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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 29, 2000
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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BIONUTRICS, INC.
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 86-0760991
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2425 EAST CAMELBACK ROAD, SUITE 650
PHOENIX, ARIZONA 85016
(602) 508-0112
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(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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RONALD H. LANE, PH.D.,
CHAIRMAN OF THE BOARD, CHIEF
EXECUTIVE OFFICER, AND PRESIDENT
2425 EAST CAMELBACK ROAD, SUITE 650
PHOENIX, ARIZONA 85016
(602) 508-0112
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(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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Copies to:
JEAN E. HARRIS, ESQ.
BRIAN H. BLANEY, ESQ.
GREENBERG TRAURIG, LLP
ONE EAST CAMELBACK
PHOENIX, ARIZONA 85012-1656
(602) 263-2300
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] __________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED
AMOUNT TO BE AGGREGATE OFFERING MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SHARES TO BE REGISTERED REGISTERED PRICE PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE(1)
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value......... 560,000 shares $1.00 $560,000 $140.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT
NOTICE. BIONUTRICS, INC. MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND BIONUTRICS, INC. IS NOT
SOLICITING OFFERS TO BUY THESE SECURITIES, IN ANY JURISDICTION WHERE THE OFFER
OR SALE OF THESE SECURITIES IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED DECEMBER 29, 2000
PROSPECTUS
560,000 SHARES
BIONUTRICS, INC.
COMMON STOCK
This prospectus relates to the sale of up to 560,000 shares of
Bionutrics, Inc. common stock and common stock issuable upon the exercise of
warrants held by certain selling stockholders from time to time. We expect that
sales made pursuant to this prospectus will be made
- in broker's transactions,
- in transactions directly with market makers, or
- in negotiated sales or otherwise.
The shares may be sold at current market prices or at negotiated prices
at the time of the sale. We will pay the expenses incurred to register the
shares for resale, but the selling stockholders will pay any underwriting
discounts, concessions, and brokerage commissions associated with the sale of
their shares.
The selling stockholders and the brokers and dealers that they utilize
may be deemed to be "underwriters" within the meaning of the securities laws,
and any commissions received and any profits realized by them on the sale of
shares may be considered to be underwriting compensation.
We will not receive any of the proceeds from sales by the selling
stockholders. Securities laws and SEC regulations may require the delivery of
this prospectus to purchasers when they resell their shares of common stock.
Our common stock is traded on the Nasdaq SmallCap Market under the
symbol "BNRX." On __________, 2000, the last reported sale price of our common
stock as reported on the Nasdaq SmallCap Market was $_____ per share.
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PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED
UNDER "RISK FACTORS," BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is , 2000.
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THIS PROSPECTUS INCORPORATES CERTAIN INFORMATION BY REFERENCE
The SEC allows us to incorporate by reference the information we file
with it, which means that we can disclose important information to you by
referring you to those documents. The information incorporated by reference is
considered to be part of this prospectus and information we file later with the
SEC will automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made by us with the
SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities Exchange Act of
1934 until the sale of all of the shares of common stock that are part of this
offering. The documents we are incorporating by reference are as follows:
- our Annual Report on Form 10-K for the year ended October 31,
1999, filed on January 26, 2000;
- our Quarterly Report on Form 10-Q for the quarter ended
January 31, 2000, filed on March 16, 2000;
- our Quarterly Report on Form 10-Q for the quarter ended April
30, 2000, filed June 14, 2000;
- our Quarterly Report on Form 10-Q for the quarter ended July
31, 2000, filed in September 14, 2000;
- the description of our common stock contained in our
registration statement on Form 10 (Registration No. 000-22011)
filed with the SEC on January 21, 1997, including any
amendments or reports filed for the purpose of updating that
description; and
- our Proxy Statement, filed on February 17, 2000.
Any statement contained in a document that is incorporated by reference
will be modified or superseded for all purposes to the extent that a statement
contained in this prospectus (or in any other document that is subsequently
filed with the SEC and incorporated by reference) modifies or is contrary to
that previous statement. Any statement so modified or superseded will not be
deemed a part of this prospectus except as so modified or superseded.
You may request a copy of these filings at no cost by writing or
telephoning our investor relations department at the following address and
number:
Bionutrics, Inc.
2425 East Camelback Road, Suite 650
Phoenix, Arizona 85016
(602) 508-0112
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements and information contained in this prospectus concerning
our future, proposed, and anticipated activities; certain trends with respect to
our revenue, operating results, capital resources, and liquidity or with respect
to the markets in which we compete or our industry in general; and other
statements contained in this prospectus regarding matters that are not
historical facts are forward-looking statements, as that term is defined in the
Securities Act. Forward-looking statements, by their very nature, include risks
and uncertainties, many of which are beyond our control. Accordingly, actual
results may differ, perhaps materially, from those expressed in or implied by
such forward-looking statements. Factors that could cause actual results to
differ materially include those discussed elsewhere under "Risk Factors."
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read this entire prospectus carefully before deciding to
acquire shares of our common stock. All references to "we," "us," "our,"
"Bionutrics," or "the Company" in this prospectus mean Bionutrics, Inc. and all
entities owned or controlled by Bionutrics, Inc., except where it is clear that
the term means only the parent company.
BIONUTRICS, INC.
INTRODUCTION
We are a biopharmaceutical company founded to discover, develop and
apply novel biologically active compounds from natural sources. Our goal is to
be a leader in the newly emerging field of functional nutrition: the marriage of
drugs and food. The objective is to address health by providing food ingredients
that can prevent and even cure diagnosed diseases. Our business model is to
source biologically active compounds from food commodity processing by-product
streams and develop these compounds as proprietary functional nutrition and/or
ethical drug products. The disciplines and efforts comprising a discovery and
development program for functional nutrition and ethical drugs are fundamentally
the same. Products derived from our research program will be directed initially
towards functional nutrition to generate early revenue and reduce the need for
capital while we pursue the development and regulatory approval of drug
candidates.
Our building efforts of the previous decade have positioned us with
proprietary technology, compounds, processing methods, and products having
application to worldwide markets of potential significance. We have sources of
raw material by-products streams available to us in large quantities and we have
developed specific capabilities in engineering and processing technologies for
the separation of these streams into both high-value biologically active
products and bulk food ingredients. This technology provides us the advantage of
access to proprietary active ingredients at relatively low cost. Initial
products are tocotrienol concentrates derived from rice bran.
Our operating strategy has changed from prior years where we
manufactured and marketed our products to our current strategy, which is to
leverage our core competency of new product development by partnering the
manufacturing and marketing. Our goal is to discover, define, and protect our
products and technology and to partner manufacturing and marketing. We believe
this strategy will allow us to exploit our strengths while recognizing our
resource limitations, and at the same time access the unfolding global
opportunity.
Our three primary subsidiaries are LipoGenics, Inc., Bionutrics Health
Products, Inc., and InCon Technologies Inc. LipoGenics serves as our product
research arm with a focus on the discovery and development of active compounds
for both drugs and functional nutrition. Health Products is our market research
and product positioning company charged to deliver new functional nutrition
products to marketing partners. InCon saw its operation merged into a new
limited liability company, InCon Processing, LLC in which InCon has a 50%
ownership together with ACH, a subsidiary of ABF North America Corp. InCon
Processing provides engineering and design for our compound recovery systems and
ingredient processing. In addition, we have three inactive subsidiaries,
Nutrition Technology Corporation, InCon International Ltd., and Cosmedics, Inc.
We were incorporated in Nevada in 1990. All of our subsidiaries are
organized in Delaware except Nutrition Technology Corporation, which is
organized in Nevada, and InCon International Ltd., which is organized in the
British Virgin Islands. We maintain our principal offices at 2425 East Camelback
Road, Suite 650, Phoenix, Arizona 85016. Our telephone number is (602) 508-0112.
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RISK FACTORS
Before you invest in our common stock, you should be aware that there
are risks, including those set forth below. You should carefully consider these
risk factors, together with all the other information included in this
prospectus, before you decide to purchase shares of our common stock.
WE HAVE A LIMITED OPERATING HISTORY UPON WHICH YOU CAN EVALUATE OUR POTENTIAL
FOR FUTURE SUCCESS.
We commenced sales of our first product late in the second quarter of
fiscal 1997. We have only recently acquired or developed additional products
that may lead to future revenue sources. Accordingly, we have limited historical
financial information upon which you can base an evaluation of our performance
or make a decision regarding an investment in shares of our common stock. We
have generated an accumulated deficit of approximately $34.9 million through the
fiscal year ended October 31, 2000. Our operations to date have progressed from
research and development activities to the marketing and sale of our first
product evolvE(R). All other products are in the developmental stage. We can
provide no assurance that sales of evolvE(R) or other products we may introduce
will achieve significant levels of market acceptance. As a result, our business
will be subject to all the problems, expenses, delays, and risks inherent in the
establishment of a new business enterprise, including the following:
- limited capital;
- delays in product development;
- possible cost overruns due to price increases in raw product;
- unforeseen difficulties in our manufacturing processes;
- uncertain market acceptance; and
- the absence of an operating history.
Therefore, we can provide no assurance that we will be able to achieve
or maintain profitable operations. We can provide no assurance that we will not
encounter unforeseen difficulties that may deplete our capital resources more
rapidly than anticipated.
WE WILL REQUIRE ADDITIONAL CAPITAL TO SUPPORT OUR GROWTH.
To become and remain competitive, we will be required to make
significant investments in research and development on an ongoing basis. We
will, from time to time, including in the near term, be required to seek
additional equity or debt financing to provide the capital required to maintain
or expand our marketing and production capabilities. This may require us to sell
additional common stock or preferred stock or issue warrants for common stock to
obtain the capital. The timing and amount of any such capital requirements
cannot be predicted at this time. We can provide no assurance that any financing
will be available on acceptable terms. If financing is not available on
satisfactory terms, we may be unable to operate at our present level or develop
and expand our business, develop new products, or develop new markets at the
rate desired and our operating results may be adversely affected. Debt financing
increases expenses and must be repaid regardless of operating results. Equity
financing could result in additional dilution to existing shareholders. Our
losses incurred to date, the uncertainty regarding our ability to raise
additional capital, and our inability to generate gross profits and positive
cash flows from operations may indicate that we will be unable to continue as a
going concern for a reasonable period of time. Our audit opinion also indicates
that due to these factors we may not be able to continue as a going concern.
WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND ADDITIONAL FINANCING MAY NOT BE
AVAILABLE.
We currently anticipate that our available cash resources combined with
the maximum drawdown under the stock purchase agreement with Justicia Holdings
Limited will be sufficient to meet our anticipated working capital and capital
expenditure requirements for at least the next 12 months. However, if our stock
price and trading volume stay at current levels, we will only be able to draw
down the minimum amount of $100,000 during each of the draw down periods under
the common stock purchase agreement. Should this occur, our available cash
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resources will meet our requirements for only the next 7 months. In addition,
business and economic conditions may not make it feasible to draw down under the
common stock purchase agreement at every opportunity, and drawdowns are
available only every 29 trading days. We may need to raise additional capital to
fund more rapid expansion, to develop and enhance new and existing services, to
respond to competitive pressures, and to acquire complementary businesses or
technologies.
Our common stock purchase agreement with Justicia Holdings Limited
limits our ability to sell our securities for cash at a discount to the market
price pursuant to an equity line type financing for 24 months from the effective
date of the registration statement of which this prospectus is a part or 60 days
after the entire 4,000,000 shares have been purchased. If we need capital but
are unable to drawdown under the common stock purchase agreement for any reason,
we may need to separately negotiate with Justicia Holdings Limited to lift such
restrictions.
We may not be able to obtain additional financing on terms favorable to
us, if at all. If adequate funds are not available or are not available on terms
favorable to us, we may not be able to effectively execute our business plan.
WE FACE MARKET RISKS ASSOCIATED WITH OUR BUSINESS PLAN ASSUMPTIONS.
We have formulated our business plans and strategies based on certain
assumptions regarding:
- opportunities in the ethical drug market based on our
technology;
- the depth and nature of edible oil and derivative products
markets;
- the size of the functional nutrition market including dietary
supplements, functional foods and medical foods;
- our anticipated share of our target markets; and
- the estimated price and acceptance of our projected products.
We can provide no assurance that our assessments regarding these or a
variety of other factors will prove to be correct. Any future success that we
might enjoy will depend upon many factors, including factors that may be beyond
our control or that cannot be predicted at this time. Factors beyond our control
may include:
- changes in the pharmaceutical, edible oil (and processing
derivatives) and functional nutrition industry;
- governmental regulation;
- increased levels of competition, including the entry of
additional competitors and increased success by existing
competitors;
- changes in general economic conditions;
- increases in operating costs, including costs of production,
supplies, personnel, and equipment; and
- reduced margins caused by competitive pressures and other
factors.
- suprising results from future research
WE FACE INTENSE COMPETITION.
Competition in the health food industry is vigorous, with a large
number of businesses present. In addition, many companies are just beginning to
determine how and if they will compete in the functional nutrition market
presently developing. Candidate companies for mass-market retail competition
include virtually all firms currently engaged in retail mass-market consumer
marketing of food and OTC products. While these same companies are potential
customer targets for our company, they also are potential competitors because of
their own product development programs or programs they sponsor. Notably, these
companies include
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- American Home Products,
- Bayer,
- Warner-Lambert,
- Pharmaton Boehringer Ingleheim,
- Bristol-Myers & Squibb,
- Novartis,
- Smith Kline Beecham
with OTC and dietary supplements,
- Kraft,
- Nabisco,
- Nestle,
- Danone,
- Kellogg,
- General Mills,
- Proctor & Gamble, and
- Hunt-Wesson/ConAgra
with food.
Ingredient manufacturing companies such as
- BASF,
- ADM,
- Hoffmann LaRoche,
- Heckle,
- Cargill, and
- Eastman Chemical
are all involved in both food and pharmaceutical/pharmaceutical intermediate
processing and sales, and have begun to promote products with functional food
applications. These companies represent some of the largest companies in the
world and most formidable competition for any firm considering entering the
functional nutrition business. Other companies have recently announced
tocotrienol supplement products, including Eastman Chemical Company, whose new
product is also derived from rice bran oil and claims antioxidant properties.
Many of our competitors have established reputations for successfully developing
and marketing dietary supplement products. Many of these companies have greater
financial, managerial, and technical resources than we possess, which may put us
at a competitive disadvantage. Even though we intend to license our functional
nutrition ingredients/products to marketing partners and this would eliminate
certain elements of risk, we can provide no assurance that we will be successful
in our licensing efforts or that our potential marketing partners will be
successful in marketing and selling our products. If we are not successful in
competing in the dietary supplement market, we may not be able to recognize our
business objectives.
Competition in the pharmaceutical area is intense and competitors have
substantially greater resources than we possess. We will be required to obtain
development and/or marketing partners to effectively enter the drug market.
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InCon Processing's current competition is primarily from specialized
local and regional processing facilities. However, many of its toll processing
customers have the capacity to perform toll processing and molecular separation
in-house. No assurance can be given that its customers will continue to
outsource toll processing to InCon Processing, or that they will continue to
utilize InCon Processing's facility over that of a local processor.
WE MAY FAIL TO ESTABLISH OR CULTIVATE STRATEGIC PARTNERSHIPS.
We have stated our intent to develop our business model and build our
business through strategic partnerships. We can provide no assurance that we
will be able to successfully form or manage such partnerships, and if not, our
ability to execute our business plan will be at risk. If these partnerships do
not succeed and therefore no further capital is provided to us from these
sources, we can provide no assurance that we will be able to identify other
sources of capital sufficient for our needs in the time required to execute our
business plan.
We have formed an alliance with ABF to pursue the exploitation of
certain food processing by-product streams. As part of this alliance ACH is
considering the exploitation of rice bran derivative products. The rice bran,
rice bran oil, and other derivative products business is highly competitive and
we can provide no assurance that ACH will succeed or produce profits, of which
we participate at 15% EBIT, or that ACH will determine to stay in the business
even if profitable.
WE MAY BECOME SUBJECT TO INCREASED GOVERNMENTAL REGULATION.
The processing, formulation, packaging, labeling, and advertising of
our products are primarily subject to regulation by the FDA and the FTC. In
addition, individual state attorneys general have authority to enforce
individual state consumer protection acts within their own states. Although
Congress has recently recognized by enacting the Dietary Supplement and Health
Education Act, or DSHEA, the potential impact of dietary supplements in
promoting the health of U.S. citizens, there are a number of new provisions not
yet subject to judicial interpretation with respect to the FDA's regulation of
dietary supplements and the ultimate effect of DSHEA cannot be predicted.
Further, because of the technical requirements imposed by DSHEA, it may be
difficult for any company manufacturing or marketing dietary supplements to
remain in strict compliance. The FDA has recently promulgated regulations
effective in March 1999 in part to implement DSHEA. Proposals have also been
made to modify or change the provisions of DSHEA. It is impossible to predict
whether those proposed changes will become law or the full effect that such
regulations will have on our business and operations. We are still reviewing
various aspects of the new regulations. The regulations require material changes
in the labeling of all dietary supplement products, including products we sell.
In addition, due to the finalization of the FDA's structure/function regulations
on January 6, 2000 we are required to significantly modify cholesterol claims
presently being made for our evolvE(R) product.
WE RELY ON A LIMITED NUMBER OF PRODUCTS AND CUSTOMERS.
To date our only product is the evolvE(R) dietary supplement,
containing a patented tocotrienol vitamin E ingredient, Clearesterol(TM),
derived from rice bran. Our dependence on one product increases risk since a
decline in the market demand for our product or the products of other companies
that may utilize Clearesterol(TM) could have a significant adverse impact on us.
