E.     Loss Per Share

Loss per share is presented in accordance with the provisions of SFAS No. 128, Earnings Per Share. Basic EPS is calculated by dividing the income or loss available to common stockholders by the weighted number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. These common stock equivalents have been omitted from earnings per share because they are anti-dilutive. Basic and diluted EPS were the same for the six months ended June 30, 2005 and 2004. Common stock equivalents outstanding at June 30, 2005 consisted of 1,130,816 incentive stock options and warrants to purchase 6,831,387 shares of common stock at June 30, 2005.

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F. Recent Accounting Pronouncements

In December 2004, the FASB revised FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." It applies in the first reporting period beginning after December 15, 2005. The adoption of Statement No. 123 (revised 2004) is not expected to have a material impact on the Company's financial position, liquidity, or 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 $1,577,000 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.

NOTE 4 - NOTES PAYABLE - UNDERWRITER

In May 2005, the Company borrowed $200,000 from the investment bank that managed the initial public offering. The note was repaid upon the closing of the stock offering on June 24, 2005. The note did not bear any interest. The Company also paid $21,874 of principal and accrued interest on an advance from the underwriter made in July of 2004.

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NOTE 5 - ASSIGNMENT OF SENIOR NOTES PAYABLE

On May 22, 2005 the bank holding a $2,500,000 note receivable from the Company assigned the note to the holder guarantor of the note, a holder of the Company’s preferred stock and senior secured convertible promissory notes. The note was extinguished in exchange for common stock upon closing of the initial public offering (see note 5).

NOTE 6 - DEBT EXTINGUISHMENTS

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 are subject to lock-up agreements with the Company’s underwriter of 6 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 excess of 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, Troubled Debt Restructurings. The 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, 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
		Shares Issued			Fair Value			Debt Extinguishment			Paid In  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

NOTE 7 - CONVERTIBLE NOTE

 

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’s 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. On June 24, 2005, the note automatically converted into 245,000 unregistered units substantially identical to the units sold at the initial public offering. 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 beneficial conversion feature prior to the closing of the initial public offering because its terms change based on the occurrence of future events outside the control of the holder of the convertible note. Upon completion of the public offering on June 24,2005, the Company recorded interest expense of $49,755 to reflect the beneficial conversion feature of the note.

NOTE 8 - SENIOR NOTE PAYABLE - RELATED PARTY

 

On May 31, 2005, holders of senior secured notes - related party agreed to extend the due date on $500,000 of outstanding notes payable to the earlier of the completion of a subsequent stock sale, sale of assets, change of control or financing by the Company, or November 30, 2006. The notes accrue interest at 8%.

 

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NOTE 9 - STOCKHOLDER LOANS - SUBORDINATED CONVERTIBLE PROMISSORY NOTES

 

In May 2005, holders of stockholder loans - subordinated convertible promissory notes agreed to extend the due date on $225,000 of outstanding notes payable to the completion of a stock sale subsequent to the initial public offering in June 2005 by the Company. The notes accrue interest at 10%.

 

NOTE 10 - NOTE PAYABLE

 

In June 2005, holders of notes payable with a face amount of $150,000 agreed to extend the due date to the completion of a stock sale subsequent to the initial public offering in June 2005 by the Company, if progress payments of $5,000 upon the completion of the initial public stock offering, and $2,000 each month thereafter, are made. The notes accrue interest at 10%.

NOTE 11 - PREFERRED STOCK CONVERSION

On June 24, 2005, 4,875,850 shares of the Company’s series A preferred stock and 3,623,000 shares of Series C preferred stock automatically converted into 88,732 and 65,881 shares of common stock, respectively, upon closing of the Company’s initial public offering.

NOTE 12 - WARRANTS

On June 24, 2005, the Company issued warrants to the managing underwriter for its initial public offering to purchase 270,000 units identical to those issued in the IPO. The warrants become exercisable December 20, 2005 and expire five years from the date of the IPO at a price of $1.20 per unit.

Also, on June 24, 2005, debtholders cancelled warrants to purchase 63,792 shares of common stock and 4,500,000 shares of preferred stock in connection with the extinguishment of debt.

