UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark one)
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED: JUNE 30, 2008
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number: 33-19598
VYTA CORP
-------------------
(Exact name of small business issuer as specified in its charter)
NEVADA 84-0992908
-------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
370 17TH STREET, SUITE 3640
DENVER, COLORADO 80202
(303) 592-1010
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(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. /_/
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes /x/ No
/_/
Check if there is no disclosure of delinquent filers pursuant to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. /x/
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes /_/ No /x/
As of the close of trading on October 10, 2008, there were 45,013,178
shares outstanding, 32,908,823 of which were held by non-affiliates. The
aggregate market value of the common shares held by non-affiliates, based on the
average closing bid and asked prices on October 10, 2008, was approximately
$1,809,985.
The registrant's revenue for the fiscal year ended June 30, 2008 was
$0.
Transitional Small Business Disclosure Yes /_/ No/x/
TABLE OF CONTENTS
PAGE NUMBER
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FORWARD-LOOKING STATEMENTS 1
PART I 1
ITEM 1. DESCRIPTION OF BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 18
ITEM 3. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
PART II 20
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS ISSUER PURCHASES OF 20
EQUITY SECURITIES
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 21
ITEM 7. FINANCIAL STATEMENTS 27
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 27
ITEM 8A. CONTROLS AND PROCEDURES 27
ITEM 8B. OTHER INFORMATION 28
PART III 29
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY 29
ITEM 10. EXECUTIVE COMPENSATION 31
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 35
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 37
ITEM 13. EXHIBITS 37
ITEM 14. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES 38
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. We base these forward looking statements on our current expectations
and projections about future events. These forward looking statements are
subject to risks, uncertainties, and assumptions about our company, including:
O the operations and potential profitability of BioAgra, LLC, a
company in which we have a 50% interest;
O the rate of market development and acceptance of our beta
glucan products in the animal and aquatic animal feed industry
within which we are concentrating our business activities;
O the rate of market development and acceptance of our beta
glucan products for human consumption;
O our ability to compete successfully with growth promotion
antibiotic manufacturers and other providers of feed
additives;
O the operations and potential profitability of ExypnoTech,
Gmbh, a company in which we have a 49% interest that is
manufacturing and developing inlay components used in the
manufacturing of radio frequency identification devices
("RFID"), such as smart labels, smart cards and smart tags;
O the limited revenues and significant operating losses
generated by us to date;
O the possibility of significant ongoing capital requirements
and our ability to secure financing as and when necessary;
O our ability to retain the services of our key management, and
to attract new members to the management team; and
O our ability to obtain and retain appropriate patent, copyright
and trademark protection for our intellectual properties and
any of our products.
These forward-looking statements include statements regarding our
expectations, beliefs, or intentions about the future, and are based on
information available to us at this time. We assume no obligation to update any
of these statements and specifically decline any obligation to update or correct
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. Actual events and results could differ materially from our expectations
as a result of many factors, including those identified in the section titled
"Item 1. Description of Business--Risk Factors" and other sections of this
report. We urge you to review and consider those factors, and those identified
from time to time in our reports and filings with the Securities and Exchange
Commission, for information about risks and uncertainties that may affect our
future results. All forward-looking statements we make after the date of this
filing are also qualified by this cautionary statement and identified risks.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
COMPANY OVERVIEW
We were incorporated on June 22, 1996 as a Nevada corporation. In
January 2006, we changed our name from NanoPierce Technologies, Inc. to Vyta
Corp. Our corporate offices are located at 370 17th Street, Suite 3640, Denver,
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Colorado 80202, and our telephone number is (303) 592-1010. We maintain a
website at www.vytacorp.com, which is not incorporated in and is not a part of
this report.
When used in this report, the terms "we," "our," "us," "the company"
and similar expressions refer to Vyta Corp, BioAgra, LLC, ExypnoTech, Gmbh and
our subsidiaries, unless the context otherwise requires.
BUSINESS
GENERAL
In 2004, we instituted steps to change our principal business from
electronics technology to biotechnology. In August 2005, we purchased a 50%
equity interest in BioAgra, LLC, a Georgia limited liability company. The
remaining 50% was purchased by Xact Resources International and later assigned
to Justin Holdings, Inc., both unaffiliated parties. BioAgra is engaged in the
production, marketing and sale of Agrastim(R), a natural, non-toxic purified
beta-1,3/1,6-D glucan feed additive used to replace growtH promotion antibiotics
that are currently in use in the animal feed industry. In addition to its use as
a feed additive, BioAgra intends to include Agrastim(R) in premixed feeds, such
as in EquiForce(TM), a feed targeted for the equine industry that contains
Agrastim(R), vitamins and minerals formulated to supply nutrients to meet the
physiological needs of equine athletes and to boost theiR immune systems.