Three customers accounted for approximately 63% of InCon Processing's
revenue related to its core business of toll processing and molecular
distillation for the 12 months ended October 31, 2000. Our participation in
ACH's efforts to market derivative products is just beginning and we can provide
no assurance that ACH can capture a share of the market for such products. A
limited number of customers could adversely affect our operations.
WE MAY BECOME SUBJECT TO PRODUCT LIABILITY CLAIMS.
As a marketer of dietary supplements that are ingested by consumers, we
may be subject to various product liability claims, including, among others,
that our products contain contaminants or include inadequate instructions
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as to use or inadequate warnings concerning side effects and interactions with
other substances. While no such claims have been made to date and we maintain
product liability insurance, we can provide no assurance that product liability
claims and the resulting adverse publicity will not have a material adverse
effect on us.
WE DEPEND ON OUR MARKETING PARTNERS TO MARKET OUR PRODUCTS.
We depend on our ability to market our products through marketing
partners to large mass merchandise and health food retailers and to other
companies for use in their products. We do not anticipate that we will enter
into long-term contractual relationships with any of our customers. We have
stated our intent to rely in the future on strategic partnerships with marketing
companies to market and sell our current and to-be-developed functional
nutrition products. We can provide no assurance that we will be successful in
finalizing such strategic partnerships, nor if finalized that the selected
strategic partner(s) will successfully market and sell our products.
OUR TECHNOLOGY MAY BE QUESTIONED OR REFUTED.
We have invested a decade in research and development to demonstrate
the value of our technology and secure patents and make patent applications. We
have chosen to apply for and secure and acquire by acquisition patent protection
of strategic elements of this technology. We can provide no assurance that the
science upon which the technology is based will not be refuted or otherwise
drawn into question by further research conducted by us or independent
laboratories or our strategic partners.
WE MAY RECEIVE UNFAVORABLE PUBLICITY.
We believe the functional nutrition market is affected by national
media attention regarding the consumption of dietary supplements. We can provide
no assurance that future scientific research or publicity will not be
unfavorable to the functional nutrition market or any particular product, or
inconsistent with earlier favorable research or publicity. Future reports of
research that are perceived as less favorable or that question such earlier
research could have a material adverse effect on us. Because of our dependence
upon consumer perceptions, adverse publicity associated with adverse effects
resulting from the consumption of our products or any similar products
distributed by other companies could have a material adverse impact on us. Such
adverse publicity could arise even if the adverse effects associated with such
products resulted from consumers' failure to consume such products as directed.
In addition, we may not be able to counter the effects of negative publicity
concerning the efficacy of our products. Further, because our products are
derived from natural sources, we must contend with variations in composition
that may impact a product's functionality and which may require us to modify our
processing methodology or product formulations. These changes may impact
consumer perceptions.
WE DEPEND ON OUR KEY MANAGEMENT PERSONNEL.
We depend on our management, particularly Dr. Ronald Lane, a founder
and our chief executive officer, for all our business activities. We depend on
our ability to attract, retain, and motivate additional qualified personnel. We
have no long-term employment or other agreements with any executive officer
except for Mr. Palmer. The loss of the services of Dr. Lane or other executive
officers and key employees could have a material adverse effect on our business.
WE DEPEND ON OUR SUPPLIERS AND MANUFACTURERS FOR OUR INGREDIENTS.
We have agreed to acquire the Clearesterol(TM) ingredient from ACH, if
and when we need it. If ACH encounters difficulties in obtaining on commercially
reasonable terms quality rice bran for use in its manufacturing process, we
could experience production delays or the inability to fulfill orders on a
timely basis. Since we have agreed to purchase Clearesterol(TM) from ACH on a
cost-plus basis, any material increase in projected costs of manufacture could
materially affect our or any strategic marketing partner's ability to compete
with evolvE(R) or any other dietary supplement or functional food containing
such ingredient. We also rely on outside sources for evolvE(R) encapsulation. In
the event our contract manufacturers cannot meet our manufacturing and delivery
requirements, we may suffer interruptions of delivery while we arrange for
alternative manufacturing sources.
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Access to replacement sources could be delayed if we must first complete a
review of the manufacturer's quality control and capabilities.
WE MAY EXPERIENCE DIFFICULTY ENTERING INTO INTERNATIONAL MARKETS.
We may experience difficulty entering international markets due to
greater regulatory barriers, the necessity of adapting to new regulatory
systems, and problems related to entering new markets with different cultural
bases and political systems. Operating in international markets exposes us to
certain risks, including, among other things:
- changes in or interpretations of foreign regulations that may
limit our ability to sell certain products or repatriate
profits to the United States;
- exposure to currency fluctuations;
- the potential imposition of trade or foreign exchange
restrictions or increased tariffs; and
- political instability.
If we expand into international operations, we are likely to encounter these and
other risks associated with international operations.
WE RELY ON PATENTS, LICENSES, AND INTELLECTUAL PROPERTY RIGHTS TO PROTECT OUR
PROPRIETARY INTERESTS.
Our success depends in part on our ability to obtain patents, licenses,
and other intellectual property rights covering our products. Our patent rights
are held by our subsidiary LipoGenics. We can provide no assurance that our
patents and patent applications are sufficiently comprehensive to protect
evolvE(R) or our other products intended. The process of seeking further patent
protection can be long and expensive, and we can provide no assurance that all
patents will issue from our eleven currently pending or future patent
applications or that any of the patents when issued will be of sufficient scope
or strength to provide meaningful protection or any commercial advantage to us.
While we believe the basis on which we have made further patent applications
correspond to the patents that have been issued for composition and method of
production and use and is reasonable given the issuance of the latter patents,
we can provide no assurance that the patents for which we have applied will be
issued. We may be subject to or may be required to initiate interference
proceedings in the U.S. Patent and Trademark Office. These proceedings could
demand significant financial and management resources. We may receive
communications alleging possible infringement of patents or other intellectual
property rights of others. We believe that in most cases we could obtain
necessary licenses or other rights on commercially reasonable terms, but we can
provide no assurance on this point or that litigation would not ensue or that
damages for any past infringements would not be assessed. Litigation, which
could result in substantial cost to us and diversion of our effort, may be
necessary to enforce our patents or other intellectual property rights or to
defend us against claimed infringement of the rights of others. Our failure to
obtain necessary licenses or other rights or litigation arising out of
infringement claims could have a material adverse effect on our business.
OUR STOCK IS THINLY TRADED AND MAY EXPERIENCE PRICE VOLATILITY.
There has been and may continue to be, at least for the immediate
future, a limited public market for our common stock. Despite our listing on
Nasdaq SmallCap in November 1997, we can provide no assurance that an active
public market will be developed or sustained for our common stock. The stock
markets have experienced extreme price and volume fluctuations during certain
periods. These broad market fluctuations and other factors may adversely affect
the market price of our common stock and our ability to raise necessary capital
and finance possible acquisitions including of technology.
RIGHTS TO ACQUIRE SHARES OF OUR COMMON STOCK WILL RESULT IN DILUTION TO OTHER
HOLDERS OF OUR COMMON STOCK.
As of October 31, 2000, options to acquire a total of 2,301,667 shares
were outstanding under our 1996 Stock Option Plan. An additional 499,100 shares
of common stock are reserved for issuance pursuant to the exercise of options
that may be granted in the future under our 1996 Stock Option Plan. We also have
outstanding
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<PAGE> 11
options and warrants not issued under the 1996 Plan to purchase up to 3,690,144
shares of common stock. During the terms of those options and warrants, the
holders will have the opportunity to profit from an increase in the market price
of our common stock with resulting dilution in the interests of holders of our
common stock. The existence of such stock options and warrants could adversely
affect the terms on which we can obtain additional financing, and the holders of
those options and warrants can be expected to exercise such options and warrants
at a time when we, in all likelihood, would be able to obtain additional capital
by offering shares of our common stock on terms more favorable to us than those
provided by the exercise of those options and warrants. We also have the
authority to issue additional shares of common stock and shares of one or more
series of preferred and convertible preferred stock. The issuance of these
shares could result in the dilution of the voting power of outstanding shares of
common stock and could have a dilutive effect on earnings per share.
SALES OF LARGE NUMBERS OF SHARES COULD ADVERSELY AFFECT THE PRICE OF OUR COMMON
STOCK.
Of the 21,471,252 shares outstanding as of October 31, 2000, 19,609,888
are eligible for resale in the public markets. Of these eligible shares,
8,818,054 shares are eligible for resale in the public markets subject to
compliance with the volume and manner of sale rules of Rule 144 under the
Securities Act of 1933, as amended, and 10,791,834 are eligible for resale in
the public markets either as unrestricted shares or pursuant to Rule 144(k). In
general, under Rule 144 as currently in effect, any person (or persons whose
shares are aggregated for purposes of Rule 144) who beneficially owns restricted
securities with respect to which at least one year has elapsed since the later
of the date the shares were acquired from our company, or from an affiliate of
our company, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
our common stock and the average weekly trading volume in our common stock
during the four calendar weeks preceding the sale. Sales under Rule 144 also are
subject to certain manner-of-sale provisions and notice requirements and to the
availability of current public information about our company. A person who is
not an affiliate, who has not been an affiliate within three months prior to
sale, and who beneficially owns restricted securities with respect to which at
least two years have elapsed since the later of the date the shares were
acquired from our company, or from an affiliate of our company, is entitled to
sell such shares under Rule 144(k) without regard to any of the volume
limitations or other requirements described above. Sales of substantial amounts
of our common stock in the public market could adversely affect prevailing
market prices.
We have registered for offer and sale up to 2,850,000 shares of our
common stock that are reserved for issuance pursuant to our 1996 Stock Option
Plan. Shares issued after the effective date of that registration statement upon
the exercise of stock options generally will be eligible for sale in the public
market, except that affiliates will continue to be subject to volume limitations
and other requirements of Rule 144. The issuance of these shares could depress
the market price of our common stock.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF THE ACQUISITION
WOULD BE IN THE BEST INTERESTS OF OUR STOCKHOLDERS.
Our restated articles of incorporation and the Nevada General
Corporation Law contain provisions that may have the effect of making more
difficult or delaying attempts by others to obtain control of our company, even
when those attempts may be in the best interests of our stockholders. The Nevada
GCL also imposes conditions on certain business combination transactions with
"interested stockholders" as defined by the Nevada GCL. Our restated articles
provide for a staggered board and also authorize our Board of Directors, without
stockholder approval, to issue one or more series of preferred stock, which
could have voting and conversion rights that adversely affect the voting power
of the holders of our common stock.
OUR OPERATING RESULTS COULD DIFFER MATERIALLY FROM THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROSPECTUS.
Certain statements and information contained in this prospectus regarding
matters that are not historical facts are forward-looking statements, as that
term is defined under applicable securities laws. These include statements
concerning our future, proposed, and anticipated activities; certain trends with
respect to our revenue, operating results, capital resources, and liquidity, and
certain trends with respect to the markets in which we compete or our industry
in general. Forward-looking statements, by their very nature, include risks and
uncertainties, many of
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<PAGE> 12
which are beyond our control. Accordingly, actual results may differ, perhaps
materially, from those expressed in or implied by such forward-looking
statements. Factors that could cause actual results to differ materially include
those discussed under "Risk Factors."
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<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data should be read in conjunction
with our consolidated financial statements and the related notes and with the
management's discussion and analysis of financial condition and results of
operations, incorporated by reference or provided elsewhere herein.
<TABLE>
<CAPTION>
Year Ended
October 31
-----------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Gross Revenues ............ $ 355,624 $ 3,689,747 $ 6,653,904 $ 2,862,843 $ 20,000
Operating Expenses ........ 2,689,162 6,307,426 10,760,959 10,022,163 2,996,880
Other Income (Expense) .... 153,394 (112,364) 2,426,291 266,929 (30,667)
Net Loss .................. (2,566,731) (5,623,144) (9,242,405) (12,341,866) (3,007,547)
Basic Loss Per Share(1) ... $ (.12) $ (.27) $ (.49) $ (.77) $ (.26)
Weighted Average Shares
Outstanding(1) .......... 20,948,968 20,714,652 18,716,757 16,042,785 11,564,327
BALANCE SHEET DATA:
Working capital ........... $ (366,240) $ 364,627 $ 1,328,931 $ 1,237,642 $ 4,739,882
Total Assets .............. 4,106,368 5,186,031 10,894,259 14,155,335 6,217,348
Total Liabilities ......... 1,257,432 2,042,095 3,318,530 5,119,016 936,478
Stockholders equity ....... 2,848,936 3,143,936 7,575,729 9,036,319 5,280,870
</TABLE>
----------
(1) These shares do not include 5,991,811, 5,360,145, 4,957,978, 2,749,577
or 2,128,144 shares of common stock as of October 31, 2000, 1999, 1998, 1997 and
1996, respectively, that may be issued upon exercise of outstanding stock
options and warrants as they are antidilutive.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations as well as certain statements and information under "Business"
include certain forward looking statements. When used in this report, the words
"expects," "intends," "plans" and "anticipates" and similar terms are intended
to identify forward looking statements that relate to our future performance.
Such statements involve risks and uncertainties. Actual results may differ
materially from the results discussed here. Factors that might cause such a
difference includes, but is not limited to, those discussed under "Risk
Factors."
INTRODUCTION
Results of operations for fiscal 2000 reflect our continuing efforts to
reposition ourselves as a product development company. Prior to 1997, our
efforts had been primarily directed toward conducting research and
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<PAGE> 14
development, applying for patent approvals, developing manufacturing and
distribution arrangements for its dietary supplement product and obtaining
initial capital and financing to fund these activities.
Bionutrics (formerly NutraGenics, Inc. until December 26, 1996) completed
a merger with LipoGenics, Inc., a Delaware corporation ("LipoGenics") on October
31, 1996, and LipoGenics became a wholly owned subsidiary of ours. The merger
with LipoGenics was accounted for in a manner similar to a pooling-of-interest
and as such Bionutrics' accounts reflect the historic operations of LipoGenics.
Bionutrics issued 2,092,743 shares in connection with the merger. Pursuant to
the merger, we obtained ownership of certain proprietary rights related to
dietary supplements previously licensed to it by LipoGenics and acquired ethical
drug, functional food and other dietary supplement rights owned by LipoGenics.
On October 31, 1997, Nutrition Technology Corporation ("Nutrition
Technology"), a subsidiary of Bionutrics, completed a forward triangular merger
of a subsidiary of Nutrition Technology with InCon Technologies Inc. ("InCon"),
and InCon became a wholly owned subsidiary of Nutrition Technology. The merger
with InCon was accounted for as a purchase and Bionutrics issued 1,400,000
shares in connection with the merger. In connection with the merger, the edible
oil plant sales and consulting business formerly conducted by an InCon affiliate
was transferred to InCon International Ltd., a wholly-owned subsidiary of
Bionutrics, and specialty vitamin E technology relating to soluble and powder
vitamin E owned by another affiliate was transferred to InCon.
In June 1999, we entered into a new 50/50 venture with ACH, wherein InCon
transferred substantially all of its assets to a newly formed limited liability
company, InCon Processing, LLC ("InCon Processing") for which it received a
payment of $3,000,000 and a 50% interest in the venture. InCon Processing took
over substantially all of the business previously engaged in by InCon related to
toll processing, molecular separation, and the design and sale of molecular
separation facilities. InCon Processing expects to utilize the InCon expertise
to expand its existing business and to expand its business into processing
micronutrients that would be available for food grade products. In connection
with this transaction, the remaining amount of goodwill recorded at the date of
acquisition of InCon was written off at the date of the transaction.
RESULTS OF OPERATIONS
YEAR ENDED OCTOBER 31, 2000, COMPARED TO YEAR ENDED OCTOBER 31, 1999
Consolidated gross revenues for the 12 months ended October 31, 2000 were
$356,000 versus $3,690,000 for the same 12 months in 1999, summarized by
subsidiary as follows (intercompany sales excluded):
<TABLE>
<CAPTION>
Subsidiary 2000 1999
---------- ---- ----
<S> <C> <C>
InCon Technologies ................... $ 0 $2,729,000
Bionutrics Health Products ........... 247,000 835,000
Nutrition Technology ................. 0 105,000
LipoGenics ........................... 109,000 21,000
-------- ----------
Total Consolidated Gross Revenues .... $ 356,000 $3,690,000
========== ==========
</TABLE>
In June 1999, InCon transferred substantially all of its assets to InCon
Processing. Therefore, revenues for the 12 months ended October 31, 2000 are
zero as compared to the same period in 1999. As a result of its investment in
InCon Processing, we will be entitled to 50% of the future profits, it is
anticipated that InCon Processing will retain the cash generated from operations
for at least the next 12 months to expand and develop its business.
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<PAGE> 15
Bionutrics Health Products revenues reflect the sales of its first
product, evolvE(R), as well as revenues related to product development
activities during fiscal year 2000. As of the 12 months ended October 31, 2000,
evolvE(R) maintained distribution in over 10,000 stores including many leading
drug and food chains throughout the United States. We also sell the product
directly to the consumer via the Internet. Nonetheless, sales of evolvE(R) have
been less than anticipated and declining because we were forced to cut back on
budgeted advertising and promotions for the product due to delays in raising
capital during this and prior periods. In addition, some accounts have returned
the product due to low volume activity. We recognize that a substantial
advertising program is necessary to achieve growth in the evolvE(R) product
line, and that failure to show positive sales results will have a negative
impact on obtaining and maintaining distribution store accounts. We are seeking
a marketing partner to provide the resources needed to properly market and
promote the evolvE(R) brand and other anticipated dietary supplements and
functional food products. We are engaged in discussions with several potential
marketing partners involving the present and future brand products.
