<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 1998
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from October 1, 1998 to December 31, 1998
--------------- -----------------
Commission File Number 33-7106-A
NATURADE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2442709
-------- ----------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
7110 East Jackson Street, Paramount, California 90723
-----------------------------------------------------
(Address of principal executive offices)
(562) 531-8120
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 5,333,731 shares as of January
31, 1999.
Exhibit Index on Page 14
1
<PAGE>
FORM 10-Q
QUARTERLY REPORT
Quarter Ended December 31, 1998
On June 29, 1998, the Board of Directors of Naturade, Inc., voted to
change the Company's fiscal year end from September 30 to December 31, effective
the calendar year beginning January 1, 1999. A transition period from October
1, 1998 through December 31, 1998 will precede the start of the new fiscal year
and is presented herewith. Under the new fiscal calendar, the Company's
quarters will each be comprised of three calendar months ending March 31, June
30, September 30 and December 31. The first quarterly report affected by this
change will be the 10-Q Report for the "new" first quarter of 1999 ending on
March 31, 1999, and the first annual report affected by this change will be the
10-K Report for the "new" fiscal year ending December 31, 1999.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements
Balance Sheets at December 31, 1998 3
(unaudited) and September 30, 1998 (audited)
Statements of Operations for the three month 5
periods ended December 31, 1998 (unaudited)
and December 31, 1997 (unaudited)
Statements of Cash Flows for the three month 6
periods ended December 31, 1998 (unaudited)
and December 31, 1997 (unaudited)
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
</TABLE>
2
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATURADE, INC.
Balance Sheets
ASSETS
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $842,029 $1,975,513
Accounts receivable 1,294,612 1,419,293
Notes receivable - -
Related party receivable 600,000 600,000
Inventories 2,093,981 1,957,940
Refundable income taxes 163,416 163,416
Prepaid expenses and other current assets 325,853 208,901
---------- ----------
Total current assets 5,319,891 6,325,063
Property and equipment, net 1,981,326 2,018,147
Intangible assets, net 1,106,358 1,120,588
Other assets 116,014 84,671
---------- ----------
Total assets $8,523,589 $9,548,469
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
3
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31, 1998 September 30, 1998
(Unaudited)
<S> <C> <C>
Current liabilities:
Accounts payable $891,069 $1,011,165
Accrued expenses 565,794 545,209
Notes payable 1,450,000 1,450,000
Current portion of long-term debt 193,383 202,380
---------- ----------
Total current liabilities 3,100,246 3,208,754
---------- ----------
Long-term debt, less current maturities 1,964,324 2,011,523
---------- ----------
Commitments and contingencies - -
Stockholders' equity:
Common stock, par value $0.0001 per share;
authorized, 50,000,000 shares; issued and outstanding,
5,273,731 (5,203,731 at September 30, 1998) 527 520
Preferred stock, par value $0.0001 per share;
authorized, 2,000,000 shares; issued and outstanding,
1,250,024 125 125
Additional paid-in capital 7,453,201 7,375,708
Retained earnings (accumulated deficit) (3,994,834) (3,048,161)
---------- ----------
Total stockholders' equity 3,459,019 4,328,192
---------- ----------
Total liabilities and stockholders' equity $8,523,589 $9,548,469
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
NATURADE, INC.
Statements of Operations
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
December 31, 1998 December 31, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales $3,597,155 $2,729,058
Cost of sales 2,269,950 1,354,705
---------- ----------
Gross profit 1,327,205 1,374,353
---------- ----------
Costs and expenses:
Selling, general and administrative expenses 1,975,550 1,567,931
Special legal expenses 90,086 -
Relocation expenses 130,000 -
Other (income) expense:
Interest expense 89,981 101,147
Miscellaneous, net (11,739) (188,361)
---------- ----------
Total costs and expenses 2,273,878 1,480,717
---------- ----------
(Loss) income before income taxes (946,673) (106,364)
Provision for income taxes - (42,546)
---------- ----------
Net (Loss) income ($946,673) ($63,818)
---------- ----------
---------- ----------
Basic (loss) earnings per share ($0.18) ($0.02)
---------- ----------
---------- ----------
Weighted average number of shares
used in computation of basic (loss)
earnings per share 5,200,000 3,666,340
---------- ----------
---------- ----------
Diluted (loss) earnings per share $0.18 $0.02
---------- ----------
---------- ----------
Weighted average number of shares
used in computation of diluted
(loss) earnings per share 5,200,000 3,666,340
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to financial statements
5
<PAGE>
NATURADE, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
December 31, 1998 December 31, 1997
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income (946,673) (63,818)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 47,178 46,748
Deferred income taxes - (125,990)
Loss on disposition of property and equipment 6,363
Net gain on exchange of available-for-sale security - 166,125
Changes in assets and liabilities:
Accounts receivable 124,681 14,802
Inventories (136,041) (5,533)
Prepaid expenses and other current assets (116,952) (112,086)
Other assets (31,343) (2,500)
Accounts payable, accrued expenses and income taxes
payable (99,511) (141,613)
---------- ----------
Net cash (used in) provided by operating activities: (1,152,298) (223,865)
Cash flows from investing activities:
Purchase of property and equipment (2,490) (16,541)
---------- ----------
Net cash used in investing activities: (2,490) (16,541)
Cash flows from financing activities:
Net borrowings under note payable - 349,809
Payments of long-term debt, including capital lease (56,196) (52,628)
Proceeds from sale of stock - 5,529,707
Proceeds from exercise of warrants 77,500
---------- ----------
Net cash provided by financing activities: 21,304 5,826,888
Net increase (decrease) in cash and cash equivalents (1,133,484) 5,586,482
Cash and cash equivalents, beginning of period 1,975,513 157,585
Cash and cash equivalents, end of period 842,029 5,744,067
Supplemental disclosures of cash flow information-
Cash paid during the period for:
Interest 91,095 93,007
</TABLE>
See accompanying notes to financial statements
6
<PAGE>
NATURADE, INC.