BioAgra is also producing Purestim(TM), a purified beta-1,3/1,6-D
glucan intended for use by other companies that manufacture neutraceuticals and
dietary supplements for human consumption, and is designing other products for
human, animal and aquaculture consumption based on beta glucan and other
immunoenhancers. Purestim(TM), together with Agrastim(R), are sometimes referred
to herein as "beta glucan products."
Prior to our acquisition of an interest in BioAgra, we were primarily
involved in our patented particle interconnect technology. We acquired the
particle technology in February 1998 to pursue a more focused, strategic
application and development of the particle technology and to commercialize the
technology as the NanoPierce Connection System (NCSTM). While we do not plan, at
this time, to continue efforts to manufacture or develop products that utilize
our particle technology, we have entered into two provisional technology license
agreements for the manufacture, development and marketing of products using our
particle technology. However, to date, neither agreement has matured into a
full-scale commercial license generating royalty and license revenues for us.
RECENT DEVELOPMENTS
On December 27, 2007, we sold our 49% interest in ExypnoTech, Gmbh
("ExypnoTech") to TagStar Systems, GmbH for $250,000 cash pursuant to a share
purchase agreement. ExypnoTech is a company that manufactures and develops radio
frequency identification ("RFID") components used in the production of, among
other things, smart labels, smart cards and smart tags. As a result of this
sale, we no longer have any interest in ExypnoTech, and TagStar Systems owns
100% of ExypnoTech
In addition, the United States is experiencing severe instability in
the commercial and investment banking systems which is likely to continue to
have far-reaching effects on the economic activity in the country for an
indeterminable period. The long-term impact on the United States economy and the
Company's operating activities and ability to raise capital cannot be predicted
at this time, but may be substantial.
BIOAGRA, LLC
BUSINESS STRATEGY
Governments are currently urging, and consumers are demanding,
producers to remove growth promotion antibiotics from the human food chain
supply to reduce the development in humans of increasingly powerful and virulent
strains of antibiotic-resistant bacteria, which makes treatment for illnesses
and diseases more difficult and expensive. In addition, consumers are demanding
more natural, organic, antibiotic-free foods.
Animals in the cattle, dairy, poultry, turkey, duck, equine, and swine
industries and aquatic animals, such as shrimp, are currently fed growth
promotion antibiotics. BioAgra is targeting the cattle, dairy, poultry, turkey,
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duck and swine industries for the sale of Agrastim(R) as an alternative to
growth promotion antibiotics used in feed. BioAgra is targeting the equine
industry with a product called EquiForce(TM) that contains Agrastim(R) and has
been formulated to supply nutrients to meet the physiological needs of equine
athletes and to boost their immune systems.
BioAgra has also begun producing and marketing a new beta glucan
product under the name Purestim(TM). This product is sold to companies that
manufacture neutraceuticals and dietary supplements for human consumption.
BioAgra's beta glucan products may be targeted for other uses in the future.
BACKGROUND ON BETA GLUCAN PRODUCTS AND THE NEED FOR ALTERNATIVES TO GROWTH
PROMOTION ANTIBIOTICS
Agrastim(R) and Purestim(TM) are produced from spent brewer's or
distillery yeast. The beta glucan products are a combination of bioactive
nutrients and B-glucans that are extracted from the cell walls of yeast using
steam injection and a centrifuging extraction process. Beta glucan is a natural,
non-toxic product that has been shown to stimulate immune systems in animal,
poultry and other organisms. Independent test results were published in an
article titled "THE INFLUENCE OF B-GLUCAN ON IMMUNE RESPONSES IN BROILER
CHICKENS" ("IMMUNOPHARMACOLOGY AND IMMUNOTOXICOLOGY," Volume 25, 2003 (Marcel
Dekker)), demonstrating the stimulation of the broiler chicken's immune systems
by the B-glucan. BioAgra's beta glucan products are designed to enhance the
immune system and to promote accelerated growth in various organisms.