Nutrition Technology is substantially inactive. Gross revenues reflected
in fiscal 1999 represent remaining byproducts sold out of inventory. In August
of 1998, we entered into a contract with ACH which provided: (i) for the sale of
certain rice bran oil and processing assets to ACH; (ii) for the development of
rice bran oil and other derivative products whereby Bionutrics will receive a
perpetual profit sharing interest; and (iii) for a supply agreement where ACH
will provide rice bran-derived Clearesterol(TM) ingredient used in evolvE(R).
All elements of the alliance with ACH were executed on or before October 31,
1998.
LipoGenics revenues are attributable to a Phase I Small Business
Innovation Research (SBIR) grant from the National Heart, Blood and Lung
Institute. This grant was received during the 4th quarter of fiscal 1999 and was
concluded during fiscal 2000. Revenues shown for both periods relate to this
grant.
Cost of revenues for the 12 months ended October 31, 2000, was $165,000
versus $2,335,000 for the same 12 months in 1999. This reduction is primarily
due to the new 50/50 joint venture entered into with ACH, which substantially
took over all of the business engaged in by InCon. Due to this transaction which
occurred during fiscal 1999, cost of revenues decreased $2,170,000 for fiscal
2000 as compared to fiscal 1999.
Operating expenses for the 12 months ended October 31, 2000 of $2,689,000
were $3,618,000 lower than that recognized for the same 12 months in 1999 of
$6,307,000. This reduction is primarily due to the 50/50 joint venture entered
into during the third quarter of 1999 with ACH as well as significantly reduced
advertising, salaries and cost containment programs.
Other income for the 12 months ended October 31, 2000 was $153,000
compared to the prior years' expense of $112,000. The current year includes
certain non-recurring income items. Both years reflect a write down of the
investment in InCon Processing.
Net loss decreased to $2,567,000, or $.12 per share for the 12 months
ended October 31, 2000 from $5,623,000, or $.27 per share for the 12 months
ended October 31, 1999 due primarily to lower cost of revenues and operating
expenses as outlined above.
YEAR ENDED OCTOBER 31, 1999, COMPARED TO YEAR ENDED OCTOBER 31, 1998
Consolidated gross revenues for the 12 months ended October 31, 1999 were
$3,690,000 versus $6,654,000 for the same 12 months in 1998, summarized by
subsidiary as follows (intercompany sales excluded):
13
<PAGE> 16
<TABLE>
<CAPTION>
For the 12 Months Ended
-----------------------
Subsidiary 1999 1998
---------- ---- ----
<S> <C> <C>
InCon Technologies ................... $2,729,000 $4,104,000
Bionutrics Health Products ........... 835,000 2,190,000
Nutrition Technology ................. 105,000 360,000
LipoGenics ........................... 21,000 0
---------- ----------
Total Consolidated Gross Revenues .... $3,690,000 $6,654,000
========== ==========
</TABLE>
InCon Technologies' gross revenues are primarily attributed to molecular
distillation toll processing of materials from a variety of customers. In June
1999, InCon transferred substantially all of its assets to InCon Processing.
InCon Processing took over substantially all of the business currently engaged
in by InCon related to toll processing, molecular separation, and the design and
sale of molecular separation facilities. As a result of its investment in InCon
Processing, we will be entitled to 50% of the future profits. However, it is
anticipated that InCon Processing will retain the cash generated from operations
for at least the next 12 months to expand and develop its business. Therefore,
revenues for the 12 months ended 1999 are substantially reduced compared to the
same period 1998.
Bionutrics Health Products revenues reflect the sales of its first
product, evolvE(R). As of the 12 months ended October 31, 1999, evolvE(R),
offered in three packages, was distributed by over 25,000 stores including many
leading drug and food chains throughout the United States. Nonetheless, sales of
evolvE(R) have been less than anticipated and declining because the Company was
forced to cut back on budgeted advertising and promotions for the product due to
delays in raising capital during this and prior periods. In addition, some
accounts have returned the product due to low volume activity. We recognize that
a substantial advertising program is necessary to achieve growth in the
evolvE(R) product line, and that failure to show positive sales results will
have a negative impact on obtaining and maintaining distribution store accounts.
We are seeking a marketing partner to provide the resources needed to properly
market and promote the evolvE(R) brand and other anticipated dietary supplements
and functional food products. We are engaged in discussions with several
potential marketing partners involving the present and future brand products.
Nutrition Technology is substantially inactive. Gross revenues reflected
in both periods represent remaining byproducts sold out of inventory. In August
of 1998, we entered into a contract with ACH which provided: (i) for the sale of
certain rice bran oil and processing assets to ACH; (ii) for the development of
rice bran oil and other derivative products whereby Bionutrics will receive a
perpetual profit sharing interest; and (iii) for a supply agreement where ACH
will provide rice bran-derived Clearesterol(TM) ingredient used in evolvE(R).
All elements of the alliance with ACH were executed on or before October 31,
1998.
LipoGenics revenues are attributable to a Phase I Small Business
Innovation Research (SBIR) grant from the National Heart, Blood and Lung
Institute. As this is the first such grant received by LipoGenics, there are no
revenues shown for the same 12 months of the prior years.
Cost of revenues for the 12 months ended October 31, 1999, was $2,335,000
versus $7,259,000 for the same 12 months in 1998. This reduction is due to lower
sales volume, reduced manufacturing costs from discontinuance of operations at
the West Monroe, Louisiana production facility, as well as the new 50/50 joint
venture entered into with ACH, which substantially took over all of the business
engaged in by InCon. Due to the aforementioned events, the reduction in
production costs resulted in our first year of positive gross margin for the 12
months ended October 31, 1999.
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<PAGE> 17
Operating expenses for the 12 months ended October 31, 1999 of $6,307,000
were $4,454,000 lower than that recognized for the same 12 months in 1998 of
$10,761,000. This reduction is due to significantly reduced advertising and
salaries, cost containment programs, as well as the 50/50 joint venture entered
into during the third quarter of 1999 with ACH.
Other expense for the 12 months ended October 31, 1999 was $112,000
compared to the prior years' income of $2,426,000. The prior years' income is
essentially attributable to the gain recognized on the sale of processing assets
to ACH from the West Monroe, Louisiana plant.
Net loss decreased to $5,623,000, or $.27 per share for the 12 months
ended October 31, 1999 from $9,242,000, or $.49 per share for the 12 months
ended October 31, 1998 due primarily to lower cost of revenues and operating
expenses as outlined above.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities during the 12 month period ended
October 31, 2000, was $1,857,000 as compared to $3,325,000 during the same
period in 1999. This decrease is due primarily to lower cost of revenues and
operating expenses.
Net cash used in investing activities during the 12 months ended October
31, 2000, was $3,000 as compared to net cash provided of $2,583,000 during the
same period in 1999. Of the net $2,583,000 provided in 1999, $3,000,000
pertained to the new 50/50 joint venture with ACH wherein InCon transferred
substantially all of its assets to InCon Processing. The balance represents the
investment in the new joint venture as well as capital expenditures.
Net cash provided by financing activities totaled $1,891,000 for the
12-month period ended October 31, 2000, versus net cash used of $282,000 for the
same period in 1999. The cash provided was from the sale of common stock and
short term loans for both years. The cash provided during 2000 reflects
$1,000,000 from the sale of common stock, $750,000 from a short-term loan from a
director and $150,000 from a bridge loan from an unrelated third party. In
October 2000, both of these loans totaling $900,000 were converted to equity.
The cash provided during 1999 reflects $500,000 from the sale of common stock
and $200,000 from a short-term loan from a director. The net cash used during
1999 reflects the complete repayment of notes payable to directors of $982,000.
Our consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. We have incurred cumulative
operating losses of $34,914,137 through October 31, 2000, which have been funded
through the issuance of stock and debt. The losses incurred to date, the
uncertainty regarding the ability to raise additional capital and the our
inability to generate gross profits and positive cash flows from operations may
indicate that we will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should we
be unable to continue as a going concern. Our continuation as a going concern is
dependent upon our ability to generate sufficient cash flow to meet its
obligations on a timely basis, maintaining adequate financing, and ultimately to
attain successful operations.
Since our current cash resources and expected cash flow from operations
will not be sufficient to fund our operational needs for the next 12 months we
continue to seek additional capital through private equity and bank lines of
credit. There can be no assurance that such additional financing will be
attainable, or attainable on terms acceptable to us. Our access to additional
capital will depend substantially upon prevailing market conditions, and the
financial condition of and prospects for us at the time. We are continuing our
efforts to obtain additional funds and are also continuing our efforts to
reposition ourselves as a product development company and, as such, is engaged
in discussions with several potential marketing partners involving evolvE(R) and
future branded products, including dietary supplements and functional food
ingredients.
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<PAGE> 18
BUSINESS
INTRODUCTION
We are a biopharmaceutical company founded to discover, develop and
apply novel biologically active compounds from natural sources. Our goal is to
be a leader in the newly emerging field of functional nutrition: the marriage of
drugs and food. The objective is to address health by providing food ingredients
that can prevent and even cure diagnosed diseases. Our business model is to
source biologically active compounds from food commodity processing by-product
streams and develop these compounds as proprietary functional nutrition and/or
ethical drug products. The disciplines and efforts comprising a discovery and
development program for functional nutrition and ethical drugs are fundamentally
the same. Products derived from our research program will be directed initially
towards functional nutrition to generate early revenue and reduce the need for
capital while we pursue the development and regulatory approval of drug
candidates.
Our building efforts of the previous decade have positioned us with
proprietary technology, compounds, processing methods, and products having
application to worldwide markets of potential significance. We have sources of
raw material by-products streams available to us in large quantities and we have
developed specific capabilities in engineering and processing technologies for
the separation of these streams into both high-value biologically active
products and bulk food ingredients. This technology provides us the potential
advantage of access to proprietary active ingredients at relatively low cost.
Initial products are tocotrienol concentrates derived from rice bran. We also
have patent rights to a composition on niacin and dietary fiber that could apply
to dietary supplements, medical foods or OTC products.
Our operating strategy is to leverage our core competency of new
product development by partnering the manufacturing and marketing. Our goal is
to discover, define, and protect our products and technology and to partner
manufacturing and marketing. We believe this strategy will allow us to exploit
our strengths while recognizing our resource limitations, and at the same time
access the unfolding global opportunity.
Our three primary subsidiaries are LipoGenics, Inc., Bionutrics Health
Products, Inc., and InCon Technologies Inc. LipoGenics serves as our product
research arm with a focus on the discovery and development of active compounds
for both drugs and functional nutrition. Health Products is our market research
and product positioning company charged to deliver new functional nutrition
products to marketing partners. InCon Technologies saw its operation merged into
a new limited liability company, InCon Processing, LLC, in which InCon
Technologies has a 50% ownership together with ACH, a subsidiary of ABF North
America Corp. InCon Processing provides engineering and design for our compound
recovery systems and ingredient processing. In addition, we have three inactive
subsidiaries, Nutrition Technology Corporation, InCon International Ltd., and
Cosmedics, Inc.
We were incorporated in Nevada in 1990. All of our subsidiaries are
organized in Delaware except Nutrition Technology Corporation, which is
organized in Nevada, and InCon International Ltd., which is organized in the
British Virgin Islands. We maintain our principal offices at 2425 East Camelback
Road, Suite 650, Phoenix, Arizona 85016. Our telephone number is (602) 508-0112.
INDUSTRY OVERVIEW
Functional Nutrition
We compete within the functional nutrition category. This category
includes functional foods, medical foods, and dietary supplements, including
vitamins, minerals, and supplements. Each of these sub-categories has a
definition, legal and competitive, which distinguishes it from the others.
Functional foods began with a National Cancer Institute initiative to
find ways of supplementing foods to enhance their cancer fighting potential. The
functional food category may be defined as conventional foods or foods for
special dietary use that are regulated under the Nutritional Labeling and
Education Act, or NLEA, that have enhanced health benefits. Such product may
require FDA pre-approval of a health claim or of a food additive petition. From
a marketing perspective, it may be difficult to distinguish between certain
non-modified products
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<PAGE> 19
such as vegetables and those that have been specially prepared to enhance
health. However, the majority of new entries in this category are
specially-fortified versions of conventional foods. The market for these
products is purported to have surpassed $18 billion last year in the United
States. Products that exemplify the category are ones such as stanol fortified
margarines and salad dressings as well as certain fortified bars and meal
replacements. As these products take hold in the mainstream, newer products such
as enriched eggs and fully prepared and packaged foods continue to proliferate.
The backbone for these products is the bioactive ingredients used to deliver on
health or function claims. From soy protein, oat bran and psyllium as macro
ingredients, to stanols, isoflavones and tocotrienols as micro ingredients,
these bioactives are beginning to fuel growth and product development momentum
in the food industry.
The medical food category is unique in that it is separate from NLEA.
These products are different from NLEA regulated foods for special dietary use
in that they must meet certain requirements. Products that meet the strict
statutory definition of medical foods, which include the requirement that such
products be used under the direction and care of a physician, are a small
segment of the group represented as such. However, many marketing companies are
adding medical foods to their product lines. In using this special category,
many new dietary ingredients may be conveniently delivered to consumers and more
specific information may be provided on labels to help consumers identify
products that may help their specific health concerns. The market for these
products is being driven by consumers' increasing willingness to self-medicate.
Examples of current medical foods are arginine enriched bars for heart health
and specially formulated bars and other foods for diabetics.
Dietary supplements are part of the health and natural food market in
the United States. This market increased from an estimated $14.8 billion in
sales in 1997 to $16.4 billion in 1998, a growth rate of 10%. The expansion of
this market is largely the result of the rapidly growing portion of the
population over 40 years old, who are concerned with aging and disease, combined
with favorable consumer attitude shifts toward natural health care. Within the
health and natural food market, dietary supplement sales were $10 billion in
1998. Recent estimates indicate that 54% of the U.S. population uses nutritional
supplements at least occasionally in some form. By 2001, retail sales in this
category alone are expected to exceed $12 billion annually. Nutritional
awareness and market size are also growing in other parts of the world. We
intend to access these global opportunities for product sales of both dietary
supplements and functional foods, in each case through strategic partners.
The growth of sales of dietary supplements has resulted largely from
recent studies indicating a correlation between the regular consumption of
selected vitamins and nutritional supplements and reduced incidences of
conditions such as cancer, heart disease, and osteoporosis. Within the dietary
supplement category, antioxidants remain the growth leader. One antioxidant,
vitamin E, has shown particularly strong growth, resulting in estimated retail
sales in excess of $700 million in mass-market sales alone in 1998. Dietary
supplements, including both vitamins and nutritional supplements, are consumed
specifically to enhance bodily structure or functions, such as thinking or
athletic performance or cholesterol maintenance. Under current law a dietary
supplement may not claim to prevent, treat, or cure a disease, which restricts
the manner in which it may be marketed and the claims that can lawfully be made.
See below under "Government Regulation."
We developed our first functional nutrition ingredient,
Clearesterol(TM), a patented all-natural complex for cardiovascular health
extracted from rice bran oil. Clearesterol(TM) belongs to a recognized class of
vitamin E compounds called tocotrienols. Clearesterol(TM) is the dietary
ingredient in evolvE(R), our first dietary supplement. evolvE(R) was launched in
1997 in a national campaign targeting mass-market retail distribution. We
succeeded in placing evolvE(R) in more than 40,000 retail outlets
coast-to-coast. However, due to capital limitations, we determined the most
promising way to leverage our new product development strength was to launch our
future products through marketing partners as opposed to spending our resources
on national marketing and advertising campaigns.
Ethical Drugs
We have technology with potential application to cardiovascular health,
cancer, anti-inflammation, anti-oxidation and diabetes. These applications
reflect proprietary claim positions for compositions that may have use in more
than one disease indication. They also reflect technology that we have acquired
the rights to during the past year. The market for successful and fully
exploited ethical drug or medical device candidates can be measured in
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the hundreds of millions of dollars or more. There is significant risk in
development and obtaining regulatory approval for any new candidate with no
assurance of success. It is our intent to define the initial opportunity with
our research for our most promising candidates and, if the results warrant, to
partner the full development of the opportunity.
PRODUCT DEVELOPMENT
We intend to develop proprietary compositions potentially as both
ethical drugs and functional nutrition products. The functional nutrition
products will be created and developed as novel medical food, functional food
and dietary supplement formulations for use by specific target populations.
These ingredients and formulations may include tocotrienols or other compounds
that can be marketed with statements of nutritional support authorized by the
NLEA and DSHEA legislation. See below under "Government Regulation." The intent
of the ingredients development program will be to generate future proprietary
products with a point-of-difference and wide marketability. Such products would
reflect our business model of focusing on new ingredients that exploit our core
competency.
Cardiovascular
Clearesterol(TM). Our first cardiovascular ingredient,
Clearesterol(TM), is a tocotrienol vitamin E based composition. Vitamin E is the
general term used for eight naturally-occurring, essential fat-soluble
nutrients. The series is composed of four compounds (alpha-, beta-, gamma-,
delta-tocopherol) with a tocopherol structure bearing a saturated phytyl C[16]
side chain and four compounds (alpha-, beta-, gamma-, delta-tocotrienol) with a
tocotrienol structure having an unsaturated phytyl C[16] side chain bearing
three double bonds. All tocols, to varying degrees, are antioxidants.
Tocotrienol vitamin E -- as opposed to the standard tocopherol vitamin E -- is a
cornerstone of our proprietary technology and patent protection.