Notes to Financial Statements
1. The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein includes all
adjustments necessary for fair presentation of the financial statements.
All such adjustments are of a normal recurring nature. These financial
statements do not include all disclosures associated with the Company's
annual financial statements and accordingly, should be read in conjunction
with such statements.
2. The related party advance of $600,000 represents a temporary loan to the
Company's Chief Executive Officer as per employment contract dated March 2,
1998 and filed as exhibit 10.20 to the Company's Form 10-Q for the period
ended March 31, 1998.
3. Inventories are stated at the lower of weighted average cost or market.
Weighted average cost is determined on a first-in, first-out basis.
Inventories at September 30, 1998 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1998
Unaudited
------------------ -----------------
<S> <C> <C>
Raw Materials $ 1,327,853 $ 880,660
Finished Goods 630,087 1,213,321
------------ ------------
$ 1,975,940 $ 2,093,981
</TABLE>
The December 31, 1998 inventory amounts reflect a write-off of $350,629
consisting of $275,930 of Raw Materials and $ 74,699 of Finished Goods.
This write-off was based on an analysis of the Company's product line,
including sales history, inventory turns and competitive position.
4. The FASB issued statement No. 128 "Earnings Per Share (EPS)" which became
effective for periods ending after December 15, 1997. This statement
requires restatement of all prior period EPS data presented. This statement
simplifies the standards for computing earnings per share previously found
in APB Opinion No. 15 and makes them comparable to international EPS
standards. It replaces the presentation of primary EPS with the
presentation of basic EPS and requires dual presentation of diluted EPS on
the face of the income statement for all entities with complex capital
structures.
Basic EPS excludes dilution and is computed by dividing income available to
common stockholders by the weighted average number of common shares
outstanding for the period. Diluted EPS is computed similarly to fully
diluted EPS pursuant to Opinion 15.
5. The Company intends to sell its interest in its current facility which
houses executive offices, manufacturing, sales, marketing and product
development operations and relocate to Irvine, California. In anticipation
of this move, the Company has outsourced its
7
<PAGE>
production requirements to several independent food processing companies.
The Company has also established a $130,000 aggregate relocation amount to
be paid to employees who are terminated and certain employees who continue
with the Company at the new location. This amount is intended to effect as
smooth a transition as possible to the new location. This relocation amount
has been fully reserved at December 31, 1998 and is classified as
"relocation bonus" on the December 31, 1998 Income Statement.
6. Commencing January 1, 1999, the Company has changed its fiscal year to end
on December 31st. Consequently, the current reporting period of October to
December 1998 is considered a transition period. The Company will prepare
an annual 10-K report for the January 1, 1999 to December 31, 1999 fiscal
year. For comparative purposes, the quarter ended December 31, 1998 will be
included in the 10-K discussion of the December 31, 1999 fiscal year.
7. As more fully discussed under Part II, Item 1: Legal Proceedings, the
Company is one of two remaining defendants in a proceeding initiated by the
Trustee in the Chapter 7 Bankruptcy case of Performance Nutrition, Inc.
("PNI") on October 3, 1997. The trial of the proceeding ended on
October 30, 1998. The bankruptcy court presiding over the Proceeding is
considering the matter and has not announced a decision.