Antibiotics have been added to animal feed in an effort to produce
healthier animals and to promote faster growth. Scientists, however, now believe
that this practice may lead to unforeseen and unwanted effects. Some studies and
articles indicate that growth promotion antibiotics contained in animal feeds
may accumulate in the animal body and can cause harm to humans, including
causing allergic and abnormal reactions.
The excessive use of antibiotics, especially growth promotion
antibiotics, in animal feed may convert some bacteria into antibiotic-resistant
strains of bacteria that can infect humans through the consumption of meat
products. When a human develops a resistant strain of bacteria, it becomes
difficult and expensive to treat due to the bacteria's resistance to
antibiotics. The use of antibiotics in animal feed has already affected many
countries in Europe, which have banned the use of growth promotion antibiotics
in animal feed. It is expected that the United States may also begin to ban or
discourage the use of these antibiotics in animal feed.
Alternatives to antibiotics, including Agrastim(R), are increasingly in
demand by animal farmers and other producers because they lack the drawbacks of
antibiotics and other chemical compounds. Agrastim(R) is a natural, non-toxic
product that has been proven to stimulate immune systems, thereby eliminating
the usage of antibiotics and growth hormone supplements in animal feeds.
Agrastim(R) is designed to enhance the immune system and to promote accelerated
growth. We believe Agrastim(R) as a feed additive can help resolve the harmful
effects of growth promotion antibiotics that can be toxic to humans and can
produce safe and healthy animal feed that may be claimed as "drug-free."
MANUFACTURING OF THE BETA GLUCAN PRODUCTS
RAW MATERIALS
BioAgra produces its beta glucan products from spent brewer's or
distillery yeast. Brewer's yeast is used in the production of alcoholic
beverages. Currently, yeast and other raw materials utilized in the production
of the beta glucan products are purchased from a Brazilian supplier pursuant to
invoices documenting each separate purchase. The yeast is consistent with
BioAgra's production needs and such arrangements currently are not subject to
any volume limitations or import restrictions. Arrangements are being made with
additional commercial firms that purchase and distribute these types of yeast.
BioAgra believes that there is an adequate supply of these raw materials for the
foreseeable future for BioAgra's proposed activities. BioAgra intends to
purchase these raw materials from other available worldwide suppliers that can
provide a cost efficient source of high quality raw materials that will permit
it to produce a purified beta glucan product that is at least 80% pure.
-3-
PRODUCTION PLANT
BioAgra's production plant is located at 103 Technology Drive,
Hinesville, Georgia 31313. BioAgra has leased the facility from the Liberty
County Industrial Authority pursuant to an Industrial Lease Agreement, dated
March 1, 2005, for a period of 120 calendar months at $12,000 per month (of
which certain amounts have been paid other than monthly as permitted by the
lessor). At the expiration of the lease term, BioAgra has the option to purchase
the leased premises (real estate and improvement) for $500,000. The facility is
approximately 30,000 square feet, consisting of both office space and a
production area and is also expected to include a research and development
laboratory. The production area has enough space to hold three separate
production lines in its current configuration, although as of this date, BioAgra
only has a single production line. The facility is located on approximately 7.29
acres.
The plant commenced operations in March of 2006. The plant went through
a shakedown period in which BioAgra evaluated and better understood the controls
and efficiencies of the plant. BioAgra started operating at full-scale capacity
in April of 2006. The production line has a designed capacity of producing
10,000 kilograms of Agrastim(R) per month. BioAgra has approximately 2,000
kilograms of packaged and drummed pure Agrastim(R) finished and on the floor for
sale and delivery. It has discontinued production at this time until demand is
sufficiently strong to justify continued production.
PRODUCTION PROCESS
In manufacturing the beta glucan product, the cell walls of the baker's
or distillery yeast are exposed to high temperatures using steam injection. The
mixture is then separated into solid and liquid portions by a centrifuge, and
the liquid portion is discarded. The solid portion is thoroughly washed with
water and then exposed to elevated temperatures using stream injection
extracting a residue. The residue is separated again into solid and liquid
portions by a centrifuge and the liquid portion is discarded. Finally, the solid
portion is thoroughly washed with water and the residue is spray dried, which
results in the beta glucan product.