Tocol antioxidants in blood appear to reduce damage to blood vessel
wall cells caused by oxidizing or "free radical" agents. Research indicates that
the Clearesterol(TM) constituents are a far more effective antioxidant than
standard vitamin-E (alpha-tocopherol) and, unlike the antioxidants found in
standard vitamin E or beta-carotene, the Clearesterol(TM) ingredient helps to
reduce blood cholesterol levels. The significance of Clearesterol(TM) with
respect to cardiovascular health has been demonstrated in clinical trials that
show tocotrienols may promote normal cardiovascular health three ways by helping
to lower cholesterol levels, providing cardiovascular antioxidant protection,
and promoting normal circulation in some individuals. We are limited by the laws
applicable to dietary supplements as to the claims which may currently be made
for this ingredient. Additional claims would require FDA approval as a health
claim or a drug. Clearesterol(TM) is an all-natural complex extracted from rice
bran oil through a patented processing method. The proprietary process involves
stabilization of the rice bran and selective extraction and concentration of the
rice bran oil.
Vitenol E(R). We have also produced a more concentrated form of rice
bran-derived tocotrienols, Vitenol E(R), which we plan to use as an ingredient
in our own novel formulations and to sell to other companies as a "value-added"
vitamin E complex. We obtain this material from InCon Processing, which employs
molecular distillation and other separation technologies.
Niacin-Fiber. We have acquired the rights to patented technology for
the use of a timed-released composition of niacin and dietary fiber, which has
demonstrated in preliminary on-going research a 22-24% reduction in
LDL-cholesterol, 13-18% increase in HDL-cholesterol, and a 21-29% drop in
triglycerides following four weeks of treatment with 1.2 gms of niacin daily.
This particular composition may have application as a medical food to diabetics
and other populations with dyslipidemia.
Cancer
We received a broad patent this past year covering the use of
tocotrienols to treat cancer. Third-party research published in peer-reviewed
journals supports our position that tocotrienols may be effective in the
treatment of certain cancer types. We are in the process of evaluating possible
approaches for further research through the use of a multi cancer cell-line
screening program with the National Cancer Institute. We have also discovered
other compounds isolated from natural sources that appear to be effective
against certain cancer cell-lines and intend to
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extend our current research on those compounds to determine their potential
efficacy and commercial feasibility. Any such commercial application would be
dependent on obtaining the prior approval of the FDA.
Inflammation
We have filed a patent application on compounds that treat
inflammation. These compounds potentially have a wide use with autoimmune and
autoimmune-like diseases and their possible prevention. We expect to continue
research on these compounds and may develop products for both the functional
nutrition and ethical drug markets based on the results of the trials.
Oxidative Stress
We have filed a patent application on a novel composition, which has
unique anti-oxidative activity and may be used to reduce oxidative stress. We
have also acquired technology that has application as a means of measuring
oxidative stress in both blood and urine. The urine based assay can be employed
as a self-administered take home kit for the determination of an individual's
level of oxidative stress, potential contribution of a disease state to the
oxidative stress, and the benefit derived by the administration of our potential
proprietary antioxidant products.
Diabetes
Diabetes is a disease closely associated with obesity and age. We have
certain rights to proprietary technology and are conducting research on
compounds and formulations that may have application to obesity and the
progression of diabetes. We may also file future patents on technology relating
to obesity and diabetes.
MARKETING
We intend to market our ingredients for functional nutrition worldwide
via marketing agreements with strategic partners. Because of the high cost of
product entry today, the companies with the commitment and capacity to provide
consumer advertising and support with the retail trade will be best positioned
for success. We have stated our intent to market our products through
partnerships with such companies. This design is intended to allow us to invest
our resources in product development and rely on our partners to address the
advertising, public relations, and other promotional costs for their respective
markets.
We have several pharmaceutical and food companies that have expressed
interest in technology presently being developed. Depending on the timing and
outcome of this development work we may further explore marketing opportunities
with these firms. The areas of interest include cardiovascular health where we
have our historical investment, and cancer, cellular oxidation, inflammation,
and diabetes. Market channels include mass-market retail, multi-level marketing,
and the Internet.
As part of our strategy to partner marketing and manufacturing, the
evolvE(R) brand is not being supported with consumer advertising or product
promotion funds. However, the product does still have a presence in the mass
market, primarily retail drug stores. We are also serving consumers through our
Internet address and 800-phone line. We are planning to consider distributors
for evolvE(R) outside the United States.
MANUFACTURING
Our operating strategy is to leverage our core competency of new
product development by partnering manufacturing and marketing. In particular, we
desire to expand our manufacturing base and take advantage of value-added
commodity by-product processing technology without operational responsibility or
capital risk. To accomplish this, we are looking to form partnerships with
global food manufacturing firms who will assume the logistic, transportation,
distribution, regulatory, environmental, labor, administration and other
operational elements associated with processing by-product streams necessary to
manufacture our products.
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ABF Alliance
In 1998, we and ABF North America Corp., the U.S. subsidiary of
Associated British Foods Plc, a company headquartered in London, England,
entered into an alliance for the manufacturing of certain rice bran based food
and other functional nutrition products. The intent of the alliance was for ABF
to partner in the manufacturing of our products, when feasible, and in the
process to unburden us of related operational and capital issues.
As part of the 1998 transaction, ACH, a subsidiary of ABF, acquired for
$2 million our rice bran-processing technology for use in North America. The
technology acquisition was part of a contemporaneous $4 million stock investment
in our company and a subsequent purchase for approximately $2.5 million of
certain oil processing assets from the plant owned by our subsidiary, Nutrition
Technology Corp., in West Monroe, Louisiana, which plant was closed on October
1, 1998. As part of the divestiture, we retained the right to participate in
rice bran processing profits by ACH without operational responsibility or
capital risk.
InCon Processing
In June of 1999 we further reduced our manufacturing exposure by
merging our molecular separation operation, InCon Technologies, with ACH to
create a new joint venture company, InCon Processing, LLC, a limited liability
company. InCon Technologies transferred substantially all of its assets to the
newly formed LLC for which it received a payment of $3,000,000 and a 50%
interest in the new company. As part of this transaction, we restructured a
profit sharing provision of the 1998 transaction relating to the calculation of
profit and minimums. In the future, we will receive 15% of all earnings before
interest and taxes, or EBIT, derived by ACH from the sale of rice bran
derivative products (verses a graduated percentage of EBITDA, or earnings before
interest, taxes, depreciation and amortization) without an offset against a
floor or minimum earnings deduction (verses a graduated minimum earnings
deduction prior to a percentage participation calculation). In October 2000, we
agreed to issue 300,000 shares of our common stock to ACH as consideration for
the release of certain contingent obligations under the Master Formation
Agreement and Members Agreement related to the formation of this venture.
The formation of this venture will allow us to more ably avail our
company of the research and development capacity of InCon Technologies for
specialty processing without being encumbered by capital requirements of the
operation or for new facilities. As new functional nutrition products are
developed within our company, and InCon Processing designs and engineers systems
necessary for their processing, we will look initially to ACH for manufacturing.
ACH will provide the manufacturing of these products where feasible and when
such manufacturing is taken on by ACH, capital expenditures and operational
responsibilities will also be theirs. It is our view that the InCon Processing
venture with ACH, in a practical sense, enhances our manufacturing base,
broadens the valued partnership between our company and ABF, and gives us
greater strength to deal with our future marketing partners.
A critical aspect of our core competency is the ability to engineer and
design equipment necessary to convert raw material sources into value-added
active compounds and nutritional products. This is important because the nature
of active compounds renders them difficult to process, isolate, and recover.
Producers of raw material by-product streams generally do not have this
requisite equipment. We believe our compound discovery, clinical research and
product market capabilities in combination with InCon Processing's technology
and ACH's manufacturing abilities give us competitive and operational
advantages.
InCon Processing operates a specialized development and chemical
manufacturing facility located in Batavia, Illinois, approximately 45 miles due
west of Chicago. The 30,000 square foot facility contains uniquely fabricated
molecular distillation and other molecular separation equipment. InCon
Processing has developed significant skill in applying molecular distillation
technology to engineering and designing molecular separation equipment. Other
methods of separation including dry fractionation, chromatographic isolation,
solvent extraction, membrane separation, and enzymatic fermentation are
potentially employed in its designed systems.
InCon Processing provides toll molecular separation services for
Eastman Chemical and other independent companies requiring chemical separation
services for the manufacturing of their products. InCon Processing
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markets its engineering and design skills independently of our raw material
sourcing and sells equipment to unrelated third parties as part of oil
processing plant design and construction oversight.
InCon Processing faces competition for its services from a number of
companies as well as from expanding in-house capabilities of several of its
customers and potential customers. However, we believe that InCon Processing's
management enjoys an excellent reputation in the field, has long-standing
relationships with its customers and, particularly with the advantage of its
state-of-the-art equipment, is well-positioned to retain and expand its customer
base.
PATENTS AND TRADEMARKS
As of December 2000, we have seven issued U.S. patents and eleven
pending U.S. patent applications (with numerous foreign counterparts) covering
novel tocotrienols and tocotrienol-like compounds, methods for their use,
compositions containing those compounds and production processes in the area of
tocotrienols. Four of the pending U.S. patent applications have recently been
allowed, with patent grants anticipated in early 2001. Furthermore, we have
acquired one U.S. patent with four corresponding foreign patent applications
claiming methods for promoting weight and fat loss. In addition, we have secured
exclusive licenses under eleven additional U.S. patents and two additional
pending U.S. patent applications relating to other therapeutic and diagnostic
areas of commercial interest to us.
Our first U.S. patent, obtained through our R&D subsidiary LipoGenics
(U.S. patent 5,591,772) was issued in January 1997. This patent, through
composition of matter claims, secures protection for several novel vitamin-E
like compounds discovered by us and through method and process claims, protects
methods for using and processes for producing those compounds. The patent may
also serve to protect the Clearesterol(TM) ingredient contained in our evolvE(R)
brand dietary supplement. A second U.S. patent was issued in October 1998 (U.S.
patent 5,821,264) with claims that parallel those of the January 1997 patent but
refer to a broader and more generic class of compounds.
We have also been successful in obtaining patent protection for our
unique tocotrienol processing technology. In June 1999, we received another U.S.
patent directed to specific tocotrienol/tocopherol production processes (U.S.
patent 5,908,940). In March 2000, we were informed by the United States Patent
and Trademark Office that it had allowed our U.S. patent application for
tocotrienol-rich fractions produced using our proprietary tocotrienol/tocopherol
production process. We expect this U.S. patent to issue during the first quarter
of 2001.
We continue to enhance our estate of patents covering the use
tocotrienols to treat and prevent a wide range of disorders and conditions. In
July 1999, a broad U.S. patent was issued to us for methods to treat and prevent
cancer using tocotrienols (U.S. patent 5,919,818). This patent contains method
claims directed to the known, naturally occurring tocotrienols (such as
alpha-tocotrienol and gamma-tocotrienol), as well as our novel proprietary
tocotrienols and other vitamin-E like compounds. In March 2000, the U.S. Patent
and Trademark Office allowed two of our patent applications that claim the use
of tocotrienols to address inflammation and bone diseases, respectively. These
patents are expected to issue in early 2001. Additional U.S. and foreign patent
applications that focus on other diseases and conditions are pending.
We continue to protect our trademarks by seeking registration in the
U.S. and abroad. We obtained U.S. trademark protection for the evolvE(R) brand
name and associated logo in fiscal year 1997 and have obtained additional
registrations in certain foreign countries. In January 1999, we obtained
registration of the mark P[25] for one of our proprietary tocotrienols. In
September and October 1999, we were granted registration of the marks Vitenol
and Vitenol E. In November 1999 and March 2000, we obtained registration of two
separate marks for Clearesterol and the related logo. U.S. and foreign trademark
applications are currently pending for other marks we use or intend to use on
our products.
We have also continued our activities directed towards acquiring
additional patents and other intellectual property to augment our holdings. In
late 1995, we acquired a U.S. patent from the Wisconsin Alumni Research
Foundation (U.S. patent 4,603,142) covering the use of alpha-tocotrienol for
lowering cholesterol. This patent serves to protect our dietary supplement,
evolvE(R), which contains a significant amount of gamma-tocotrienol. In 1997, we
acquired a U.S. patent from Dr. Tung-Ching Lee (U.S. patent 5,047,254) covering
a process for recovering edible oil
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from rice bran. This patent has since been assigned to ABF/AC HUMKO as part of a
strategic alliance formed in August 1998. In 1999, we licensed the exclusive
rights to certain proprietary technology owned by Eric Kuhrts, Lipoprotein
Diagnostics, Inc., and Hauser-Kuhrts, Inc., located in California. This
technology relates to three main areas:
- sustained release arginine formulations and therapeutic applications,
- niacin/fiber compositions having cardiovascular applications and
- oxidative stress diagnostic test kits to measure the positive effects
of dietary antioxidants, as well as the negative impact of
environmental factors (such as smoking) and disease states.
In February 2000, we acquired the rights to certain patents and patent
applications owned by John Gustin and Mark F. McCarty claiming methods for
promoting weight and fat loss. We intend to pursue commercializing these
technologies independently, as well as possibly integrating them with our
existing proprietary technology. Negotiations are ongoing for acquisition of
rights in several additional patents relating to technology of interest to us.
COMPETITION
The market for functional nutrition is presently developing, with many
companies just beginning to determine how and if they will compete in this new
segment. Candidate companies for mass-market retail competition include
virtually all firms currently engaged in retail mass-market consumer marketing
of food and OTC products. While these same companies are potential customer
targets for our company, they also are potential competitors because of their
own product development programs or programs they sponsor. Notably, these
companies include
- American Home Products,
- Bayer,
- Warner-Lambert,
- Pharmaton Boehringer Ingleheim,
- Bristol-Myers & Squibb,
- Novartis,
- Smith Kline Beecham
with OTC and dietary supplements, and
- Kraft,
- Nabisco,
- Nestle,
- Danone,
- Kellogg,
- General Mills,
- Proctor & Gamble and
- Hunt-Wesson/ConAgra
with food.
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Ingredient manufacturing companies such as
- BASF,
- ADM,
- Hoffmann LaRoche,
- Heckle,
- Cargill, and
- Eastman Chemical
are all involved in both food and pharmaceutical/pharmaceutical intermediate
processing and sales, and have begun to promote products with functional food
applications. These companies represent some of the largest companies in the
world and most formidable competition for any firm considering entering the
functional nutrition business, including our company. These firms, to one degree
or another, represent potential strategic partners for firms entering the field,
depending upon the significance and value of the technology they bring.
Because the ethical drug and functional food markets are highly
competitive and require extensive resources to develop new products, we intend
to pursue strategic partnerships for this purpose. No arrangements have yet been
entered into and we can provide no assurance that partners can be found or that
terms acceptable to us can be negotiated. We do not have any products that have
been submitted for regulatory approval. Our research in the near term is
expected to focus on compounds and devices in the preclinical stage of
development.
GOVERNMENT REGULATION
Dietary Supplements
The Federal Food and Drug Administration is the most active regulatory
authority exercising jurisdiction over vitamins, minerals, and other dietary
supplements. It regulates our products under the Food, Drug and Cosmetic Act, or
FDCA, and regulations promulgated by the FDA to implement this statute. 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 FDCA.
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 as a drug solely because of its 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 or drug claims made in the product's labeling. Such a determination
would require deletion of such claims, or the submission and the FDA's approval
of a new drug application, which entails costly and time-consuming clinical
studies over successive phases.
In 1990, the FDA's authority over dietary supplement labeling was
expanded in several respects by the Nutrition Labeling and Education Act, or
NLEA. This statute amended the FDCA by establishing a requirement for the
nutrition labeling of most foods, including dietary supplements. In addition,
the NLEA prohibits the use of any health claim, as opposed to a statement of
nutritional support, in dietary supplement labeling unless the claim is
supported by significant scientific agreement and is pre-approved by the FDA.
Interested companies may petition the FDA for the approval of health claims. To
date, the FDA has approved health claims for dietary supplements seldomly,
including in connection with the use of calcium for prevention of osteoporosis
and the use of folic acid for prevention of neural tube defects, and
applications therefor have been few. NLEA also allows nutrient content claims
characterizing the level of a particular nutrient in a dietary supplement (e.g.,
"high in," "low in," "source of") if they are in compliance with definitions
issued by the FDA. Significantly, NLEA precludes any state from mandating
nutritional labeling, nutrient content claims, or health claim requirements that
differ from those established under NLEA, thereby eliminating the risk that our
products might be subject to inconsistent labeling requirements.
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In October 1994, the FDCA was amended by enactment of the Dietary
Supplement and Health Education Act, or DSHEA, which introduced a new statutory
framework governing the composition and labeling of dietary supplements. In our
judgment, DSHEA is in some parts favorable to the dietary supplement industry
while imposing additional burdens in other parts. With respect to composition,
DSHEA creates a new class of "dietary supplements," dietary ingredients
consisting of vitamins, minerals, herbs, amino acids, and other dietary
substances for human use to supplement the diet, as well as concentrates,
metabolites, extracts or combinations of such dietary ingredients.
As for labeling, DSHEA permits "statements of nutritional support",
also known as structure/function claims, for dietary supplements without FDA
pre-approval. Such 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 under NLEA, that is, generally a
claim that the dietary supplement will lower the risk of a disease or correct an
existing health condition. 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. We can provide no
assurance that the FDA will, if it makes a demand therefor, accept
substantiating scientific evidence we possess as adequate support for our
product structure/function claims. We can provide no assurance that the FDA will
not determine that a given statement of nutritional support we decide to make is
a disease claim rather than an acceptable nutritional support statement relating
to body function or structure. Such a determination would require
- deletion of the disease claim,
- if it is to be used at all, submission by us and the approval
by the FDA of a new drug application, which would entail
costly and time-consuming clinical studies,
- revision from a disease claim to a health claim, which would,
as noted above, require demonstration of significant
scientific agreement and prior FDA approval, or
- revision to a structure/function claim.
