $66,000.
F-30
During May and June of 2006, NuVim agreed with several organizations to provide
various services for 393,554 shares of common stock. The services have a value
of approximately $144,000. During September 2006, 17,142 shares of common stock
were returned and cancelled due to services not performed valued at
approximately $6,000.
On December 1, 2006, NuVim agreed with a production and operations expert to
provide various services for a total of 100,000 shares of common stock. The
services have a value of approximately $32,000.
On December 1, 2006, NuVim agreed to issue a total of 79,000 shares to two
individuals for their services in seeking strategic partners and merger
candidates. The services have a value of approximately $25,280.
On December 29, 2006, NuVim agreed with its new spokesperson to issue a total of
15,000 shares of common stock as additional compensation for their services. The
shares have a value of approximately $4,800.
H. Stock Issued for Trade Debt
On November 3, 2005 the Company issued 50,000 shares of common stock in payment
of outstanding legal fees of $105,794 incurred in connection with the Company's
initial public offering of common stock. The fees were originally recorded as a
reduction of the net proceeds of the Company's initial public offering of common
stock. Therefore, the excess of the amount of accounts payable over the fair
market value of common stock issued of $83,294 was recorded as an increase in
paid in capital. The Company also issued 20,000 shares as payment for legal fees
for the third and fourth quarter of 2005 at a fair value of $6,000.
On November 3, 2005 the Company issued 34,697 shares of common stock at fair
value in payment of outstanding legal fees aggregating $15,614.
On November 3, 2005 the Company issued 50,000 shares of common stock at fair
value as compensation for the Company's corporate secretary for the six month
period ended December 31, 2005.
During 2005, the Company issued 42,334 shares of common stock for past due trade
debt valued at $109,000.
In June 2006, several creditors agreed to accept 331,453 shares of common stock
at a price of $0.35 per share to settle an aggregate of approximately $111,000
of current or past due trade debt.
I. Common Stock issued for Executive Compensation
On April 20, 2006 NuVim and two current and one retired executives reached
agreement on the number of shares to be granted in lieu of a cash bonus for 2005
and the additional restrictions to be imposed on their ability to sell the
shares. A total of 661,500 shares were granted, 341,500 to Mr. Kundrat, the CEO,
200,000 to John L. Sullivan,
F-31
the Vice-President of Sales, and 120,000 to Paul J. Young, until April 1, 2006
the Vice President of Operations and now a member of the Advisory Board. All are
accredited investors who have agreed in writing that they are accepting the
shares for investment purposes and will not sell the shares until after May 1,
2007.
Also, during April 2006 a former officer, (Young), of the Company also accepted
9,000 shares of common stock for approximately $3,000 of accrued compensation.
On April 21, 2006 Michael Vesey agreed, in connection with his resignation, to
accept 98,955 shares of NuVim common stock in payment of accrued salary of
$19,791. In addition, he accepted 85,000 shares of common stock in lieu of his
executive cash bonus for 2005. Mr. Vesey also agreed that he would not sell his
shares before May 1, 2007.
During December 2006, Mr. Kundrat, NuVim's CEO, agreed to accept 392,188 shares
of common stock in lieu of cash payments of $125,500 for part of his executive
bonus for 2006 and 218,750 shares of common stock in lieu of cash payment of his
$43,750 of unpaid 2005 salary.
J. Common Stock issued on Conversion of Secured Convertible Promissory Notes
In June 2006, the holders of the Secured Convertible Promissory Notes, in the
amount of $67,000, agreed to the conversion of their Notes into an aggregate of
335,000 shares of common stock. In addition, the holders surrendered the
warrants that had been issued in connection with the Notes for cancellation.
In June 2006, a stockholder loan note holder exchanged $37,631 of principal and
accrued interest for 107,631 shares of common stock.
F-32
In December 2006, another stockholder loan note holder agreed to convert his
$50,000 note and approximately $8,500 of unpaid interest into 182,983 shares of
common stock.
K. Stock Reserved
At December 31, 2006, the Company had reserved shares of its common stock as
follows:
Common
----------
Conversion of Accrued Compensation 100,000
Exercise of common stock warrants 7,522,514
Exercise of stock options 2,628,647
----------
Total 10,251,161
==========
L. Acquisition of the Remainder of NuVim Powder LLC
On August 23, 2004 NuVim Powder LLC was formed as a condition to a loan
agreement with a director and investor, who was also a spokesperson for the
Company. NuVim Powder LLC was owned 51% by the Company, 12.5% by the
spokesperson, 12.5% by the director and 24% by a related vendor providing
production services to the Company, and was to be the exclusive distributor of
food powder products developed by the Company. The LLC was not active in 2004
and 2005.
NuVim originally planned to distribute the powder version of its product through
a subsidiary of which fifty-one percent was to be owned by NuVim and the balance
owned by Santa Fe Productions Inc., the venture's production company, the
entertainer Dick Clark, and NuVim director Stanley Moger.
During the first quarter of 2006, NuVim acquired all of Santa Fe Productions'
24% interest in the powder subsidiary for a seven year warrant to purchase
50,000 shares of common stock for a dollar a share. The fair value of this
warrant was not significant to these financial statements.