 

The following is a summary of warrants outstanding at June 30, 2005:

Date Issued		Basis for Warrant Issuance			Number of Shares of Common Stock Pertaining to Warrant			Exercise Price per Share
November 2000			Placement agent fees for series A preferred stock (a) (b)			8,714		$	55.00
June 2001			Stockholder demand notes payable (e)			8,823		$	55.00
November 2002			Placement agent fees for series C preferred stock (b) (f)			1,273		$	11.00
March 2003			Accrued compensation			2,577		$	11.00
September 2004			Second amended services agreement (g) (b)			650,000		$	1.00
July 2004			Amended services agreement (h)			—			—
June 2005			Conversion of note payable(d)			245,000		$	1.50
June 2005			Conversion of note payable(d)			245,000		$	2.00
June 2005			Class A warrants IPO (c) (d)			2,700,000		$	1.50
June 2005			Class B warrants IPO(d)			2,700,000		$	2.00
June 2005			Underwriters warrant(d)			270,000		$	1.20

(a)	Expires November 2007
(b)	Includes anti-dilution agreement and cashless exercise right.
(c)	Callable at $.25 if common stock trades at $2.00 for five days.
(d)	Expires June 24, 2010.

 

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(e)	Expires September 2006.
(f)	Expires the June 20, 2008.
(g)	Expires September 14, 2014.
(h)	Warrant to purchase an amount of common stock to bring spokesperson’s total holdings to 9.9% of outstanding fully-diluted common shares of the Company immediately after its initial public offering. The spokesperson’s holdings exceeded 9.9% immediately after the offering. Therefore, no additional shares were issuable under the warrant.

NOTE 13 - EMPLOYEE STOCK OPTIONS

In January 2005, the Board of Directors approved the 2005 Incentive Stock Option Plan for the benefit of its officers, employees and consultants. The Board also approved the 2005 Directors’ Stock Option Plan for the Company’s board members. These plans became effective concurrently with the closing of the Company’s initial public offering. The Plans expire ten years from the date of adoption. The Company is authorized to grant options for up to 1,500,000 common shares under the employee plan, and 200,000 under the directors plan. Under each Plan, the option price of an ISO may not be less than the fair market value of a share of common stock on the date of grant. An ISO may not be granted to a “ten percent stockholder” (as such term is defined in Section 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. Nonqualified stock options under both plans may be granted at exercise prices equal to or greater than 85% of the fair market value on the date of grant. The maximum term of each stock option granted to persons other than ten percent stockholders is ten years from the date of the grant. The Company may also grant up to options to purchase up to 35,373 shares of common stock under three plans adopted in 2000, 2001 and 2003, which have similar terms.

A summary of the activity in the Plans is as follows:

		Number of Shares			Weighted- Average Exercise Price
Outstanding December 31, 2004			13,116		$	14.04
Cancelled			—			—
Issued			1,117,700		$	1.00
Outstanding June 30, 2005			1,130,816		$	1.25

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 6 and 9.9 years as of December 31, 2004 and June 30, 2005, respectively.

Pro-forma information regarding net loss is required by SFAS No. 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS No. 123. Since there is no trading history for the Company’s stock, the fair value of the Company’s issued options and warrants were estimated at the date of grant using the fair value method with the following assumptions:

Assumptions:
Risk-free rate		3.5%-4.85	%
Dividend yield		0
Volatility factor of the expected market		82	%
Price of the Company’s common stock		1.00
Average life		7 years

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The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

NOTE 14 - SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

		Six Months Ended June 30,
		2005			2004
Assignment of senior secured notes payable and accrued interest to related party		$	2,679,498			—
Automatic conversion of notes payable		$	245,000			—
Debt extinguished through issuance of common stock - see note 6		$	7,679,916			—
Interest Paid			—			—

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Quarterly Report on Form 10-QSB. This discussion contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, but are not limited to, statements regarding:

 

•

possible or assumed future results of operations, including statements regarding revenue mix, cost of revenues, promotion of our products through advertising, sampling and other programs, changes to our internal financial controls, trends in our operating expenses and provision for income taxes, increased costs as a result of becoming a public company and expenses related to stock-based compensation;

•

financing plans, including the adequacy of financial resources to meet future needs;

•

business strategies, including any expansion into new products;

•

our industry environment, including our relationships with our significant customers and suppliers;

 

•

potential growth opportunities; and

 

•

the effects of competition.