We can provide no assurance that the FDA will accept as adequate for a health
claim such substantiation as we have amassed for nutritional support
(structure/function) claims and thus, if the health claim is to be used at all,
we may be required to document or await significant scientific agreement on the
claim's basis.
DSHEA allows dissemination of "third party literature," such as
reprints of scientific articles that link particular dietary ingredients with
health benefits. Third party literature may be used in connection with the sale
of dietary supplements to consumers under certain conditions. Such a publication
may be so distributed if it is not false or misleading, if no particular
manufacturer or brand of dietary supplement is mentioned, if the publication is
presented in such manner so as to offer a balanced view of available scientific
information on the subject matter, if it is physically separated from products
when used in a retail establishment, and if it does not have any other
information appended to it. There can no assurance, however, that all pieces of
third party literature that may be disseminated in connection with our products
will be determined by the FDA to satisfy each of these requirements, and any
such failure to comply could subject the product involved to regulation as a new
drug.
On December 24, 1996, we filed our notification letter for the
evolvE(R) dietary supplement with the FDA with respect to the product's
statements of nutritional support. Although DSHEA only requires companies to
notify the FDA, the agency has adopted an unofficial policy of responding with a
letter, which has become known as a "courtesy letter," when it believes that
there may be a question with respect to any statement of nutritional support. On
January 29, 1997, the FDA responded with a courtesy letter raising questions
concerning one of our statements of nutritional support. In our March 10, 1998,
notification to the FDA, we announced labeling changes -- to add a statement on
the importance to cholesterol-lowering of a low-fat diet and exercise -- in
deference to the FDA's courtesy letter, and although no further courtesy letter.
Our chief structure/function claims for evolvE(R) are that it works to help
lower cholesterol when taken as part of an overall program including a low-fat,
low-cholesterol diet
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and exercise, acts as a powerful antioxidant, and promotes normal circulation.
On April 29, 1998, the FDA proposed regulations to limit statements
that may be placed on product labels and labeling concerning the effect that a
dietary supplement has on the structure or function of the human body. FDA
sought to prohibit as disease claims requiring agency pre-approval all
cholesterol lowering statements such as those that currently appear on the
evolvE(R) label and in labeling. Like numerous other affected parties and
organizations, we wrote to oppose such FDA rules. On January 6, 2000, the FDA
issued its final regulation concerning structure and function claims for dietary
supplements. In the preamble to the regulation, FDA states, with regard to
cholesterol claims for dietary supplements, that the agency has concluded that
an appropriate structure/function claim for maintaining cholesterol would be,
"helps to maintain cholesterol levels that are already within the normal range."
The agency also stated its position that a "lowers cholesterol" claim, however
qualified, is an implied disease claim.
As such, we must revise our claim for evolvE(R) product to comply with
the new regulation prior to the effective compliance date for a company our size
which is July 7, 2001, or face FDA regulatory enforcement action.
In September 1997, the FDA published final regulations to implement
certain DSHEA labeling provisions, which became effective in March 1999. These
regulations necessitate material changes in the labeling of all dietary
supplement products, including products we sell. DSHEA also requires that
dietary supplements be prepared, packed and held under conditions that meet the
good manufacturing practice, or GMP, regulations to be promulgated but not yet
proposed by the FDA with respect to dietary supplements. Therefore, we can
provide no assurance that our manufacturing partner ABF's production facilities
will meet all GMP regulations when issued by the FDA with respect to dietary
supplements, and we may be required to expend resources to take appropriate
action to ensure compliance with such regulations.
The FTC, which exercises jurisdiction over the advertising of dietary
supplements, has in the past several years instituted enforcement actions
against several dietary supplement companies for false and misleading
advertising of certain products. These enforcement actions have resulted in
consent decrees, agency cease and desist orders, injunctions, and the payment of
fines by the companies involved. In addition, the FTC has increased its scrutiny
of infomercials and Internet websites. We can provide no assurance that the FTC
will not question our advertising in the future. The FTC has been very active in
enforcing its requirements that companies possess adequate substantiation in
their files for claims in product advertising.
We intend to market certain products pursuant to contracts with
customers who will distribute the products under their own or other trademarks.
In addition to Bionutrics' responsibilities, those customers are subject to the
governmental regulations discussed in this section in connection with their
marketing, distribution, and sale of such products, and we will be subject to
those regulations in connection with the manufacture of those products. However,
our manufacturing contractors are independent companies, and their labeling,
marketing, and distribution of such products are beyond our control except by
contract. Failure of these customers to comply with applicable laws or
regulations could have a material adverse effect on our business. Governmental
regulations in foreign countries where we or a strategic partner may determine
to sell products may prevent or delay entry into the market or prevent or delay
the introduction, or require the reformulation, of certain of our products.
Compliance with such foreign governmental regulations generally will be the
responsibility of our customers in those countries. Those customers are expected
to be independent companies over which we will have no control except by
contract.
The FDA has broad authority to enforce the provisions of the laws and
regulations applicable to dietary supplements, including the power to seize
adulterated or misbranded products or unapproved new drugs, to request their
recall from the market, to enjoin their further manufacture or sale, to
publicize information about a hazardous product, to issue warning letters, and
to institute criminal proceedings. We may be subject to additional laws or
regulations administered by the FDA, the FTC, or other regulatory authorities,
such as the individual state attorneys general who have authority under
individual state consumer protection acts to impose injunctions and fines within
their states. We are unable to predict the nature of such future laws,
regulations, interpretations or applications, nor can we predict what effect
additional governmental regulations or administrative orders, when and if
promulgated, may have on our business. They could require
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- the reformulation of certain products to meet new standards,
- the recall or discontinuance of certain products not able to
be reformulated,
- imposition of additional record keeping requirements,
- expanded documentation of the properties of certain products,
- expanded or different labeling, and
- additional scientific substantiation.
Any of or all these requirements could have a material adverse effect
on our results of operations and financial condition.
Food Additive/New Dietary Ingredient
If we decide to market any new ingredient for use in conventional foods
or for a technical effect, such as a colorant, preservative, etc., in dietary
supplements, the ingredient may be subject to the FDA food additive provisions.
Such an ingredient must be shown to be generally recognized, among experts
qualified by scientific training and experience to evaluate its safety, as
having been adequately shown through scientific procedures to be safe under the
conditions of its intended use. This is known as generally recognized as safe,
or "GRAS," status and can be accomplished by submitting what is known as a GRAS
affirmation to the FDA.
In the alternative, if the ingredient is not generally known among
scientists as set forth above, we may submit a food additive petition to the FDA
setting forth how the ingredient is to be used and all scientific data that
establishes safety for such use. This can include costly and time consuming
clinical studies over successive phases.
The FDA can accept or reject our GRAS affirmation or food additive
petition. We can provide no assurance that the FDA will accept as adequate the
scientific data presented with either the GRAS affirmation or as part of the
food additive petition. We can seek judicial review if we disagree with the FDA
determination.
For a dietary ingredient in dietary supplements, under DSHEA, a "new
dietary ingredient" is a dietary ingredient that was not marketed in the United
States before October 15, 1994 and does not include any dietary ingredient
marketed in the United States before that date. DSHEA requires notification to
be submitted to the FDA at least 75 days before a company introduces or delivers
for introduction into interstate commerce a dietary supplement that contains a
new dietary ingredient that has not been present in the food supply as an
article used for food in a form in which the food has not been chemically
altered. Information that provides the basis for concluding the ingredient is
safe is also required by the statute to be included in the notification.
The FDA may not disclose the existence of, or the information contained
in, the new dietary ingredient notification for 90 days after the filing date of
the notification. After the 90th day, all information that is not trade secret
or otherwise confidential commercial information will be placed on public
display.
Failure of the FDA to respond does not constitute a finding that the
new dietary ingredient, or the dietary supplement containing the new dietary
ingredient, is safe or is not adulterated. The FDA has stated that the process
is intended to identify those new dietary ingredients that present a concern.
With respect to dietary supplements that contain a new dietary ingredient, if
the FDA determines that there is inadequate information to provide reasonable
assurance that such new dietary ingredient does not present a significant or
unreasonable risk of harm, the FDA could initiate civil or criminal proceedings.
With respect to our mission to promote newly discovered active
compounds for functional nutrition as ingredients in dietary supplements and
functional foods, we or our strategic partners will be subject to the regulatory
schemes described above.
26
<PAGE> 29
Drugs
Products that are intended for use in the diagnosis, cure, mitigation,
treatment or prevention of disease in humans are subject to extensive
governmental regulation. All such products must undergo extensive
characterization, and are subject to regulation for quality assurance,
toxicology, and safety. Products containing such agents must undergo thorough
preclinical and clinical evaluations of performance as to safety and efficacy
under approved protocols.
We intend to pursue regulatory approval for the pharmaceutical and
related uses of drug products. Such pharmaceutical products will be subject to
the regulatory approval processes for new drugs. To take a pharmaceutical
product from the discovery stage through research and preclinical development to
the point where we and our partners can make the necessary filings to the FDA
and governmental agencies outside the U.S. to conduct human clinical trials may
take several years. Regulatory requirements for human clinical trials are
substantial, depend upon a variety of factors, vary by country, and will further
add to the time necessary to determine whether a product candidate can be
approved for human use. We do not have any pharmaceutical products that have
commenced this trial process. We can provide no assurance that we will be able
to demonstrate that our proposed drug products are safe and will be efficacious
under these regulatory procedures.
EMPLOYEES
We currently employ 9 people, after the transition of the InCon
Technologies employees to InCon Processing. Of the current employees, two are
involved in marketing and sales at Bionutrics Health Products, five in corporate
and general administration, and two in research and development at LipoGenics.
27
<PAGE> 30
SELLING STOCKHOLDERS
The following table sets forth (i) the name of each of the selling
stockholders, and (ii) the number of shares of our common stock beneficially
owned by each selling stockholder that may be offered for the account of such
selling stockholder under this prospectus. Each of the selling stockholders is
assumed to be selling all of the shares of common stock registered for sale and
will own no shares of common stock after the offering. The selling stockholders
may sell all or none of the securities being registered.
We have obtained this information from the selling stockholders, but
have not independently verified it. The term "selling stockholders" includes the
persons listed below and their respective transferees, pledgees, donees, or
other successors.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BEING
OWNED PRIOR TO REGISTERED
NAME AND ADDRESS OF OFFERING(1) FOR SALE
--------------------- ------------
BENEFICIAL OWNER NUMBER PERCENT
----------------------- ------ ------- ------------
<S> <C> <C> <C>
AMRO International, S.A 560,000 2.6% 560,000
</TABLE>
----------
(1) Except as otherwise indicated, each person named in the table has sole
voting and investment power with respect to all shares of common stock
beneficially owned by him or her, subject to applicable community
property law. The numbers and percentages shown include the shares of
common stock actually owned as of December 26, 2000 as well as shares
of common stock issuable to the identified person pursuant to stock
options or warrants that may be exercised within 60 days after December
26, 2000.
PLAN OF DISTRIBUTION
This prospectus, as appropriately amended or supplemented, may be used
from time to time principally by persons who were granted shares of common stock
pursuant to private placements or pursuant to the exercise of warrants or their
transferees, pledgees, donees, legatees, heirs, or legal representatives who
wish to offer and sell such shares (such persons are referred to in this
prospectus as the "Selling Stockholder" or "Selling Stockholders") in
transactions in which they and any person acting on their behalf through whom
such shares are sold may be deemed to be underwriters within the meaning of the
Securities Act. We have granted registration rights to the Selling Stockholders.
The registration statement of which this prospectus forms a part is intended to
satisfy these registration rights. We will receive none of the proceeds from any
such sales. We will pay substantially all of the expenses incident to this
offering of the shares by the Selling Stockholders to the public other than
commissions and discounts of underwriters, brokers, dealers, or agents.
There presently are no arrangements or understandings, formal or
informal, pertaining to the distribution of the shares described in this
prospectus. Upon our company being notified by a Selling Stockholder that any
material arrangements have been entered into for the sale of shares, to the
extent required, we will file, during any period in which offers or sales are
being made, one or more supplements to this prospectus to set forth the names of
Selling Stockholders and any other material information with respect to the plan
of distribution not previously disclosed. In addition, any shares which qualify
for sale pursuant to Section 4 of, or Rules 144 or 144A under, the Securities
Act may be sold under such provisions rather than pursuant to this prospectus.
Selling Stockholders may sell the shares being offered by this
prospectus from time to time in transactions (which may involve crosses and
block transactions) on the Nasdaq SmallCap Market at market prices prevailing at
the time of sale, at prices related to such prevailing market prices, at
negotiated prices, at fixed prices, or in transactions directly to one or more
purchasers, including pledgees in privately negotiated transactions (including
sales pursuant to pledges). Selling Stockholders may sell some or all of the
shares in transactions involving broker-
28
<PAGE> 31
dealers, who may act either as agent or as principal. Broker-dealers
participating in such transactions as agent may receive commissions from Selling
Stockholders (and, if they act as agent for the purchaser of such shares, from
such purchaser), such commissions computed in appropriate cases in accordance
with the applicable rules of the Nasdaq SmallCap Market, which commissions may
be at negotiated rates where permissible under such rules.
Participating broker-dealers may agree with Selling Stockholders to
sell a specified number of shares at a stipulated price per share and, to the
extent such broker-dealer is unable to do so acting as an agent for Selling
Stockholders, to purchase as principal any unsold shares at the price required
to fulfill the broker-dealer's commitment to Selling Stockholders. In addition
or alternatively, shares may be sold by Selling Stockholders and/or by or
through other broker-dealers in special offerings or secondary distributions
pursuant to and in compliance with the governing rules of the Nasdaq SmallCap
Market, and in connection therewith commissions in excess of the customary
commissions prescribed by the rules of the Nasdaq SmallCap Market may be paid to
participating broker-dealers, or, in the case of certain secondary
distributions, a discount or concession from the offering price may be allowed
to participating broker-dealers in excess of the customary commission.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to or through other broker-dealers,
including transactions of the nature described in the preceding two sentences)
on the Nasdaq SmallCap Market, in negotiated transactions or otherwise, at
market prices prevailing at the time of sale or at negotiated prices, and in
connection with such resales may pay to or receive commissions from the
purchaser of such shares.
Selling Stockholders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the shares by the Selling Stockholders. All of the foregoing may
affect the marketability of the shares.
If the shares are sold in an underwritten offering, the underwriting
and selling group members (if any) may engage in passive market making
transactions in our common stock on the Nasdaq SmallCap Market immediately prior
to the commencement of the offering in accordance with Regulation M. Passive
market making presently consists of displaying bids on Nasdaq limited by the bid
prices of market makers not connected with such offering and purchases limited
by such prices and effected in response to order flow. Net purchases by a
passive market maker on each day are limited in amount to 30% of the passive
market maker's average daily trading volume in the common stock during the
period of the two full consecutive calendar months prior to the determination of
the offering price in connection with a sale pursuant to this prospectus and
must be discontinued when such limit is reached. Passive market making may
stabilize the market price of our common stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
We may agree to indemnify each Selling Stockholder as an
underwriter under the Securities Act against certain liabilities, including
liabilities arising under the Securities Act. Each Selling Stockholder may
indemnify any broker-dealer that participates in transactions involving sales of
the shares against certain liabilities, including liabilities arising under the
Securities Act.
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus
will be passed on for us by Greenberg Traurig, LLP, Phoenix, Arizona.
EXPERTS
The financial statements as of October 31, 1999 and 2000, and for each
of the three years in the period ended October 31, 2000, included in this
Prospectus, and the financial statements and the related financial statement
schedule incorporated in this Prospectus by reference from the Company's Annual
Report on Form 10-K for the year ended October 31, 1999 have been audited by
Deloitte & Touche LLP, independent auditors, as
29
<PAGE> 32
stated in their reports (which contain an unqualified opinion that includes an
explanatory paragraph regarding the substantial doubt about the Company's
ability to continue as a going concern) appearing herein and elsewhere in the
Registration Statement and incorporated herein by reference, and have been so
included in reliance upon the reports of such firm given their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-3 with the Securities
and Exchange Commission relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance we refer you to the copy of the contract or other document filed with
the SEC, each such statement being qualified in all respects by such reference.
We file reports, proxy statements, and other information with the SEC.
A copy of any materials that we file with the SEC may be inspected by anyone
without charge at the public reference facilities maintained by the SEC in Room
1024, 450 Fifth Street, N.W., Washington D.C. 20549; the Chicago Regional
Office, Suite 1400, 500 West Madison Street, Citicorp Center, Chicago, Illinois
60661; and the New York Regional Office, Suite 1300, 7 World Trade Center, New
York, New York 10048. Copies of all or any part of the registration statement
may be obtained from the Public Reference Section of the SEC at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of the prescribed fees. The
public may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. The registration statement is also available
through the SEC's Web site at the following address: http://www.sec.gov.