On April 7, 2006 NuVim agreed with Messrs. Clark and Moger to acquire their
respective 12.5% interests in the powder subsidiary for 225,000 shares of NuVim
common stock each. NuVim executed the agreement on April 18. 2006. The NuVim
shares were exchanged for the interests in the powder subsidiary on April 20,
2006.
F-33
The value of these shares is approximately $90,000 and has been allocated to an
intangible asset, distribution rights, and in accordance with SFAS 142, the
Company will perform an impairment test within the one year of the closing date.
In the event that the value of this intangible asset can not be sustained, the
carrying value may be written down to its then defined fair value. Such charge
could be significant in future periods.
NOTE 19 - INCOME TAXES
Based on the Company's operating losses, no provision for income taxes has been
provided for the years ended December 31, 2005 and 2006. As of December 31,
2006, the Company had net operating losses of approximately $21,600,000 which
expire though the year 2021. Due to the Company's initial public offering there
was a change in ownership in accordance with relevant provisions of the Internal
Revenue Code, which are expected to limit the realization of certain net
operating losses.
At December 31, 2005 and 2006, the Company had deferred tax assets of
approximately $5,440,000 and $7,000,000, respectively. A valuation allowance for
the full amount of the deferred tax assets was established since it is more
likely than not that all of the deferred tax assets will not be realized.
Deferred tax assets principally consist of net operating losses and accrued
compensation expense.
In December 2005 and 2006, the Company received proceeds from the sale of the
rights to approximately $3,075,264 and $6,275,000 of New Jersey state income tax
losses, respectively. Based on an agreement with the State of New Jersey, the
Company was allowed to allocate and sell their net operating loss representing
$276,774 and $502,599 in 2005 and 2006, respectively, in potential tax benefits
under the Technology Business Tax Certificate Program administered by the New
Jersey Economic Development Authority. The Company received net proceeds of
$238,026 and $442,287 in 2005 and 2006, respectively, related to the sale and
accordingly recorded them as a tax benefit in the year received.
The state of New Jersey renews the program annually and currently limits the
aggregate proceeds to $60,000,000. We cannot be cerain if we will be able to
sell any of our remaining or future New Jersey loss carryforwards or tax credits
under this program.
NOTE 20 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
December 31,
---------------------------
2005 2006
------------ ------------
Interest paid $ 1,625 $ --
Non-cash investing and financing activities:
Assignment of senior secured notes payable
and accrued interest to related part $ 2,679,498 $ --
Automatic conversion of notes payable $ 245,000 $ --
Debt extinguished through issuance of common
stock - see Note 6 $ 7,679,916 $ --
Warrants issued for convertible note debt
discount $ 117,366 $ --
Settlement of deferred offering cost $ 95,000 $ --
Issuance of common stock for services $ 250,000 $ --
Stock issued for accounts payable $ 147,582 $ 110,584
Stock issued for accrued compensation -- $ 399,291
Stock issued for senior notes payable -- $ 67,000
Stock issued for management loan and accrued interest -- $ 96,186
Stock issued for interest in NuVim Powder, LLC,
distribution rights -- $ 90,000
Warrants issued for extension of senior note payable -- $ 52,500
Warrants issued for pre-paid expenses -- $ 34,000
F-34
NOTE 21 - COMMITMENTS
A. Royalty, License and Supply Agreement - Related Party
In March 2000 and amended in May 2004, the Company entered into an agreement for
the exclusive licensing rights, in specific territories, to produce and market
certain beverage products, patented and trademarked by SMBI. The agreement is
for a term of 10 years commencing on the date of the amendment, May 2004, and
provides for royalties of between 1% and 2% of net sales for the duration of the
agreement. The exclusive licensing agreement can be cancelled by SMBI if the
Company does not meet its annual purchasing commitment under the supply
agreement (see below), in which case, SMBI agrees to negotiate in good faith for
a non-exclusive supply agreement. Royalty expense of approximately $9,000 and
$19,000 was recorded in the years ended December 31, 2005 and 2006,
respectively, of which $10,000 and $29,000 are payable to SMBI at December 31,
2005 and 2006, respectively.
In January 2000 and amended in May 2004, the Company entered into a supply
agreement with SMBI for the purchase of SMBI's proprietary immune whey protein
concentrate. The agreement is for a term of 10 years, commencing on the date of
amendment, May 2004. During the years ended December 31, 2005 and 2006, the
Company purchased approximately $98,000, and $41,000, respectively, of the milk
and whey protein concentrates from SMBI.
SMBI is the Company's sole source of this whey protein concentrate. If the
Company is unable to obtain this product from SMBI, the Company's manufacturing
and distribution processes could be severely disrupted and operations could be
adversely affected.
The license and supply agreements are subject to the Company maintaining minimum
purchases of SMBI's proprietary immune whey protein concentrate. The agreement
requires the Company to purchased minimum amounts of whey protein which are
determined annually by mutual agreement. The Company has met its minimum
purchase agreement in 2005 of three metric tons (approximately $98,000). The
2006 commitment is approximately four metric tons ($172,000) in 2006. In each
subsequent
F-35
year the minimum purchase commitment is the greater of the prior year's actual
purchases or 115% of the prior year's minimum purchase commitment. For each
calendar year in which the Company fails to purchase its minimum purchase
requirements, the Company shall pay to SMBI a sum equal to the contract price
for the shortfall of product not purchased.