Agrastim(R) is a concentrate that many farmers or producers will be
unable to mix with feed in the required proportions. Therefore, BioAgra expects
to produce specialized premixes containing Agrastim(R) and vitamins and/or
mannoproteins. Mannoproteins are purified from the yeast during the
manufacturing process. BioAgra will be able to sell to a broader array of
customers through the production of premixed products. EquiForce(TM), a premixed
product designed for and marketed to the racing and sport horse industry, is one
of BioAgra's first premixed products and is a combination of vitamins, minerals
and Agrastim(R).
Purestim(TM) is a concentrate that is being marketed and sold as an
additive to companies that manufacture and sell neutraceuticals and dietary
supplements. These companies will purchase the Purestim(TM) as an ingredient for
inclusion in existing products. There has been limited sales of Purestim(TM) to
customers of AHD International.
EMPLOYEES
BioAgra has three employees. In addition to its two managers and
executive officers, there is one employee employed as Plant Manager, one as
Research and Development Director and one as Administrative Assistant. During
production cycles, BioAgra hires additional employees consisting of one manager
and two crew members for each of two 12 hour shifts. When BioAgra begins
full-scale operations, these temporary employees are expected to be hired on a
full-time basis.
MARKETING AND DISTRIBUTION
BioAgra is focusing its initial marketing efforts on the animal feed
industry. BioAgra has targeted its efforts in the State of Georgia and those
states in which the vast majority of poultry producers in the United States are
located. The initial marketing strategy was to penetrate the poultry industry by
utilizing existing industry distributors or direct sales on a national and
international basis. BioAgra also marketed Agrastim(R) by attendance at various
poultry-related conventions. After successful testing of Agrastim(R) with other
-4-
animals, BioAgra has expanded the scope of its marketing to include the cattle,
dairy, swine, aquatic animal, equine and dietary supplement industries.
In addition to BioAgra's agreement with AHD International, LLC, BioAgra
has one independent distributor, Agra Nutrition, LLC, that is marketing
Agrastim(R) on a national basis and in India. Agra Nutrition, LLC is owned by
Mr. Warren Robold who also functions as Director of U.S. and International Sales
for BioAgra.
POULTRY AND TURKEY INDUSTRY
Poultry is the largest worldwide source of protein food for human
consumption. In addition, poultry can be raised in small geographical areas. In
the United States, approximately 8 billion chickens and 275 million turkeys are
farmed for "broiler" production and processing each year. Each broiler chicken
consumes an average of 10 pounds of feed during its approximately 42 day life
span for a total of 40 million tons of feed for all the broiler chickens in the
United States each year. Each turkey consumes approximately 110 pounds of feed
for a total of 13.75 million tons of feed. In addition, there are approximately
450 million egg producing chickens raised in the United States each year, which
consume approximately 132 pounds of feed over a period of 1.5 years for a total
of 27 million tons of feed.
CATTLE INDUSTRY
The United States has the largest fed-cattle industry in the world, and
is the world's largest producer of beef for domestic and export use. According
to the National Cattleman's Beef Association, there are roughly 800,000 beef
producers in the United States and approximately 97.1 million cattle in the
United States. During the production process, cattle usually spend four to six
months in a feedlot, during which time they are fed scientifically formulated
rations. Producers and veterinarians take great care to use only the optimal
amount of antibiotics needed to maintain an animal in good health. The United
States government through the National AntiMicrobal Resistance Monitoring System
strictly tracks antibiotic resistance as well as products and interventions to
assure the safety of the cattle as well as the beef supply.
DAIRY INDUSTRY
According to Best Food Nation, a group of associations representing all
levels of the food chain, there are approximately 65,000 dairy farms and
approximately 9,041,000 dairy cows in the United States. Each year, the United
States produces over 1 billion pounds of butter, more than 7 billion pounds of
cheese, over 1 billion pounds of nonfat dry milk, 1.5 billion pounds of yogurts,
and 1 billion gallons of ice cream. Dairy cows eat roughly 100 pounds of feed
each day. Dairy farmers typically employ professional nutritionists to develop
scientifically formulated diets for their cows. If a cow is being treated with
antibiotics, she is taken out of the milking herd and not put back into the herd
until her milk tests free of antibiotics. Applicable regulations require every
tank load of milk entering dairy processing plants to be strictly tested for
animal drug residues. The United States dairy industry conducts more than 3.5
million tests each year to ensure that antibiotics are kept out of the milk
supply. Any tanker that tests positive is disposed of immediately, never
reaching the public.