 

Some of our forward-looking statements can be identified by use of words such as “may,”“will,”“should,”“potential,”“continue,”“expects,”“anticipates,”“intends,”“plans,”“believes” and “estimates.”

 

Forward-looking statements involve many risks, uncertainties and assumptions. Actual results may differ materially from those expressed in the forward-looking statements for a number of reasons, including those appearing under the caption “Factors Affecting Operating Results” and elsewhere in this Quarterly Report on Form 10-QSB. The cautionary statements contained or referred to in this report should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

         We produce, market and distribute NuVim dietary supplement beverages, which contain two proprietary micronutrients derived from cow’s milk, known as LactoActin and LactoMune. NuVim beverages are non-dairy, virtually lactose-free and fortified with vitamins and minerals. Except for Asia, Australia and New Zealand, we have an exclusive worldwide license agreement with Stolle Milk Biologics, Inc. (“SMBI”) to use these proprietary micronutrients in carbonated and non-carbonated beverages (and in powders designed for reconstitution based on those beverages), excluding certain milk, yogurt and nutritional meal replacement products. We currently sell our ready-to-drink dietary supplement beverages in 13 states, principally in the northeast and southeast, and the District of Columbia. Our products are produced by third party manufacturers of beverage products. We generally sell these products to supermarket chain warehouses, who in turn distribute the product to their stores. We also sell to some distributors that sell our product directly to individual stores.

NuVim was established in 1999 in conjunction with SMBI, the owner of the proprietary technology, to produce, market and distribute beverages that use this proprietary micronutrient technology. Our product line currently consists of three varieties of a natural, fruit-flavored dietary supplement beverage. In addition, in the second half of 2005, we plan to introduce a three variety powder version of our product to be marketed on a national basis through our website and through our subsidiary, NuVim Powder LLC. The NuVim powder mix will also contain the same consumer benefits as the original refrigerated product.

 

          We focus on developing brand awareness, and trial and repeat purchases through advertising and sampling, coupon distribution and promotional price discounts. These marketing expenditures help to enhance distribution and availability of our products as well as increase consumer awareness and preference for our brands. We believe that these marketing and promotional activities are critical to the growth of our business and expect to continue these programs in the future.

          

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         In our initial product launch in 2000, we distributed the product through supermarkets in the New York metropolitan area. We later expanded to the Baltimore/Washington, Philadelphia, Harrisburg, Pittsburgh, Rochester, Buffalo, Syracuse and Richmond metropolitan areas. The product launch was supported by radio advertising, product sampling, store circular advertising and other promotional activities. The product launch resulted in increased gross sales in each of the years 2000, 2001 and 2002, to a high of $3,539,118 in 2002. During the initial product roll-out, the cost of marketing and promotional programs to support the growth resulted in negative cash flows in each of these years. Because we were not able to raise additional financing required to support the promotional and marketing programs, we were forced to stop substantially all advertising and sampling and coupon programs and reduced promotions of our products in the second half of 2002. As a result of these cutbacks in advertising, sampling and promotional activities, our gross revenues declined each quarter, from the fourth quarter of 2002, through the second quarter of 2004.

During the third quarter of 2004, we added distribution in the southeastern United States, through the Publix supermarket chain and a forty-three store test at the Wal Mart supermarket chain. We also secured $1,000,000 in senior secured debt financing, part of which was used to launch a television advertising campaign to promote our refrigerated product and implement sampling programs at some stores. We experienced increased gross case shipments over the immediately preceding quarter of approximately 4.6% in the third quarter of 2004, 2.8% in the fourth quarter of 2004 and 9.3% in the first quarter of 2005, we believe, as a result of the expansion, sampling and advertising.