NuVim and SBMI have agreed that both the supply agreement and the license
agreement had terminated as of the end of 2006 and that NuVim's only remaining
obligation to SBMI was for $29,000 for unpaid royalties. This amount had been
paid during April 2007.
B. Lease
The Company leases office space under an agreement which expired in December
2006, with annual payments approximating $58,000. During the years ended
December 31, 2005 and 2006, rent expense was approximately $58,000. As of
December 31, 2006, the Company does not have a lease agreement with the landlord
and is operating on a month to month basis.
C. Employment Agreements
In September 2004, the Company entered into employment agreements with three of
its executive officers that will become effective upon the closing of the
proposed public offering of its common stock, which occurred on June 24, 2005.
The employment agreements have a term of three years with an aggregate annual
salary of $575,000. All except one of these agreements were cancelled as these
employees left the Company. The remaining salary agreement at December 31, 2006
has a salary obligation of $225,000.
NOTE 22 - RELATED PARTY TRANSACTIONS
Included in selling, general and administrative expenses are consulting fees to
a stockholder and convertible note holder to act as general counsel and
secretary of the Company of approximately $15,000 and $66,000 for the years
ended December 31, 2005 and 2006, respectively.
Included in selling, general and administrative expenses are salaries to
immediate family members of an executive officer of the Company of approximately
$27,000 and $48,000 for the years ended December 31, 2005 and 2006,
respectively.
Included in selling, general and administrative expenses are royalties paid to
SMBI, a stockholder of the Company, in the amount of $9,000 and $19,000 for the
years ended December 31, 2005 and 2006, respectively. Royalties payable which
are included in accounts payable-related party, amounted to $10,000 and $29,000
at December 31, 2005 and 2006, respectively
Included in cost of sales are purchases from SMBI, a stockholder of the Company
in the amount of $98,000 and $41,000 for the years ended December 31, 2005 and
2006.
F-36
NOTE 23 - SUBSEQUENT EVENTS
A. Stock Option Plan
In March 2007, the Board of Directors approved the 2007 Incentive Stock Option
Plan for the benefit of its officers, employees and consultants. The plan
authorizes the grant of 2,000,000 shares of common stock. The plan is subject to
the approval of shareholders at the Company's annual meeting in May of 2007.
B. Sales for Cash
On March 1 and 8, 2007, NuVim issued a total of 433,333 shares to an unrelated
accredited investor for $130,000 or $.30 per share. No commissions or fees were
paid in connection with this sale.
On March 8, 2007, at the same time as the second purchase, three of NuVim's
outside directors, Doug Scott, Peter DeCrescenzo, and Cal Hodock purchased
50,000, 33,333, and 16,667 shares respectively at the same price totaling
$30,000 or $0.30 per share.
At the end of the first quarter of 2007, NuVim received $300,000 to purchase
1,000,000 shares of common stock from Julius Baer Multistock SICAV US Stock
Fund, a European Institutional Investor a price of $.30 per share. NuVim paid a
commission of $30,000 to Continental Advisors SA in connection with this sale.
In addition, Continental Advisors SA received $9,000 for its expenses without
accounting for it.
In April 2007 five investors represented by Paulsen Investment Company, Inc. and
an additional private investor purchased a total of 872,667 shares of common
stock for $261,800 or $0.30 per share. Paulson will receive a commission of
$22,680 on the 772,667 shares sold to its clients.
All cash raised in these sales has been applied to working capital.
C. Debt and Accrued Compensation Conversion
On January 30, 2007, NuVim issued 72,915 shares of common stock in lieu of cash
for unpaid 2006 salary of approximately $14,600 due to Michael Vesey, NuVim's
former CFO.
D. Stock Issued for Services
On January 29, 2007, NuVim agreed with its Secretary and General Counsel to
issue 100,000 shares of common stock as additional compensation for his services
during 2007. The services have a value of approximately $16,000.
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On January 29, 2007, NuVim agreed with its operations director to issue a total
of 50,000 shares of common stock as additional compensation for his services.
The shares have a value of approximately $8,000. He agreed in writing to
restrictions on resale placed with the NuVim's transfer agent and the printing
of a legend on its certificate. Because of these factors, this sale was exempt
from registration under the Securities Act as not involving a public
distribution under section 4(2) and 4(6)
On January 30, 2007 NuVim agreed with a communications expert to provide various
services for a total of 40,000 shares of common stock. The services have a value
of approximately $6,400. He agreed to restrictions on resale placed with the
NuVim's transfer agent and the printing of a legend on its certificate. Because
of these factors, this sale was exempt from registration under the Securities
Act as not involving a public distribution under section 4(2) and 4(6).
In March 2007, NuVim issued 100,000 shares of common stock to Mr. Kundrat,
NuVim's CEO for the remaining balance of his 2006 executive bonus due him in the
amount of $32,000.
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