On January 20, 1999 the Trustee in the PNI bankruptcy case filed a
second adversary complaint against the Company, seeking recovery of
$130,200 in allegedly preferential payments made to the Company by PNI
prior to bankruptcy. Management continues to believe that the Trustee's
claims lack substantive merit. However, all litigation contains an
element of uncertainty, and it is not possible to determine at this time
whether the ultimate outcome of the Proceeding will have a material
adverse effect on the Company's results of operations or financial
condition.
8. In early February 1999, the Company signed a 7 1/2 year lease agreement for
new executive offices, sales & marketing and warehouse operations located
in Irvine, Ca. The total minimum rental commitments under this lease for
the respective years ending December 31 are:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
1999 $ 246,681
2000 328,908
2001 351,327
2002 358,800
2003 381,228
Thereafter 1,122,756
-----------
Total $2,789,700
</TABLE>
8
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This discussion contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although Naturade, Inc. (the
"Company" or the "Registrant") believes that the expectations reflected in such
forward looking statements are reasonable, such statements are inherently
subject to risk and the Company can give no assurances that such expectations
will prove to be correct. Such forward looking statements involve risks and
uncertainties and actual results could differ from those described herein and
future results may be subject to numerous factors, many of which are beyond the
control of the Company. Such risk factors include, without limitation, the risk
of changes or developments in the regulatory framework or product liability
principles applicable to the Company and its products, and the risk of
consolidation in the distribution channels expected to be used by the Company to
distribute its products. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unexpected events.
LIQUIDITY AND CAPITAL RESOURCES
The Company used cash of $1,152,298 in operating activities in the three
months ended December 31, 1998.
The Company's working capital decreased from $3,116,309 at September 30,
1998 to $2,219,645 at December 31, 1998. This decrease was largely due to the
$1,133,484 reduction in cash required to fund the Company's operating losses for
the three-month period ended December 31, 1998.
Cash used for capital expenditures during the three month period ended
December 31, 1998 total $2,490. The Company anticipates its capital expenditures
for the three-month period ended March 31, 1999 to be approximately $100,000.
The Company's cash provided by financing activities of $21,304 for the
three month period ended December 31,1998 was the result of proceeds from the
sale of warrants net of long-term debt payments.
The Company is currently in negotiations with several asset-based lenders
for an expanded line of credit. This line of credit will support the Company's
working capital requirements as it expands sales into the mass market. In
anticipation of this new financing, the Company has extended the current
$1,500,000 line of credit agreement with South Bay Bank to May 1, 1999.
RESULTS OF OPERATIONS
Total net sales for the three months ended December 31, 1998 increased
$868,098 or 31.8% compared to the same period last year. Of this amount,
domestic sales increased $123,960 or 5.5% and international sales increased
$477,544 or 221.1% compared to the same period last year. In addition, initial
sales of "The Chinese Way-TM-" product line were $230,478 representing the
beginning of this product rollout.
9
<PAGE>
Gross profit as a percentage of sales decreased 13.5% to 36.9% of sales
for the three months ended December 31,1998 from 50.4% for the same period
last year. This decrease was primarily due to inventory write-off expenses
which were a result of a systematic repositioning and expansion of the
Company's product line, including sales history, inventory turns and
competitive position. This inventory write-off reflects the Company's
decision to reduce its stock keeping units and focus its growth on mass
market opportunities. The total inventory write-off expenses for the three
months ended December 31,1998 are $350,629, or 9.8% of sales, consisting of
$275,930 of raw materials and $74,699 of finished goods. If unable to be
sold, this inventory will be discarded. Contributing to the decrease in
gross profit was the increased international sales which provide a lower
gross profit than the Company's other product lines.
Selling, general and administrative expenses increased $407,619 to
$1,975,550 or 54.9% of sales for the three months ended December 31, 1998 from
$1,567,931 or 57.5% for the same period last year. These increases were
primarily the result of higher selling and marketing expenses which increased
$181,596 to $1,011,162 or 28.1% of sales for the quarter, from $829,566, or
30.4% for the same period last year and higher general and administrative
expenses, which increased $177,827 to $602,661, or 16.8% of sales for the
quarter, from $424,784, or 15.6% of sales, for the same period last year.
Shipping and receiving expenses increased $41,031 to $299,253, or 8.4% of sales
for the quarter ended December 31, 1998, from $258,222, or 9.5% for the same
period last year. Shipping and receiving expenses reflect the Company's
continued downward trend in freight costs as a percentage of sales.
Relocation expenses for the quarter ended December 31, 1998 were $130,000
compared to zero for the same period last year. The Company has established this
amount to reflect employee termination costs and continuation bonuses to be paid
when the Company relocates to its new location. These amounts are intended to
effect a smooth transition and rapid settlement in the Company's new location so
that the Company can focus on its new mass market customers.