30
<PAGE> 33
BIONUTRICS, INC. AND
SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
CONSOLIDATED FINANCIAL STATEMENTS
As of October 31, 2000 and 1999,
and for Each of the Three Years in the
Period Ended October 31, 2000
F-1
<PAGE> 34
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bionutrics, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Bionutrics, Inc. and
subsidiaries (the "Company") as of October 31, 2000 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended October 31, 2000. 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at October 31, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended October 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company's operating losses since
inception, the uncertainty regarding the Company's ability to raise additional
capital and the Company's inability to generate income and positive cash flow
from operations raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
December 8, 2000
F-2
<PAGE> 35
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 2000 1999
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 711,563 $ 680,190
Trade receivables - net of allowance for bad debts of $48,239
and $48,925, respectively 16,845 1,364,823
Inventory (Note 3) 100,401 259,489
Prepaids and other current assets 62,383 99,942
------------ ------------
Total current assets 891,192 2,404,444
------------ ------------
PROPERTY - Net of accumulated depreciation of $342,573
and $264,354, respectively (Notes 4 and 9) 15,474 90,659
------------ ------------
LONG-TERM RECEIVABLE (Note 5) 263,071
------------ ------------
OTHER ASSETS:
Patents - net of accumulated amortization of $177,328
and $149,664, respectively 392,137 419,801
Investment in InCon Processing, L.L.C. (Note 11) 2,544,494 2,271,127
------------ ------------
Total other assets 2,936,631 2,690,928
------------ ------------
TOTAL $ 4,106,368 $ 5,186,031
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 664,375 $ 533,013
Accrued liabilities 590,779 1,175,275
Current portion of notes payable and capital leases (Notes 6 and 9) 2,278 331,529
------------ ------------
Total current liabilities 1,257,432 2,039,817
NOTES PAYABLE AND CAPITAL LEASES - Net of
current portion (Notes 6 and 9) 2,278
------------ ------------
Total liabilities 1,257,432 2,042,095
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 1, 6 and 9)
STOCKHOLDERS' EQUITY (Note 7):
Common stock, $.001 par value - authorized, 45,000,000 shares;
21,471,252 and 20,812,774 issued and outstanding, respectively 21,468 20,809
Preferred stock, $.001 par value - authorized, 5,000,000 shares;
no issued and outstanding shares
Additional paid-in capital 37,545,322 32,216,750
Receivable collectible in cash or common stock (677,117)
Warrants 874,603 3,254,986
Accumulated deficit (34,914,137) (32,347,406)
Common stock in treasury, at cost (1,203) (1,203)
------------ ------------
Total stockholders' equity 2,848,936 3,143,936
------------ ------------
TOTAL $ 4,106,368 $ 5,186,031
============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 36
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
REVENUES (Note 1):
Revenue from services $ 209,098 $ 2,516,554 $ 3,999,408
Revenue from product sales 146,526 1,173,193 2,654,496
------------ ------------ ------------
Total gross revenues 355,624 3,689,747 6,653,904
DISCOUNTS AND ALLOWANCES 221,545 558,262 302,626
------------ ------------ ------------
Net revenues 134,079 3,131,485 6,351,278
COST OF REVENUES 165,042 2,334,839 7,259,015
------------ ------------ ------------
Gross (loss) profit (30,963) 796,646 (907,737)
------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative (Note 10) 2,573,762 5,939,356 10,328,653
Research and development 115,400 368,070 432,306
------------ ------------ ------------
Total operating expenses 2,689,162 6,307,426 10,760,959
------------ ------------ ------------
OPERATING LOSS (2,720,125) (5,510,780) (11,668,696)
------------ ------------ ------------
OTHER (EXPENSE) INCOME:
Net interest expense (Notes 6, 9 and 10) (31,657) (25,313) (127,225)
Other income (expense) 211,685 (30,237)
Net loss on investment in joint venture (Note 11) (26,634) (56,814)
Net gain on disposal of assets (Note 7) 2,553,516
Net other income (expense) 153,394 (112,364) 2,426,291
------------ ------------ ------------
NET LOSS $ (2,566,731) $ (5,623,144) $ (9,242,405)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,948,968 20,714,652 18,716,757
============ ============ ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE $ (0.12) $ (0.27) $ (0.49)
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 37
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
BALANCE, NOVEMBER 1, 1997 17,814,205 $ 17,812 $26,501,567
Issuance of common shares for cash at $5 per share (converted rate) under option
agreement, December 1997 8,333 8 41,647
Issuance of common shares for cash at $8 per share, December 1997 83,050 82 664,318
Issuance of common shares for cash at $7.25 per share, February 1998 413,793 414 2,999,586
Cash paid for stock related expenses (284,135)
Issuance of common shares for services at $6.375 per share, April 1998 10,000 10 63,740
Issuance of common shares for incentive compensation at $6.75 per share, June 1998 4,922 5 33,218
Issuance of common stock warrants for cash
Issuance of common shares and warrants for cash at $2 per share, August 1998 2,000,000 2,000 1,200,864
Issuance of common shares for incentive compensation at $1.75 per share, October 1998 21,429 21 37,479
Amortization of non-employee stock-based compensation, November 1997 - October 1998 (Note 7) 175,422
Net loss - year ended October 31, 1998
---------- --------- -----------
BALANCE, OCTOBER 31, 1998 20,355,732 20,352 31,433,706
Issuance of common shares and warrants for cash at $2 per share, January 1999 250,000 250 215,404
Issuance of common shares for services at $1.25 per share, February 1999 100,000 100 124,900
Issuance of common shares for services at $1.375 per share, February 1999 100,000 100 137,400
Issuance of common stock warrants for services at $4 per share, April 1999
Issuance of common stock warrants for services at $2 per share, August 1999
Issuance of common stock warrants for services at $7 per share, August 1999
Issuance of common shares as consideration for rights granted under an Option
agreement at $1.42 per share, October 1999 7,042 7 9,993
Issuance of common stock options as partial consideration for rights granted
under a license and sublicense agreement at $2 per share, October 1999 51,574
Amortization of non-employee stock-based compensation, November 1998 - October 1999 (Note 7) 193,773
Net loss - year ended October 31, 1999
---------- --------- -----------
BALANCE, OCTOBER 31, 1999 20,812,774 20,809 32,166,750
</TABLE>
<TABLE>
<CAPTION>
RECEIVABLE WARRANTS
COLLECTIBLE IN --------------------
CASH OR SHARES AMOUNT
COMMON STOCK
<S> <C> <C> <C>
BALANCE, NOVEMBER 1, 1997
Issuance of common shares for cash at $5 per share (converted rate) under option
agreement, December 1997
Issuance of common shares for cash at $8 per share, December 1997
Issuance of common shares for cash at $7.25 per share, February 1998
Cash paid for stock related expenses
Issuance of common shares for services at $6.375 per share, April 1998
Issuance of common shares for incentive compensation at $6.75 per share, June 1998
Issuance of common stock warrants for cash 700,000 50,000
Issuance of common shares and warrants for cash at $2 per share, August 1998 2,000,000 $2,797,136
Issuance of common shares for incentive compensation at $1.75 per share, October 1998
Amortization of non-employee stock-based compensation, November 1997 - October 1998 (Note 7)
Net loss - year ended October 31, 1998
--------- ----------
BALANCE, OCTOBER 31, 1998 2,700,000 2,847,136
Issuance of common shares and warrants for cash at $2 per share, January 1999 500,000 284,346
Issuance of common shares for services at $1.25 per share, February 1999
Issuance of common shares for services at $1.375 per share, February 1999
Issuance of common stock warrants for services at $4 per share, April 1999 100,000 11,603
Issuance of common stock warrants for services at $2 per share, August 1999 100,000 86,907
Issuance of common stock warrants for services at $7 per share, August 1999 30,000 74,994
Issuance of common shares as consideration for rights granted under an Option
agreement at $1.42 per share, October 1999
Issuance of common stock options as partial consideration for rights granted
under a license and sublicense agreement at $2 per share, October 1999
Amortization of non-employee stock-based compensation, November 1998 - October 1999 (Note 7)
Net loss - year ended October 31, 1999
--------- ----------
BALANCE, OCTOBER 31, 1999 3,430,000 3,304,986
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
IN TREASURY
ACCUMULATED ---------------------
DEFICIT SHARES AMOUNT
<S> <C> <C> <C>
BALANCE, NOVEMBER 1, 1997 $ (17,481,857) (1,202,886) $(1,203)
Issuance of common shares for cash at $5 per share (converted rate) under option
agreement, December 1997
Issuance of common shares for cash at $8 per share, December 1997
Issuance of common shares for cash at $7.25 per share, February 1998
Cash paid for stock related expenses
Issuance of common shares for services at $6.375 per share, April 1998
Issuance of common shares for incentive compensation at $6.75 per share, June 1998
Issuance of common stock warrants for cash
Issuance of common shares and warrants for cash at $2 per share, August 1998
Issuance of common shares for incentive compensation at $1.75 per share, October 1998
Amortization of non-employee stock-based compensation, November 1997 - October 1998 (Note 7)
Net loss - year ended October 31, 1998 (9,242,405)
------------ --------- -------
BALANCE, OCTOBER 31, 1998 (26,724,262) (1,202,886) (1,203)
Issuance of common shares and warrants for cash at $2 per share, January 1999
Issuance of common shares for services at $1.25 per share, February 1999
Issuance of common shares for services at $1.375 per share, February 1999
Issuance of common stock warrants for services at $4 per share, April 1999
Issuance of common stock warrants for services at $2 per share, August 1999
Issuance of common stock warrants for services at $7 per share, August 1999
Issuance of common shares as consideration for rights granted under an Option
agreement at $1.42 per share, October 1999
Issuance of common stock options as partial consideration for rights granted
under a license and sublicense agreement at $2 per share, October 1999
Amortization of non-employee stock-based compensation, November 1998 - October 1999 (Note 7)
Net loss - year ended October 31, 1999 (5,623,144)
------------ --------- ------
BALANCE, OCTOBER 31, 1999 (32,347,406) (1,202,886) (1,203)
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
BALANCE, NOVEMBER 1, 1997 $ 9,036,319
Issuance of common shares for cash at $5 per share (converted rate) under option
agreement, December 1997 41,655
Issuance of common shares for cash at $8 per share, December 1997 664,400
Issuance of common shares for cash at $7.25 per share, February 1998 3,000,000
Cash paid for stock related expenses (284,135)
Issuance of common shares for services at $6.375 per share, April 1998 63,750
Issuance of common shares for incentive compensation at $6.75 per share, June 1998 33,223
Issuance of common stock warrants for cash 50,000
Issuance of common shares and warrants for cash at $2 per share, August 1998 4,000,000
Issuance of common shares for incentive compensation at $1.75 per share, October 1998 37,500
Amortization of non-employee stock-based compensation, November 1997 - October 1998 (Note 7) 175,422
Net loss - year ended October 31, 1998 (9,242,405)
-----------
BALANCE, OCTOBER 31, 1998 7,575,729
Issuance of common shares and warrants for cash at $2 per share, January 1999 500,000
Issuance of common shares for services at $1.25 per share, February 1999 125,000
Issuance of common shares for services at $1.375 per share, February 1999 137,500
Issuance of common stock warrants for services at $4 per share, April 1999 11,603
Issuance of common stock warrants for services at $2 per share, August 1999 86,907
Issuance of common stock warrants for services at $7 per share, August 1999 74,994
Issuance of common shares as consideration for rights granted under an Option
agreement at $1.42 per share, October 1999 10,000
Issuance of common stock options as partial consideration for rights granted
under a license and sublicense agreement at $2 per share, October 1999 51,574
Amortization of non-employee stock-based compensation, November 1998 - October 1999 (Note 7) 193,773
Net loss - year ended October 31, 1999 (5,623,144)
-----------
BALANCE, OCTOBER 31, 1999 3,143,936
</TABLE>
(Continued)
F-5
<PAGE> 38
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN
SHARES AMOUNT CAPITAL
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1999 20,812,774 20,809 32,166,750
Issuance of common shares for incentive compensation at $2 per share,
December 1999 7,407 7 14,807
Expiration of warrants to purchase common shares, January 2000 111,800
Issuance of common shares for incentive compensation at $1.75 per share,
March 2000 28,571 29 49,971
Issuance of common shares for services at $4 per share, April 2000 87,500 88 349,912
Expiration of warrants to purchase common shares, August 2000 2,797,136
Receivable collateralized by common stock, reclassified as contra-equity, August 2000 (Note 7)
Issuance of common shares for fees and expenses of investor at $1 per share,
September 2000 (Note 1) 25,000 25 24,975
Issuance of common stock warrants in connection with equity line,
September 2000 (Note 1) (95,037)
Issuance of common shares and warrants for cash at $1 per share, September 2000 500,000 500 475,497
Issuance of common shares for stock-related expenses, September 2000 10,000 10 (10)
Payment for 500,000 shares at $1 per share and stock warrants, October 2000 (Note 1) 471,926
Issuance of common stock warrants to replace expired warrants at $2
per share, October 2000 (278,602)
Amended warrant exercise price for the purchase of 100,000 shares of
common stock from $2 to $1 per share as consideration for a liability, October 2000
Agreement to issue 300,000 shares to ACH for release of certain contingent obligations
under the Master Formation Agreement relating to InCon Processing LLC,
October 2000 (Note 1) 300,000
Agreement to issue 591,850 shares of Preferred Stock to a director in
exchange for extinguishment of notes payable, including accrued interest,
of $798,998, October 2000 (Note 1) 798,998
Agreement to issue 150,000 shares in satisfaction of a $150,000 debt,
October 2000 (Note 1) 150,000
Amortization of non-employee stock-based compensation, November 1999 to October 2000 (Note 7) 207,199
Net loss - year ended October 31, 2000
---------- ------- -----------
BALANCE, OCTOBER 31, 2000 21,471,252 $21,468 $37,545,322
========== ======= ===========
</TABLE>
<TABLE>
<CAPTION>
RECEIVABLE
COLLECTIBLE IN
CASH OR
COMMON STOCK
<S> <C>
BALANCE, OCTOBER 31, 1999
Issuance of common shares for incentive compensation at $2 per share,
December 1999
Expiration of warrants to purchase common shares, January 2000
Issuance of common shares for incentive compensation at $1.75 per share,
March 2000
Issuance of common shares for services at $4 per share, April 2000
Expiration of warrants to purchase common shares, August 2000
Receivable collateralized by common stock, reclassified as contra-equity, August 2000 (Note 7) $(677,117)
Issuance of common shares for fees and expenses of investor at $1 per share,
September 2000 (Note 1)
Issuance of common stock warrants in connection with equity line,
September 2000 (Note 1)
Issuance of common shares and warrants for cash at $1 per share, September 2000
Issuance of common shares for stock-related expenses, September 2000
Payment for 500,000 shares at $1 per share and stock warrants, October 2000 (Note 1)
Issuance of common stock warrants to replace expired warrants at $2
per share, October 2000
Amended warrant exercise price for the purchase of 100,000 shares of
common stock from $2 to $1 per share as consideration for a liability, October 2000
Agreement to issue 300,000 shares to ACH for release of certain contingent obligations
under the Master Formation Agreement relating to InCon Processing LLC,
October 2000 (Note 1)
Agreement to issue 591,850 shares of Preferred Stock to a director in
exchange for extinguishment of notes payable, including accrued interest,
of $798,998, October 2000 (Note 1)
Agreement to issue 150,000 shares in satisfaction of a $150,000 debt,
October 2000 (Note 1)
Amortization of non-employee stock-based compensation, November 1999 to October 2000 (Note 7)
Net loss - year ended October 31, 2000
---------
BALANCE, OCTOBER 31, 2000 $(677,117)
=========
</TABLE>
<TABLE>
<CAPTION>
WARRANTS
-----------------------
SHARES AMOUNT
<S> <C> <C>
BALANCE, OCTOBER 31, 1999 3,430,000 3,304,986
Issuance of common shares for incentive compensation at $2 per share,
December 1999
Expiration of warrants to purchase common shares, January 2000 (250,000) (111,800)
Issuance of common shares for incentive compensation at $1.75 per share,
March 2000
Issuance of common shares for services at $4 per share, April 2000
Expiration of warrants to purchase common shares, August 2000 (2,000,000) (2,797,136)
Receivable collateralized by common stock, reclassified as contra-equity, August 2000 (Note 7)
Issuance of common shares for fees and expenses of investor at $1 per share,
September 2000 (Note 1)
Issuance of common stock warrants in connection with equity line,
September 2000 (Note 1) 200,000 95,037
Issuance of common shares and warrants for cash at $1 per share, September 2000 50,000 24,003
Issuance of common shares for stock-related expenses, September 2000
Payment for 500,000 shares at $1 per share and stock warrants, October 2000 (Note 1) 50,000 28,074
Issuance of common stock warrants to replace expired warrants at $2
per share, October 2000 2,000,000 278,602
Amended warrant exercise price for the purchase of 100,000 shares of
common stock from $2 to $1 per share as consideration for a liability, October 2000 52,837
Agreement to issue 300,000 shares to ACH for release of certain contingent obligations
under the Master Formation Agreement relating to InCon Processing LLC,
October 2000 (Note 1)
Agreement to issue 591,850 shares of Preferred Stock to a director in
exchange for extinguishment of notes payable, including accrued interest,
of $798,998, October 2000 (Note 1)
Agreement to issue 150,000 shares in satisfaction of a $150,000 debt,
October 2000 (Note 1)
Amortization of non-employee stock-based compensation, November 1999 to October 2000 (Note 7)
Net loss - year ended October 31, 2000
--------- ----------
BALANCE, OCTOBER 31, 2000 3,480,000 $ 874,603
========= ==========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
<S> <C>
BALANCE, OCTOBER 31, 1999 (32,347,406)
Issuance of common shares for incentive compensation at $2 per share,
December 1999
Expiration of warrants to purchase common shares, January 2000
Issuance of common shares for incentive compensation at $1.75 per share,
March 2000
Issuance of common shares for services at $4 per share, April 2000
Expiration of warrants to purchase common shares, August 2000
Receivable collateralized by common stock, reclassified as contra-equity, August 2000 (Note 7)
Issuance of common shares for fees and expenses of investor at $1 per share,
September 2000 (Note 1)
Issuance of common stock warrants in connection with equity line,
September 2000 (Note 1)
Issuance of common shares and warrants for cash at $1 per share, September 2000
Issuance of common shares for stock-related expenses, September 2000
Payment for 500,000 shares at $1 per share and stock warrants, October 2000 (Note 1)
Issuance of common stock warrants to replace expired warrants at $2
per share, October 2000
Amended warrant exercise price for the purchase of 100,000 shares of
common stock from $2 to $1 per share as consideration for a liability, October 2000
Agreement to issue 300,000 shares to ACH for release of certain contingent obligations
under the Master Formation Agreement relating to InCon Processing LLC,
October 2000 (Note 1)
Agreement to issue 591,850 shares of Preferred Stock to a director in
exchange for extinguishment of notes payable, including accrued interest,
of $798,998, October 2000 (Note 1)
Agreement to issue 150,000 shares in satisfaction of a $150,000 debt,
October 2000 (Note 1)
Amortization of non-employee stock-based compensation, November 1999 to October 2000 (Note 7)