Case shipments declined in the second quarter compared to the first quarter of 2005, by 27% to 15,028, primarily resulting from decreased shipments to the Publix Supermarkets chain in the Southeast, and to a lesser extent, decreased sales in the New York/New Jersey markets. In the first quarter of 2005 we sponsored in-store sampling programs at approximately 900 Publix stores in the Southeastern United States. We did not repeat the sampling promotions or advertising in the second quarter due to a lack of funding. We had anticipated closing on our initial public offering during the first quarter of 2005 to support sampling and promotional programs at Publix and other stores. However, the offering was reduced in size and delayed until the end of the second quarter of 2005, resulting in a disruption and reduction in size in planned promotional programs. This resulted in a decline in sales and the discontinuance of our products at certain stores in the Publix supermarket chain, which accounted for approximately 27% and 12% of our gross sales in the first and second quarter of 2005, respectively. Also, Publix stocks our refrigerated product in the milk section, as opposed to the refrigerated juice section at most other stores that carry our product. We plan to reinstate marketing programs in a smaller number of Publix stores (approximately 250) in the third quarter of 2005 to better understand consumer behavior and how to increase purchases of our product in the milk section, until we secure funding to support promotions on a larger basis.

 

         The table set forth below discloses selected data regarding sales for the three and six month periods ended June 30, 2005 and 2004. Data from any one or more quarters is not necessarily indicative of annual results or 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 servings). 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 represents the number of cases shipped to the customer prior to any returned cases for product that has not been sold by its expiration date.

Unit Case Volume/Case Sales

		Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
Gross Cases Sold			15,028			17,079			35,659			40,150
Gross Sales		$	273,789		$	311,359		$	649,508		$	732,914
Net Sales		$	148,954		$	229,180		$	357,830		$	547,084

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         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 additional slotting fees. Cases sold decreased 2,051, or 12%, for the three months ended June 30, 2005, when compared to the same quarter prior year and 4,491 or 11.2% for the six months ended June 30, 2005 when compared to the same period last year. As discussed above, we believe that the number of cases sold is directly impacted by the effectiveness of advertising, sampling and marketing activities we are able to fund in support of our refrigerated product. We intend to focus our promotional spending on selected growth opportunities such as sampling in newly introduced Publix and Wal-Mart stores in the state of Florida, and introduction of our Nuvim Powder product line until we are able to obtain additional funding for a larger promotional program.

Results of Operations

Results of operations for the three months ended June 30, 2005 compared to the three months ended June 30, 2004

          Gross Sales. For the three months ended June 30, 2005, gross sales were $273,789, a decrease of $37,570, or 12% lower than gross sales of $311,359 for the three months ended June 30, 2004. The decrease in gross sales is primarily attributable to a decrease in case volume in stores New York, New Jersey, Pennsylvania, Virginia and Maryland, partially offset by sales resulting from the addition of distribution in the Southeastern United States through the Publix and Wal-Mart Supermarket chains. We suspended substantially all advertising after the first half of 2002 due to a lack of funding. This resulted in a steady decline in sales volume in existing stores in each successive quarter through the second quarter of 2004, due to a decrease in repeat purchases of our products and the loss of certain accounts, due to the lower sales volume per store. During the third quarter of 2004, we secured $1,000,000 of financing from senior secured promissory notes and reinstated advertising and sampling programs. We also added distribution in the Southeastern United States through the Publix and Wal-Mart supermarket chains, resulting in increased gross sales through the first quarter of 2005. However, we did not have funds to support sampling programs in the Publix supermarkets during the second quarter of 2005, resulting in decreased sales and discontinuance of the product at certain locations. We plan to reintroduce sampling programs in a smaller number (approximately 250) Publix stores with the proceeds of our initial public offering completed in June 2005.