Interest expense for the quarter ended December 31, 1998 decreased $11,166
compared to the same period last year.
Miscellaneous income for the quarter ended December 31, 1998 decreased
$166,125 compared to the same period last year reflecting the sale of available
for sale security in December 1997. In the 1997 fiscal year, the Company held
securities that consisted of 108,500 shares of common stock of a publicly held
company. The publicly held company also owned 48,000 shares of Naturade. During
the quarter ended December 31, 1997, the two companies exchanged the stock each
held in the other company. A gain of $166,125 was recorded on the transaction in
the quarter ended December 31, 1997 based on the market value on the exchange
date. No similar sale occurred in the current quarter.
Income tax expense decreased by $42,546 for the three-month period ended
December 31, 1998 compared to the same period last year due to losses for the
periods and the carryback benefits of such losses.
The net loss for the three month period ended December 31, 1998 was
$946,673 compared with a net loss of $63,818 for the same period last year.
The three months ended December 31, 1998 was negatively impacted by
management's decision to write-off inventory valued at $350,629, reserve
$130,000 for the relocation move to Irvine, California and the establishment
of stronger credit and collections policy.
10
<PAGE>
PART II. Other Information
ITEM 1. Legal Proceedings
The Company is one of two remaining defendants in a proceeding
initiated by the Trustee in the Chapter 7 Bankruptcy case of
Performance Nutrition, Inc. ("PNI") on October 3, 1997. The trustee
contends that the Company wrongfully participated in alleged breaches
of fiduciary duty by PNI management for failing to maximize the value
of PNI's assets. The Trustee alleges the Company aided and abetted a
breach of fiduciary duty by PNI management, conspired to breach
fiduciary duty and tortious interference with contract. The Trustee
seeks an unspecified amount of compensatory exemplary damages from the
Company. The Company has categorically denied any wrongdoing or
liability in this matter and has asserted several affirmative defenses
and counterclaims.
The trial of the proceeding ended on October 30, 1998. The bankruptcy
court presiding over the Proceeding is considering the matter and has
not announced a decision. Management continues to believe that the
Trustee's claims lack substantive merit.
On January 20, 1999 the trustee in the PNI bankruptcy case filed a
second adversary complaint against the Company, seeking recovery of
$130,200 in allegedly preferential payments made to the Company by PNI
prior to bankruptcy. The Company believes that these payments are
statutorily protected from avoidance because they were made in the
ordinary course of the two companies' business relationship or were
followed by new value provided to PNI by the Company.
Management intends to vigorously contest the trustee's claims. Because
all litigation contains an element of uncertainty, it is not possible
to determine at this time whether the ultimate outcome of these
matters will have a material adverse effect on the Company's results
of operations or financial condition.
ITEM 2. Changes in Securities
NONE
ITEM 3. Defaults upon Senior Securities
NONE
ITEM 4. Submission of Matters to a Vote of Security Holders
NONE
ITEM 5. Other Information
NONE
11
<PAGE>
PART II: OTHER INFORMATION
ITEM 6. (a)EXHIBITS & (b)REPORTS ON FORM 8-K - None
Exhibits
<TABLE>
<CAPTION>
Number Description Page
- -----------------------------------------------------------------
<S> <C> <C>
27 Financial Data Schedule 16
</TABLE>
Reports on Form 8-K
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NATURADE, INC.
--------------
(Registrant)
DATE: February 12, 1999 By /s/ Bill D.Stewart
---------------------
Bill D. Stewart
Chief Executive Officer
DATE: February 12, 1999 By /s/Lawrence J. Batina
------------------------
Lawrence J. Batina
Chief Financial Officer
13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ----------- ----------- --------
<S> <C> <C>
27 Financial Data Schedule 15
</TABLE>
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 842,029
<SECURITIES> 0
<RECEIVABLES> 1,294,612
<ALLOWANCES> 0
<INVENTORY> 2,093,981
<CURRENT-ASSETS> 5,319,891
<PP&E> 2,815,451
<DEPRECIATION> 834,125
<TOTAL-ASSETS> 8,523,589
<CURRENT-LIABILITIES> 3,100,246
<BONDS> 0
0
125
<COMMON> 527
<OTHER-SE> 3,458,367
<TOTAL-LIABILITY-AND-EQUITY> 8,523,589
<SALES> 3,597,155
<TOTAL-REVENUES> 3,597,155
<CGS> 2,269,950
<TOTAL-COSTS> 1,975,550
<OTHER-EXPENSES> 208,347
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 89,981
<INCOME-PRETAX> (946,673)
<INCOME-TAX> 0
<INCOME-CONTINUING> (946,673)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (946,673)
<EPS-PRIMARY> (.18)
<EPS-DILUTED> (.18)
</TABLE>