Net loss - year ended October 31, 2000 (2,566,731)
------------
BALANCE, OCTOBER 31, 2000 $(34,914,137)
============
</TABLE>
<TABLE>
<CAPTION>
COMMON STOCK
IN TREASURY TOTAL
--------------------- STOCKHOLDERS'
SHARES AMOUNT EQUITY
<S> <C> <C> <C>
BALANCE, OCTOBER 31, 1999 (1,202,886) (1,203) 3,143,936
Issuance of common shares for incentive compensation at $2 per share,
December 1999 14,814
Expiration of warrants to purchase common shares, January 2000
Issuance of common shares for incentive compensation at $1.75 per share,
March 2000 50,000
Issuance of common shares for services at $4 per share, April 2000 350,000
Expiration of warrants to purchase common shares, August 2000
Receivable collateralized by common stock, reclassified as contra-equity,
August 2000 (Note 7) (677,117)
Issuance of common shares for fees and expenses of investor at $1 per share,
September 2000 (Note 1) 25,000
Issuance of common stock warrants in connection with equity line,
September 2000 (Note 1)
Issuance of common shares and warrants for cash at $1 per share, September 2000 500,000
Issuance of common shares for stock-related expenses, September 2000
Payment for 500,000 shares at $1 per share and stock warrants, October 2000 (Note 1) 500,000
Issuance of common stock warrants to replace expired warrants at $2
per share, October 2000
Amended warrant exercise price for the purchase of 100,000 shares of
common stock from $2 to $1 per share as consideration for a liability, October 2000 52,837
Agreement to issue 300,000 shares to ACH for release of certain contingent obligations
under the Master Formation Agreement relating to InCon Processing LLC,
October 2000 (Note 1) 300,000
Agreement to issue 591,850 shares of Preferred Stock to a director in
exchange for extinguishment of notes payable, including accrued interest,
of $798,998, October 2000 (Note 1) 798,998
Agreement to issue 150,000 shares in satisfaction of a $150,000 debt,
October 2000 (Note 1) 150,000
Amortization of non-employee stock-based compensation, November 1999 to
October 2000 (Note 7) 207,199
Net loss - year ended October 31, 2000 (2,566,731)
--------- ------- ----------
BALANCE, OCTOBER 31, 2000 (1,202,886) $(1,203) $2,848,936
========== ======= ==========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-6
<PAGE> 39
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,566,731) $ (5,623,144) $ (9,242,405)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 105,883 1,120,358 1,318,360
(Gain) on disposal of assets (2,553,516)
Loss on investment in joint venture 26,633 56,814
Amortization of non-employee stock-based compensation 207,199 193,773 175,422
Expenses satisfied with issuance of common stock
and warrants 541,649 436,004 134,473
Changes in operating assets and liabilities:
Trade receivables 84,907 33,086 315,960
Inventory 159,088 504,165 536,404
Prepaids and other current assets 37,559 47,380 384,230
Accounts payable 131,362 (166,437) (1,678,595)
Accrued liabilities (584,496) 73,205 (904,798)
------------ ------------ ------------
Net cash used in operating activities (1,856,947) (3,324,796) (11,514,465)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,034) (133,950) (1,462,129)
Patents and rights to technology acquired (15,000) (125,000)
Proceeds from disposal of fixed assets and patents 3,004,000 4,543,855
Investment in joint venture (272,244)
------------ ------------ ------------
Net cash (used in) provided by investing activities (3,034) 2,582,806 2,956,726
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt 900,000 200,000 3,225,000
Proceeds from issuance of stock and warrants 1,000,000 500,000 7,756,055
Expenses for capital raising (284,135)
Repayments of debt and capital leases (8,646) (982,220) (2,615,902)
------------ ------------ ------------
Net cash provided (used in) by financing activities 1,891,354 (282,220) 8,081,018
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 31,373 (1,024,210) (476,721)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 680,190 1,704,400 2,181,121
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 711,563 $ 680,190 $ 1,704,400
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the period for interest $ 614 $ 65,344 $ 149,253
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of debt to equity $ 900,000
============
Conversion of a contingent liability to equity $ 300,000
============
Net receivable reclassified to equity $ 677,117
============
Contribution of assets to L.L.C $ 399,815
============
Acquisition of equipment under capital leases $ 173,808
============
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
--------------------------------------------------------------------------------
1. ORGANIZATION AND BASIS OF PRESENTATION
BIONUTRICS, INC. - Bionutrics, Inc. ("Bionutrics) consists of Bionutrics
and its wholly-owned subsidiaries, LipoGenics, Inc. ("LipoGenics"),
Bionutrics Health Products, Inc. ("BHP"), Nutrition Technologies
Corporation ("Nutrition Technologies"), InCon International Ltd. ("IIN")
and InCon Technologies, Inc. ("InCon") (collectively referred to as the
"Company").
Bionutrics' operating strategy has changed from prior years where it
manufactured and marketed its products to its current strategy, which is
to leverage its core competency of new product development by partnering
the manufacturing and marketing of such new products. The Company's goal
is to discover, define and protect its products and technology and to
partner manufacturing and marketing. Revenues for the years ended October
31, 2000, 1999 and 1998 are derived primarily from two sources: services
and product sales. For the year ended October 31, 2000, revenues from
services were primarily attributed to product development and grant
research activities. For the years ended October 31, 1999 and 1998,
revenues from services were primarily attributed to molecular distillation
toll processing of materials for a variety of customers. Revenues from
product sales during the year ended October 31, 2000 were entirely from
the sales of evolvE(R), the Company's dietary supplement product. Revenues
from product sales during the years ended October 31, 1999 and 1998 were
primarily attributed to equipment sales as well as the sale of evolvE(R).
The accompanying consolidated financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. The Company
has incurred cumulative operating losses of $34,914,137 through October
31, 2000, which have been funded through the issuance of stock and debt.
The losses incurred to date, the uncertainty regarding the Company's
ability to raise additional capital and the Company's inability to
generate income and positive cash flows from operations may indicate that
the Company will be unable to continue as a going concern for a reasonable
period of time.
The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company's continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis,
maintaining adequate financing, and ultimately to attain successful
operations.
Since the Company's current cash resources and expected cash flow from
operations will not be sufficient to fund its operational needs for the
next 12 months, it continues to seek additional capital through private
equity and bank lines of credit. There can be no assurance that such
additional financing will be attainable, or attainable on terms acceptable
to the Company. Access by the Company to additional capital will depend
substantially upon prevailing market conditions and the financial
condition of and prospects for the Company at the time.
Management is continuing its efforts to obtain additional funds through
the issuance of common stock in private transactions and management is
also continuing its efforts to reposition the Company as a product
development company and, as such, is engaged in discussions with several
potential marketing partners involving evolvE(R) and future branded
products, including dietary supplements and functional food ingredients.
The Company plans to develop, patent, and trademark novel products while
its marketing partners will provide the distribution, marketing and sales
support. New products are expected to be based on new technology extending
beyond a tocotrienol platform.
In June 1999, the Company entered into a 50/50 joint venture with ACH Food
Companies, Inc. ("ACH", formerly known as AC HUMKO CORP.), wherein InCon
transferred substantially all of its assets to a newly-
F-8
<PAGE> 41
formed limited liability company, InCon Processing, L.L.C. ("InCon
Processing"), for which it received a payment of $3,000,000 and a 50
percent interest in the joint venture. InCon Processing took over
substantially all of the business previously engaged in by InCon relating
to toll processing, molecular separation, and the design and sale of
molecular separation facilities. InCon Processing expects to utilize the
InCon expertise to expand its existing business and to expand its business
into processing micronutrients that would be available for food grade
products. In connection with this transaction, the remaining amount of
goodwill recorded at the date of acquisition of InCon was written off
(Note 11). See related issuance of shares later in this footnote.
On September 7, 2000, the Company and a private investor entered into a
Common Stock Purchase Agreement (the "Agreement") for the future issuance
and purchase of shares of the Company's common stock. The Agreement
establishes what is sometimes termed as an equity line of credit or an
equity draw down facility. The Agreement permits the Company, in its
discretion, and subject to certain restrictions, to sell up to an
aggregate of 4,000,000 shares, with the maximum amount for each sale not
to exceed $1,000,000 each month, based on a formula of weighted average
price and total trading volume for a given period. The period during which
the Company can make such sales is two years beginning upon the effective
date of a registration statement for the resale of the shares. The price
is based on the volume weighted average daily price of the Company's
common stock for the 22 trading days following a draw down notice. The
Company can establish a threshold price below which it will not sell
shares. The price is discounted by 10 percent, decreasing by .25 percent
to 7 percent for each $12,500,000 that the Company's market capitalization
exceeds $60,000,000. In lieu of a minimum draw down commitment, the
Company has issued a three-year warrant for the purchase of 200,000 shares
of common stock at an exercise price of $1.535 per share, equal to 120
percent of the average volume weighted average daily price for the 15
trading days before the date of issuance of the warrant. In addition, 35
day warrants will be issued in connection with each draw down for the
purchase of a number of shares equal to 17.5 percent of the draw down
amount divided by the weighted average of the purchase prices during the
applicable period. In payment of fees and expenses of the investor, the
Company has issued 25,000 shares of its common stock to the investor.
The Company is not permitted to draw down funds if the issuance of shares
to the investor pursuant to the draw down facility would result in the
investor owning more than 9.9 percent of the Company's common stock or
would require stockholder approval under applicable Nasdaq rules. The
agreement contains various termination rights for the investor, including,
among others, due to materially adverse changes to the Company.
The Company intends to use the proceeds of the offering for general
corporate and working capital purposes.
On September 20, 2000, the Company raised $500,000 in capital through
issuance of common stock. This capital stock was issued at $1.00 per
share. In conjunction with this issuance, 50,000 warrants were issued with
an exercise price of $1.10. These warrants expire on September 20, 2003.
Additionally, in connection with this transaction the Company issued
10,000 shares of common stock to the investors as payment for their legal
fees, expenses and related disbursements. The agreement allows for a 2
percent penalty to be charged to the Company if such shares are not
registered with the SEC on a timely basis.
On October 25, 2000, the Company raised $500,000 in capital through the
sale of common stock. This capital stock was subscribed to at $1.00 per
share. In conjunction with this issuance, 50,000 warrants were issued with
an exercise price of $1.00. These warrants expire on October 24, 2002.
These shares were issued on November 28, 2000.
On October 27, 2000, the Company agreed to issue 591,850 shares of its
Series A Convertible Preferred Stock as consideration for the cancellation
of $798,998 of debt owed under certain promissory notes dated December 22,
1999 and June 19, 2000 to a director. The shares have an annual cumulative
dividend of $0.108 per share, a liquidation rate of $1.35 per share and
each share is convertible to one share of Common
F-9
<PAGE> 42
Stock on or after October 27, 2001. The shares are also redeemable by the
Company at any time at $1.35 per share. These shares were issued on
December 6, 2000.
On October 28, 2000, the Company agreed to issue 150,000 shares of its
Common Stock as consideration for the release of its obligation to repay a
$150,000 Bridge Loan the Company received on April 7, 2000. Under the
agreement, the Company has the right to repurchase the shares at fair
market value, between $1.00 and $3.00, for three years. These shares were
issued on December 13, 2000.
On October 30, 2000, the Company agreed to issue 300,000 shares of its
Common Stock to ACH as consideration for the release of certain contingent
obligations under the Master Formation Agreement and Members Agreement
related to the formation of their 50/50 joint venture, InCon Processing.
These shares were issued on December 14, 2000.
On October 30, 2000, the Company issued 2,000,000, 1 year warrants with an
exercise price of $2.00 to ACH. These warrants were issued to effectively
extend the exercise period for the original warrants issued to ACH that
expired August 14, 2000, as the Company wishes to extend the period during
which ACH may obtain an additional equity interest in the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with
accounting principles generally accepted in the United States of America.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Bionutrics and its wholly-owned subsidiaries,
LipoGenics, Inc., Bionutrics Health Products, Inc., InCon Technologies,
Inc. and Nutrition Technology Corp. All significant intercompany balances
and transactions have been eliminated.
USE OF ESTIMATES - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash and cash equivalents.
INVENTORY is stated at the lower of cost or market. Cost is determined
using the first-in, first-out method.
PROPERTY AND DEPRECIATION - Property is stated at cost. Depreciation is
computed using the straight-line method over the estimated useful lives of
the individual assets. The estimated useful lives of depreciable assets
are:
<TABLE>
<CAPTION>
ASSET TYPE ESTIMATED USEFUL LIFE
<S> <C>
Equipment, furniture and fixtures 3 - 10 years
Leasehold improvements 10 years
Capitalized software 3 years
Leased equipment 3 years
</TABLE>
Leasehold improvements and leased equipment are amortized over the lessor
of the lease life or the useful life of the asset. Expenditures of a
repair and maintenance nature are expensed when incurred.
F-10
<PAGE> 43
REVENUE - The Company generally recognizes product revenue at the time of
shipment to the customer. Revenues from the sale of consignment inventory
is recognized upon notification from third parties. Revenues from services
are recorded at the time service is rendered and/or reimbursable expenses
are incurred. Provisions for returns and other adjustments are provided
for in the same period the related sales are recorded.
The Company had one customer that accounted for approximately 28 percent
of total revenues for the year ended October 31, 2000 and two customers
that accounted for approximately 67 percent and 52 percent of total
revenues for the years ended October 31, 1999 and 1998, respectively.
PATENTS - Legal and other costs related to patent applications are
expensed as incurred. Patents which are acquired are amortized using a
straight-line basis over 17 years commencing at the date patent approval
is obtained or the remaining life at the time of acquisition. Patents
currently capitalized relate to both the processes and products associated
with the Company's business.
INCOME TAXES are accounted for under the asset and liability approach,
which can result in recording tax provisions or benefits in periods
different from the periods in which such taxes are paid or benefits
realized. Deferred federal income taxes result principally from certain
tax carryforwards that are recognized for financial reporting purposes in
different years than for income tax reporting purposes. Deferred tax
assets were fully offset by a valuation allowance in 2000, 1999, and 1998.
RESEARCH AND DEVELOPMENT - The cost of research and development is charged
to expense as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The fair values of cash, trade and
notes receivable (except for the receivable which is classified as
contra-equity for which a fair market value is indeterminable), accounts
payable, accrued liabilities and notes payable approximate the carrying
value due to the short-term nature of these instruments.
STOCK OPTIONS AND WARRANTS granted to consultants or independent
contractors have been accounted for in accordance with the fair value
method of Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation. In accordance with Accounting
Principles Board Opinion ("APB") No. 25, options granted to employees of
the Company are recorded as expense, based on the difference, if any,
between the fair market value of the stock, on the date of grant and the
option's exercise price. No compensation cost was recognized in the
Company's consolidated statements of operations for employee-based options
and warrants for 2000, 1999 or 1998.
LOSS PER SHARE - Basic earnings per share ("EPS") excludes potential
dilution from stock options, warrants and other securities or contracts to
issue common stock. Diluted EPS takes into account the potential issuance
of these shares in the calculation of EPS. Due to losses from continuing
operations for years ended October 31, 2000, 1999, and 1998, the Company
has concluded that issuance of any additional shares would be antidilutive
and, therefore, a dual presentation is not required. There were 5,991,811,
5,360,145 and 4,957,978 shares considered antidilutive for the years ended
October 31, 2000, 1999 and 1998, respectively.
NEW ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires that an
enterprise recognize certain derivatives as either assets or liabilities
in the statement of financial position and measure those instruments at
fair value. The statement is effective for the Company's fiscal year
beginning November 1, 2000. SFAS No. 133 is not expected to have a
material impact on the Company's consolidated financial statements.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior
years financial statements to conform to the current year presentation.
F-11
<PAGE> 44
3. INVENTORY
As of October 31, inventory consists of the following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Work in process $107,733
Finished goods $100,401 151,756
-------- --------
Total $100,401 $259,489
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT
As of October 31, the components of property and equipment consist of the
following:
<TABLE>
<CAPTION>
2000 1999
<S> <C> <C>
Equipment, furniture and fixtures $ 262,068 $ 259,034
Leasehold improvements 41,444 41,444
Capitalized software 30,181 30,181
Leased equipment under capital lease (Note 9) 24,354 24,354
--------- ---------
Property and equipment - gross 358,047 355,013
Less accumulated depreciation and amortization (342,573) (264,354)
--------- ---------
Property and equipment - net $ 15,474 $ 90,659
========= =========
</TABLE>
5. LONG-TERM RECEIVABLE
The long-term receivable represents a trade receivable acquired from InCon
in connection with the purchase of InCon by the Company. As $263,071 of
this receivable remains uncollected as of October 31, 2000, the Company
has reclassified this receivable to long-term but still considers the
amount to be fully collectible.
6. NOTES PAYABLE
At October 31, 1999, the Company had $322,883 outstanding as note payable.