          Discounts, Allowances and Promotional Payments. For the three months ended June 30, 2005, promotional allowances and discounts were $124,835, an increase of $42,656 or 52%, over the promotional allowances and discounts of $82,179 for the three months ended June 30, 2004. This increase is primarily attributable to increased promotional price allowances, coupons and other incentives of $29,176, product returned after its expiration date of 8,947 and slotting fees of $6,647. Promotional price allowances, coupons and other incentives increased primarily due to increased promotional price programs in the New York and New Jersey markets. We advertised in store circulars and offered reduced prices to customers during the second quarter. 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 as a means to promote consumer sampling and trial of our product into the foreseeable future. As the product matures and a higher percentage of users of our product are repeat purchasers, we expect coupon expense, relative to gross sales, to decline. Product returned after its expiration date increased primarily due to credits given to retailers for unsold product resulting from the suspension of sampling programs in the second quarter of 2005 due to a lack of funding. Slotting fees increased due to fees paid to gain distribution in approximately 400 stores supplied by distributor serving the Mid-Atlantic region of the United States. Total Discounts, Allowances and Promotional payments as a percentage of gross sales increased from 26% for the three months ended June 30, 2004 to 46% for the three months ended June 30, 2005, primarily due to the increased coupons and price discounts discussed above. Discounts, Allowances and Promotional Payments are comprised of the following:

 

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		Three Months Ended June 30,
								Increase (Decrease)			Percentage
		2004			2005
Discounts for timely payment		$	6,417		$	4,303		$	(2,114	)		(33	)%
Product returned after its expiration date			45,144			54,091			8,947			(20	)%
Promotional price allowances, coupons and other incentives			29,401			58,577			29,176			99	%
Slotting fees			1,217			7,864			6,647			546	%
Total Discounts, Allowances and Promotional Payments		$	82,179		$	124,835		$	42,656			52	%

          Net Sales. Net sales for the three months ended June 30, 2005 were $148,954, a decrease of $80,226, or 35% lower than net sales of $229,180 for the three ended June 30, 2004. The decrease in net sales is primarily attributable to the decreased case sales and promotional pricing discussed above.

          Cost of Sales. For the three months ended June 30, 2005, cost of sales were $169,675, an increase of $1,330, or 1% higher than cost of sales of $168,345 for the three months ended June 30, 2004. Cost of sales as a percentage of gross sales increased to 62% for the three months ended June 30, 2005, compared to 54% for the three months ended June 30, 2004. The increase in cost of sales as a percentage of gross sales was primarily due to increased ingredient costs and increased packaging costs resulting from shorter production runs due to the lower sales volume.

          Gross Profit (Loss). Gross profit (Loss) was $(20,721) for the three months ended June 30, 2005, a decrease of $81,556 from the $60,835 gross profit for the three months ended June 30, 2004. Gross profit (loss) as a percentage of gross sales was (8%) for the three months ended June 30, 2005 compared to gross profit of 19.5% for the three months ended June 30, 2004. The decrease in gross profit as a percentage of gross sales was primarily due to the expense related to promotional pricing and increased ingredient costs discussed above.

          Selling, General and Administrative Expenses. Selling, general and administrative expenses were $517,364 for the three months ended June 30, 2005, an increase of $176,151, or 52%, from selling, general and administrative expenses of $341,213 for the three months ended June 30, 2004. Selling, general and administrative expenses exceeded net sales in both periods as we are in an early stage of our development and have not achieved sales volumes sufficient to generate net sales in excess of our selling, general and administrative expenses. The increase in selling, general and administrative expenses was primarily attributable to increased expenses related to the in store sampling programs of approximately $51,000, increased administrative salaries of approximately $40,000 due to the addition of a full time chief financial officer, increased advertising spending of $25,000, and increased shipping charges of $15,000 related to distribution to the Southeast markets from the warehouse facility in Pennsylvania.

          Loss from Operations. Loss from operations was $538,085 for the three months ended June 30, 2005 compared to $280,378 for the three months ended June 30, 2004. The $257,707 increase in loss from operations was primarily attributable to the decreased gross profit and increased operating expenses described above.

          Interest Expense. Interest expense was $210,077 for the three months ended June 30, 2005, an increase of $87,051, or 70%, from interest expense of $123,026 for the three months ended June 30, 2004. The increase in interest expense is primarily attributable to an increase in interest on borrowings from the senior notes - related party. Between July and December 2004, we borrowed $1,000,000 under a loan agreement with our spokesperson to fund operations and advertising programs. 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. Therefore we expect interest expense to decline in future periods due to lower outstanding borrowings.

          Gain on Forgiveness of Accounts Payable. In 2004, gain on forgiveness of accounts payable represents the difference between the invoiced amount and the amount in the form of a note payable for fees to a law firm incurred and expensed in 2002. In 2005, gain on forgiveness of accounts payable represents the difference between the principal and accrued interest due on notes payable and the fair value of common stock issued to retire those obligations.

 

          Net Loss. Net loss was $600,609 for the three months ended June 30, 2005 compared to $403,404 for the three months ended June 30, 2004. The $197,205 increase in net loss was primarily attributable to the lower gross profit and higher operating expenses discussed above.

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Results of operations for the six months ended June 30, 2005 compared to the six months ended June 30, 2004

         Gross Sales. For the six months ended June 30, 2005, gross sales were $649,508, a decrease of $83,406, or 11% lower than gross sales of $732,914 for the six months ended June 30, 2004. The decrease in gross sales is primarily attributable to an 11% decrease in case volume resulting from reduced promotional and discontinued advertising spending. We suspended substantially all advertising after the first half of 2002 due to a lack of funding. This resulted in a steady decline in sales volume in each successive quarter through the second quarter of 2004, due to a decrease in repeat purchases of our products and the loss of certain accounts, due to the lower sales volume per store. During the third quarter of 2004, we secured $1,000,000 of financing from senior secured promissory notes and reinstated advertising and sampling programs. We also added distribution in the Southeastern United States through the Publix and Wal-Mart supermarket chains, resulting in increased gross sales through the first quarter of 2005. However, we did not have funds to support sampling programs in the Publix supermarkets during the second quarter of 2005, resulting in decreased sales and discontinuance of the product at certain locations. We will reintroduce sampling programs in a smaller number (approximately 250) Publix stores with the proceeds of our initial public offering completed in June 2005.

         Discounts, Allowances and Promotional Payments . For the six months ended June 30, 2005, promotional allowances and discounts were $291,678, an increase of $105,848 or 47% higher than the promotional allowances and discounts of $185,830 for the six months ended June 30, 2004. This increase is primarily attributable to increased Promotional price allowances, coupons and other incentives of $87,116, and slotting fee’s of $18,347. Promotional price allowances, coupons and other incentives increased due to sampling programs at Publix stores in the first quarter of 2005 where $1.00 coupons were distributed in store locations, and promotional price discounts in the New York and New Jersey markets in the second quarter of 2005. We record the estimated redemptions based on our historical experience at the time the coupon is distributed 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 also record reimbursements given to retailer for consumer price promotions in accordance with EITF 01-09. We expect to continue to use coupon distribution and price promotions as a means to promote consumer sampling and trial of our product into the foreseeable future. Slotting fees increased due to fees paid to gain distribution in approximately 400 stores supplied by distributor serving the Mid-Atlantic region of the United States. Discounts, Allowances and Promotional payments as a percentage of gross sales increased from 25% for the six months ended June 30, 2004 to 44% for the six months ended June 30, 2005, primarily due to the increased coupons and price discounts discussed above. Discounts, Allowances and Promotional Payments are comprised of the following:

		Six Months Ended June 30,
		2004			2005			Increase (Decrease)			Percentage
Discounts for timely payment		$	14,682		$	8,988		$	(5,694	)		(39	)%
Product returned after its expiration date			79,013			85,092			6,079			(12	)%
Promotional price allowances, coupons and other incentives			86,619			173,735			87,116			98	%
Slotting fees			5,517			23,864			18,347			332	%
Total Discounts, Allowances and Promotional Payments		$	185,830		$	291,679		$	105,849			(49	)%

          Net Sales. Net sales for the six months ended June 30, 2005 were $357,830, a decrease of $189,254, or 35% lower than net sales of $547,084 for the six months ended June 30, 2004. The decrease in net sales is primarily attributable to the decrease in cases sold and increased Discounts, allowances and promotional payments discussed above.

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         Cost of Sales. For the six months ended June 30, 2005, cost of sales were $377,510, a decrease of $11,911 or 3% lower than cost of sales of $389,421 for the six months ended June 30, 2004. The decrease in cost of sales was primarily attributable to a 39% decrease in cases sold discussed above. Cost of sales as a percentage of gross sales increased to 58% for the three months ended June 30, 2005, compared to 53% for the three months ended June 30, 2004. The increase in cost of sales as a percentage of gross sales was primarily due to increased ingredient costs and increased packaging costs resulting from shorter production runs due to the lower sales volume.