Payment of this note, which is due to Rye, a party related through stock
ownership, is contingent upon collection of a certain receivable. The
Company has reclassified such receivable, net of this note, to
stockholders' equity for the year ended October 31, 2000 (Note 7).
7. STOCKHOLDERS' EQUITY
At October 31, 2000, the Company had four agreements for stock to be
issued. These future stock issuances are composed of the following:
- 150,000 shares to an unrelated third party as repayment for a $150,000
bridge loan received during April 2000.
- 300,000 shares to ACH as consideration for the release of certain
contingent obligations under the Master Agreement and Members Agreement
related to the formation of their 50/50 joint venture, InCon Processing.
F-12
<PAGE> 45
- 591,850 shares of Series A Convertible Preferred Stock to a director as
consideration for previously borrowed funds of $750,000, plus accrued
interest of $48,998.
- 500,000 shares sold for $1.00 per share on October 25, 2000.
At October 31, 2000, the Company had $677,117 as a net receivable
collateralized by 1.4 million shares of the Company's common stock. This
amount represents a receivable acquired from InCon in connection with the
acquisition of InCon by the Company. As this receivable is dependent on
future actions by a customer which have not occurred, but is
collateralized by the Company's stock, management has elected to
reclassify it to stockholders' equity. This receivable has been reduced by
the note payable to Rye of $322,883, as the payment of that note is
contingent upon collection of the receivable.
In August 1998, ACH acquired 2,000,000 shares of the Company's common
stock for $2.00 per share. ACH also acquired Bionutrics' rice bran
processing technology for $2,000,000. The technology transfer gives ACH
the exclusive right to use and practice Bionutrics' proprietary rice bran
processing technology in North America, with Bionutrics retaining the
right to use and practice the technology worldwide, other than in North
America. Bionutrics acquired a perpetual profit sharing interest in ACH's
rice bran business. As of October 31, 2000, the Company has received $0 in
connection with this agreement.
In February 1998, Novartis Nutrition acquired exclusive worldwide rights
to evaluate the Company's Clearesterol(R) complex for potential
application as a functional food ingredient. The evaluation right was
acquired as part of a $3,000,000 stock investment in Bionutrics.
At October 31, 1996, the Company authorized 1,900,000 shares of common
stock for issuance under its Nonqualified 1996 Stock Option Plan (the
"1996 Plan") to key personnel, consultants and independent contractors. On
December 12, 1997, an additional 950,000 shares of common stock were
authorized for issuance under the 1996 Plan, for a total of 2,850,000
authorized as of October 31, 1998. The incentive stock options are granted
to purchase common stock at 100 percent (110% for an optionee who is a 10%
stockholder) of the fair market value of the stock on the date of grant.
Stock options are granted to purchase common stock at a price determined
by the plan administrator and can be exercisable for a period of up to ten
years from the date of grant (five years for an option granted to a 10%
stockholder). All participants are eligible to receive stock awards and
stock appreciation rights, as to be determined by the Company's Board of
Directors. No stock awards or stock appreciation rights have been granted
under the plan.
DIVIDEND POLICY - The Company has not declared or paid any cash dividends
on its common stock and does not intend to declare or pay any cash
dividend in the foreseeable future. The payment of dividends, if any, is
within the discretion of the Board of Directors and will depend on the
Company's earnings, if any, its capital requirements and financial
condition and such other factors as the Board of Directors may consider.
EMPLOYEE STOCK-BASED COMPENSATION - A summary of transactions for employee
stock options and warrants for the years ended October 31, 2000, 1999 and
1998 is as follows:
F-13
<PAGE> 46
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OPTION --------------------
OF PRICE REMAINING EXERCISE
SHARES RANGE LIFE PRICE
<S> <C> <C> <C> <C>
Options outstanding at October 31, 1997 2,026,244 $1.36 - $9.13 3.9 $5.59
Options granted 382,000 $4.00 - $5.00
Warrants granted 700,000 $3.25 - $4.00
Options canceled (233,600) $5.00
----------
Options and warrants outstanding at
October 31, 1998 2,874,644 $1.36 - $5.00 4.84 $4.08
Options granted 60,000 $2.00 - $4.00
Options canceled (724,500) $4.00 - $5.00
----------
Options and warrants outstanding at
October 31, 1999 2,210,144 $1.36 - $5.00 4.33 $4.01
Options granted 615,000 $1.75 - $3.63
Options canceled (300,000) $4.00
----------
Options and warrants outstanding at
October 31, 2000 2,525,144 $1.36 - $5.00 3.62 $3.49
==========
Options available for future grant
under the 1996 Plan 499,100
==========
</TABLE>
On September 17, 1998, the compensation committee of the Board of
Directors reduced the exercise price for options held by employees who
were not Directors to $4.00. None of the other terms was modified.
F-14
<PAGE> 47
NONEMPLOYEE STOCK-BASED COMPENSATION - A summary of transactions for
nonemployee stock options and warrants for the years ended October 31,
2000, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OPTION ----------------------
OF PRICE REMAINING EXERCISE
SHARES RANGE LIFE PRICE
<S> <C> <C> <C> <C>
Options and warrants outstanding
at October 31, 1997 658,333 $2.50 - $5.00 8.0 $3.40
Warrants issued 2,000,000 $2.00 1.8 $2.00
Warrants canceled (600,000) $2.50 - $4.00 -- $3.25
Options issued 33,334 $4.00 1.7 $4.00
Options exercised (8,333) $5.00 -- $5.00
------------
Options and warrants outstanding
at October 31, 1998 2,083,334 $2.00 - $5.00 1.9 $2.10
Warrants issued 980,000 $2.00 - $7.00 1.0 $2.48
Warrants canceled (250,000) $2.00 -- $2.00
Options issued 386,667 $2.00 - $5.00 2.2 $3.28
Options canceled (50,000) $4.00 -- $4.00
------------
Options and warrants outstanding
at October 31, 1999 3,150,001 $2.00 - $7.00 1.2 $2.37
Warrants issued 2,300,000 $1.00 - $2.00 1.2 $1.92
Warrants canceled (2,250,000) $2.00
Options issued 300,000 $2.00 2.4 $2.00
Options canceled (33,334) $4.00
------------
Options and warrants outstanding
at October 31, 2000 3,466,667 $1.00 - $7.00 $2.23
===========
As of October 31, 2000:
Exercisable options 620,000 $3.20
===========
Exercisable warrants 2,780,000 $2.02
===========
</TABLE>
In accordance with the methodology prescribed under SFAS No. 123, pro
forma compensation cost for the employee stock options for 2000, 1999 and
1998 was estimated to be $618,098, $1,345,661 and $3,807,706,
respectively.
Had the Company elected to recognize the above-mentioned compensation cost
in 2000, 1999 and 1998, loss from continuing operations would be
$3,154,829, $6,968,805 and $13,050,111, respectively, and the basic net
loss per share would be $.15, $.34 and $.70, respectively.
In accordance with the methodology prescribed under SFAS No. 123, the
Company recognized $207,199, $193,773 and $175,422 of compensation expense
to the nonemployee stock options in the 2000, 1999 and 1998 consolidated
statements of operations, respectively.
F-15
<PAGE> 48
The fair value of each employee-nonemployee option and warrant was
calculated on the date of grant using the Black-Scholes pricing model with
the following weighted average assumptions:
<TABLE>
<CAPTION>
RISK FREE VOLATILITY OPTION DIVIDEND
INTEREST RATE LIVES YIELD
<S> <C> <C> <C> <C>
2000 5.63 % 68 % 3 0
1999 5.15 % 71 % 3 0
1998 4.83 % 117 % 3 0
</TABLE>
8. INCOME TAXES
At October 31, 2000, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $30,256,733 which expire on
various dates through 2020. The deferred tax assets related to such
totaled approximately $11,974,000 and $10,839,000 at October 31, 2000 and
1999, respectively, and were offset by a valuation allowance.
The difference between the statutory tax rate and the Company's effective
tax rate is due to the nonrecognition of tax benefits from operating
losses due to their uncertainty of recoverability.
9. LEASES
The Company has operating leases for office space, vehicles and equipment
which expire on various dates through January 31, 2003. Total rental
expense was approximately $207,000, $510,000 and $794,000 for fiscal years
2000, 1999 and 1998, respectively. Future minimum lease payments under
noncancelable operating leases at October 31, 2000 are as follows:
<TABLE>
<S> <C>
2001 $ 178,747
2002 181,825
2003 45,456
----------
Total $ 406,028
==========
</TABLE>
10. RELATED PARTY
Various stockholders have provided consulting and other administrative
services to the Company. Expense for the years ended October 31, 2000,
1999 and 1998 was approximately $0, $141,000 and $510,000, respectively,
and was included in selling, general and administrative expenses in the
accompanying consolidated statements of operations.
Interest paid to stockholders in connection with outstanding notes
described in Note 6 was approximately $63,557 and $45,475 for the years
ended October 31, 1999 and 1998, respectively. No interest was paid to
stockholders during 2000.
11. INVESTMENT IN JOINT VENTURE
InCon Processing is a limited liability company formed in July 1999, in
which the Company is a 50 percent member, as noted in Note 1. The Company
accounts for this investment using the equity method.
InCon Processing had three customers which accounted for approximately 63
percent of total revenues for the 12-month period ended October 31, 2000
and 73 percent of total revenues for the four-month period ended October
31, 1999.
F-16
<PAGE> 49
The following represents summarized financial information of InCon
Processing at October 31, 2000 and 1999, and for the 12-month period then
ended October 31, 2000 and the four-month period ended October 31, 1999:
<TABLE>
<CAPTION>
(dollars in thousands) 2000 1999
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 659 $ 436
Accounts receivable 634 491
Property, plant and equipment and other - net 4,369 4,750
------- -------
Total $ 5,662 $ 5,677
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable and other liabilities $ 301 $ 263
Members' capital 5,361 5,414
------- -------
Total $ 5,662 $ 5,677
======= =======
OPERATIONS
Revenues $ 5,403 $ 1,675
Expenses 5,456 1,788
------- -------
Net loss $ (53) $ (113)
======= =======
</TABLE>
12. EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan under Section 401(k) of the
Internal Revenue Code. Each participant may elect to defer up to 15
percent of his or her compensation and have such amounts matched with
common stock of the Company at a rate of 50 percent for the first 6
percent contributed. The Company recognized expenses under this plan of
approximately $10,000, $49,000 and $130,000 during the years ended October
31, 2000, 1999 and 1998, respectively.
F-17
<PAGE> 50
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Consolidated quarterly financial information for 2000, 1999 and 1998 is as
follows:
<TABLE>
<CAPTION>
BASIC NET
NET EARNINGS
GROSS GROSS EARNINGS (LOSS)
REVENUES PROFIT (LOSS) (LOSS) PER SHARE
<S> <C> <C> <C> <C>
2000
First quarter $ 187,536 $ 133,882 $ (519,060) $ (0.02)
Second quarter 75,915 11,967 (961,014) (0.05)
Third quarter 67,943 (89,249) (634,208) (0.03)
Fourth quarter 24,230 (87,563) (452,449) (0.02)
----------- ----------- ----------- --------
Total $ 355,624 $ (30,963) $(2,566,731) $ (0.12)
=========== =========== =========== ========
1999
First quarter $ 1,134,817 $ 71,464 $(1,634,988) $ (0.08)
Second quarter 1,647,910 522,329 (1,495,739) (0.07)
Third quarter 836,891 190,787 (1,467,222) (0.07)
Fourth quarter 70,129 12,066 (1,025,195) (0.05)
----------- ----------- ----------- --------
Total $ 3,689,747 $ 796,646 $(5,623,144) $ (0.27)
=========== =========== =========== ========
1998
First quarter $ 1,794,942 $ (196,557) $(3,336,407) $ (0.19)
Second quarter 1,584,660 (335,887) (3,772,764) (0.21)
Third quarter 1,767,295 (269,677) (2,651,686) (0.14)
Fourth quarter 1,507,007 (105,616) 518,452 0.05
----------- ----------- ----------- --------
Total $ 6,653,904 $ (907,737) $(9,242,405) $ (0.49)
=========== =========== =========== ========
</TABLE>
F-18
<PAGE> 51
================================================================================
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED INTO
560,000 SHARES THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU
WITH INFORMATION THAT IS DIFFERENT. THE INFORMATION IN THIS PROSPECTUS MAY ONLY
BE ACCURATE ON THE DATE OF THIS DOCUMENT. THIS DOCUMENT MAY BE USED ONLY WHERE
BIONUTRICS, INC. IT IS LEGAL TO SELL THESE SECURITIES.
--------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary......................................................... 2
Risk Factors............................................................... 3
Business................................................................... 16
Selling Stockholders....................................................... 28
Plan of Distribution....................................................... 28
Legal Matters.............................................................. 29
Experts.................................................................... 29
Where You Can Find More Information........................................ 30
Financial Statements....................................................... F-1
</TABLE>
================================================================================
================================================================================
560,000 SHARES
BIONUTRICS, INC.
COMMON STOCK
--------------------
PROSPECTUS
--------------------
, 2000
================================================================================
<PAGE> 52
PART II.
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses in connection with the
offering described in the registration statement. All such expenses are
estimates except for the Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
SEC registration fee................................. $ 140.00
--------------
Accountants' fees and expenses....................... $ 2,000.00
--------------
Legal fees and expenses.............................. $10,000.00
--------------
Printing and engraving expenses...................... $ 1,500.00
--------------
Miscellaneous fees................................... $ 360.00
--------------
Total....................................... $14,000.00
==============
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our restated articles of incorporation provide that none of our directors
or officers shall be personally liable to us or our stockholders for monetary
damages for any breach of fiduciary duty by such person as a director or
officer, except that a director or officer shall be liable, to the extent
provided by applicable law, (1) for acts or omissions which involve intentional
misconduct, fraud, or a knowing violation of law, or (2) for the payment of
dividends in violation of restrictions imposed by Section 78.300 of the Nevada
GCL. The effect of this provision in our restated articles of incorporation is
to eliminate the rights of us and our stockholders, either directly or through
stockholders' derivative suits brought on behalf of our company, to recover
monetary damages from a director or officer for breach of the fiduciary duty of
care as a director or officer except in those instances provided under the
Nevada GCL.
In addition, we have adopted provisions in our bylaws that require us to
indemnify our directors, officers, and certain other representatives against
expenses, liabilities, and other matters arising out of their conduct on our
behalf, or otherwise referred to in or covered by applicable provisions of the
Nevada GCL, to the fullest extent permitted by the Nevada GCL.
Section 78.751 of the Nevada GCL provides that a corporation may indemnify
our directors and officers against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by the director or officer in connection with an action, suit or proceeding in
which the director or officer has been made or is threatened to be made a party,
if the director or officer acted in good faith and in a manner which the
director or officer reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal proceeding, had
no reason to believe the director's or officer's conduct was unlawful. Any such
indemnification may be made by the corporation only as ordered by a court or as
authorized in a specific case upon a determination made in accordance with the
Nevada GCL that such indemnification is proper in the circumstances.
Indemnification may not be made under the Nevada GCL for any claim, issue,
or matter as to which the director or officer has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines that in view of all the
circumstances of the case, the director or officer is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
To the extent that a director or officer of a corporation has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding or in defense of any claim, issue, or matter therein, the director or
officer must be indemnified under the Nevada GCL by the corporation against
expenses, including attorneys' fees, actually and reasonably incurred by the
director or officer in connection with the defense.
II-1
<PAGE> 53
ITEM 16. EXHIBITS
(a) Exhibits:
5 Opinion of Greenberg Traurig, LLP
23.1 Consent of Greenberg Traurig, LLP (included in Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney of Directors and Executive Officers (included on
the signature page of this Registration Statement)
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include any
material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such
information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this registration
statement to be signed on our behalf by the undersigned, thereunto duly
authorized, in the city of Phoenix, state of Arizona, on December 28, 2000.
BIONUTRICS, INC.
By: /s/ Ronald H. Lane
--------------------------------------
Ronald H. Lane
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose
signatures appear below constitute and appoint jointly and severally, Ronald H.
Lane and Karen J. Harwell, and each one of them, as his true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including pre-effective and
post-effective amendments) to this registration statement, and to sign any
registration statement and amendments thereto for the same offering pursuant to
Rule 462(b) under the Securities Act of 1933, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all which said attorneys-in-fact and agents, or any of
them, or their or his substitute or substitutes, may lawfully do, or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ronald H. Lane Chairman of the Board, Chief December 28, 2000
------------------------- Executive Officer and
Ronald H. Lane President (Principal Executive
Officer)
/s/ Karen J. Harwell Controller December 28, 2000
------------------------- (Principal Financial and
Karen J. Harwell Accounting Officer)
Director ___________, 2000
-------------------------
Daniel Antonelli
/s/ Richard M. Feldheim Director December 28, 2000
-------------------------
Richard M. Feldheim
/s/ Robert B. Goergen Director December 28, 2000
-------------------------
Robert B. Goergen
Director ___________, 2000
-------------------------
Steve Henig
<PAGE> 55
/s/ William M. McCormick Director December 28, 2000
-------------------------
William M. McCormick
Director ___________, 2000
-------------------------
Milton Okin
/s/ Frederick Rentschler Director December 28, 2000
-------------------------
Frederick Rentschler
/s/ Winston A. Salser Director December 28, 2000
-------------------------
Winston A. Salser
/s/ Donald A. Winkler Director December 29, 2000
-------------------------
Donald A. Winkler
<PAGE> 56
EXHIBIT INDEX
-------------
Exhibit
Number Description
5 Opinion of Greenberg Traurig, LLP
23.1 Consent of Greenberg Traurig, LLP (included in Exhibit 5)
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney of Directors and Executive Officers (included on
the signature page of this Registration Statement)