 

         Gross Profit (loss). Gross profit (loss) was $(19,680) for the six months ended June 30, 2005, a decrease of $177,342, from the $157,663 gross profit for the six months ended June 30, 2004. Gross profit (loss) as a percentage of gross sales was (3)% for the six months ended June 30, 2005, compared to a gross profit as a percentage of gross sales of 22% for the six months ended June 30, 2004. The decrease in gross profit as a percentage of gross sales was primarily due to the increased coupons and price incentives discussed above.

         Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1,054,055 for the six months ended June 30, 2005, an increase of $360,192 or 52%, from selling, general and administrative expenses of $693,683 for the six months ended June 30, 2004. Selling, general and administrative expenses exceeded net sales in both periods as we are in an early stage of our development and have not achieved sales volumes sufficient to generate net sales in excess of our selling, general and administrative expenses. The increase in selling, general and administrative expenses was primarily attributable to increased advertising and in-store sampling expenses of $175,000 and increased administrative salaries of $125,000, primarily due to the addition of a Chief Financial Officer in 2005.

         Loss from Operations. Loss from operations was $1,073,735 for the six months ended June 30, 2005 compared to $536,020 for the six months ended June 30, 2004. The $537,710 increase in loss from operations was primarily attributable to the increased operating expenses described above.

         Interest Expense. Interest expense was $388,879 for the six months ended June 30, 2005, a decrease of $124,848, or 47%, from interest expense of $264,031 for the six months ended June 30, 2004. The increase in interest expense is primarily attributable to an increase in interest on borrowings from the senior notes - related party. Between July and December 2004, we borrowed $1,000,000 under a loan agreement with our spokesperson to fund operations and advertising programs. 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. Therefore we expect interest expense to decline in future periods due to lower outstanding borrowings.

Gain on Forgiveness of Accounts Payable. In 2004, Gain on forgiveness of accounts payable represents the difference between the invoiced amount and the amount in the form of a note payable for fees to a law firm incurred and expensed in 2002. In 2005, Gain on forgiveness of accounts payable represents the difference between the principal and accrued interest due on notes payable and the fair value of common stock issued to retire those obligations.

         Net Loss. Net loss was $1,315,061 for the six months ended June 30, 2005 compared to $800,050 for the six months ended June 30, 2004. The $515,011 increase in net loss from operations was primarily attributable to the lower gross profit and higher operating expenses discussed above.

Liquidity and Capital Resources

         Our operations to date have generated significant operating losses that have been funded through the issuance of common stock, preferred stock and external borrowings. We will require additional sources of outside capital to continue our operations and currently have no identifiable source.

     

         On June 24, 2005, we completed an initial public offering of 2,700,000 units, with each unit consisting of one share of common stock, one redeemable Class A warrant, and one Class B warrant to purchase common stock. The offering resulted in net proceeds to the Company of $1,577,000 after deducting underwriting discounts and offering expenses. We expect the net proceeds, along with product revenues and expected proceeds from the sale of State of New Jersey Tax benefits of approximately $250,000 to be adequate to fund our operations through 2005. However, we may need additional funding to continue operations beyond that date, or to fund advertising and promotional programs to maintain and increase sales. We did not use any of the proceeds of the initial public offering to fund promotional activies in the second quarter of 2005.

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         In May 2005, we borrowed $200,000 from the investment bank that managed the initial public offering. The note was repaid upon the closing of the stock offering on June 24, 2005. The note did not bear any interest. We also paid $21,874 of principal and accrued interest on an advance from the underwriter made in July of 2004.

 

On June 24, 2005, we issued 1,116,611 shares of common stock in settlement of $7,684,000 of notes payable, accrued interest, accounts payable, and accrued salaries due to executive officers at a debt conversion value per share ranging from $1.00 to $13.00 per share of common stock. The table below summarizes the debt extinguishments transactions:

 

		Shares Issued			Debt Extinguishment
Senior secured notes-related parties			461,700		$	6,141,527
Accrued salaries			250,696			593,750
Senior secured notes payable - related parties			250,000			500,000
Subordinated notes payable and accrued interest			88,882			266,639
Related party advances			23,000			69,000
Accounts payable			42,333			109,000
Total			1,116,611		$	7,679,916

On June 24, 2005, a convertible note payable with a face value of $175,000 automatically converted into 245,000 unregistered units substantially identical to the units sold at the initial public offering. 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 beneficial conversion feature prior to the closing of the initial public offering because its terms change based on the occurrence of future events outside the control of the holder of the convertible note. Upon completion of the public offering on June 24, 2005, we recorded interest expense of $49,755 to reflect the beneficial conversion feature of the note.

Additionally, we have extended the due date on $500,000 of outstanding senior secured notes payable to the earlier of the completion of an a subsequent stock sale, sale of assets, change of control or financing by the Company, or November 30, 2006.

 

As of June 30, 2005, we had cash on hand of $1,219,000, and a working capital deficit of $858,000. We have negotiated with certain noteholders and vendors to defer payment or accept progress payments on approximately $400,000 of accounts payable, and $436,000, of notes payable and accrued interest thereon until we are able to raise additional financing. We owe $200,000 to SMBI, the provider of the exclusive whey protein concentrate used in our product, which is due on January 15, 2006. If we do not pay this amount, we risk losing the exclusive right to the ingredient. As of July 31, 2005, we had remaining cash on hand of approximately $800,000. We will need to raise additional financing to pay our past due obligations, fund operating losses and to support sales and marketing programs to increase sales of our products. If we are not able to identify additional sources of financing, we may not be able to continue operations beyond January 2006.

                 Net cash used in operating activities for the six months ended June 30, 2005 was $1,058,875 compared to cash used in operating activities of $69,609 during 2004. The increase in cash used by operating activities of $989,266 was primarily attributable to an increased net loss of $663,536 and payments of related party accounts payable, including $250,000 to SMBI our exclusive provider of whey protein concentrate, of $295,320.

         Net cash provided by financing activities was $2,000,709 for the six months ended June 30, 2005, compared to $15,000 for the six months ended June 30, 2004. The increase of $1,985,709 is due to net proceeds from the initial public offering of the our common stock.

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Application of Recent and Critical Accounting Policies and Pronouncements

Recent Accounting Pronouncements

In December 2004, the FASB revised FASB Statement No. 123, Accounting for Stock-Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services." It applies in the first reporting period beginning after December 15, 2005. The adoption of Statement No. 123 (revised 2004) is not expected to have a material impact on the Company's financial position, liquidity, or results of operations

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, 2004.

         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 reimbursements to our customers for returned, unsold product.

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         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. 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 June 30, 2005, 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.

There are at present no legal proceedings pending against the Company.

Use of Proceeds From Sales of Registered Securities

On June 20, 2005, the SEC declared effective our Registration Statement on Form SB-2 (Reg. No. 333-120938), and we closed our initial public offering of 2,700,000 units on June 24, 2005. Each unit consisted of one share of common stock, one Class A redeemable public warrant and one Class B non-redeemable public warrant. The managing underwriter of our initial public offering was Paulson Investment Company, Inc. The initial public offering price was $1.00 per unit. The gross proceeds of the offering were $2,700,000. Our net proceeds from the offering, after deducting the underwriter’s discount of $243,000 and other fees and expenses, aggregated $1,577,466.

As of June 30, 2005, we had applied proceeds from the initial public offering as follows:

Payment to SMBI for assignment of NuVim trademark and payable		$	250,000
Repayment of short-term loans from the representative			100,000
Available for working capital and future operations			1,227,466
Total		$	1,577,466

 

(a) The following exhibits are filed as part of this report:

Exhibit No.		Description
31.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NUVIM, INC.
Date: August ___ , 2005				By:		/s/ RICHARD P. KUNDRAT
						Richard P. Kundrat Chief Executive Officer and Chairman of the Board (Principle Executive Officer)
Date: August ___, 2005				By:		/s/ MICHAEL VESEY
						Michael Vesey Chief Financial Officer (Principal Financial and Accounting Officer)

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