SWINE INDUSTRY
Another industry where the use of antibiotics among animals is of
concern is the swine industry. According to the United States Department of
Agriculture, pork is the number one meat consumed in the world and there are
approximately 70,000 hog farms in the United States today. Antibiotics may be
given to prevent or treat disease in hogs; however, a "withdrawal" period is
required from the time antibiotics are administered until it is legal to
slaughter the animal. Pigs fed antibiotics are segregated so that residues can
exit the animal's system and not be present in the meat. Recently, the pork
industry has established programs to encourage producers to implement management
practices that reduce the need for antibiotics, and to use antibiotics only when
other management practices do not, or will not, succeed in managing a correctly
diagnosed problem.
-5-
AQUACULTURE INDUSTRY
Aquaculture is defined as the production of aquatic animals and plants
under controlled conditions for all or part of their lifecycle. According to the
United States Department of Agriculture's Economic Research Service, during the
last two decades, the value of United States aquaculture production rose to
nearly $1 billion and is one of the fastest growing food-producing sectors.
According to the INTERNATIONAL TRADE REPORT produced in 2005 by the United
States Department of Agriculture, U.S. per-capita seafood consumption has
remained around 15 pounds through the late 1980s and 1990s, it is expected to
increase as farm-raised products become cheaper. Currently, the United States
consumes nearly 12 billion pounds of fish a year. By 2025, demand for seafood is
projected to grow by another 4.4 billion pounds above what is consumed today. In
addition, it is estimated that by 2020, 50 percent of the U.S. seafood supply
will come from aquaculture.
EQUINE INDUSTRY
In addition to the use of Agrastim(R) as an alternative to antibiotics
in animal feed, BioAgra has developed a product with Agrastim(R) focused on
racing and performance horses. Racing and performance horses are subject to the
outbreak of debilitating and deadly diseases, such as the Equine Herpesvirus
type 1 that killed six horses in an outbreak in December 2006 in Wellington,
Florida. BioAgra's EquiForce(TM) product has been designed to supply vitamins
and minerals needed to meet the physiological needs of equine athletes. In
addition, EquiForce(TM) contains Agrastim(R) to boost equine immune systems to
aid in suppressing bacterial and viral infections and increasing stamina and
resistance to stress. A trial of the EquiForce(TM) product was conducted by an
equine veterinarian at Fort Valley State University in Fort Valley, Georgia
showing positive immune responses in a controlled study. BioAgra expects to
obtain its first commercial scale order for the product in the near future.
NEUTRACEUTICALS AND DIETARY SUPPLEMENT INDUSTRY
Annual sales of supplements, fortified foods and beverages and
neutraceuticals for human consumption in the United States, are estimated to be
approximately $100 billion. The vitamins, minerals and supplements market
reached its present size due to a number of factors, including (i) interest in
healthier lifestyles, living longer and living well, (ii) the publication of
research findings supporting the positive health effects of certain nutritional
supplements and (iii) the aging of the "baby boom" generation combined with the
tendency of consumers to purchase more nutritional supplements and natural foods
as they age. BioAgra is considering the sale of Purestim(TM) as a supplement for
introduction by outside companies into packaged products for human consumption.
CUSTOMERS
BioAgra is targeting a broad range of customers consisting of both
large and small consumers of animal feed both nationally and internationally to
avoid dependency on one or a small number of customers. In addition, BioAgra is
beginning to target neutraceutical and dietary supplement producers for the sale
of Purestim(TM) as an additive in their existing products for human consumption.
On April 1, 2007, BioAgra and AHD International, LLC signed an
agreement whereby AHD International agreed to purchase beta glucan products from
BioAgra. The agreement has a term of five years with the right for successive
renewals provided minimum sales requirements are met. The agreement provides
that AHD International will purchase beta glucan products for resale to various
end users in thirteen countries. The agreement grants AHD International the
exclusive right to sell the beta glucan products to all users in ten countries,
including, Canada, Chile, Brazil, Japan, Vietnam, South Korea, Australia, New
Zealand, Germany and Denmark. In addition, the agreement grants the right to
sell the beta glucan products in an additional three countries (South Africa,
Mexico and the United States), with the exclusivity of such right dependant on
the type of end user sold to and the country involved.
Mid South Feeds of Alma, Georgia began adding Agrastim(R) to its top 5
premium lines of dog food and its top 2 premium brands of horse feed in May
2006. In addition, Mid South Feeds has recently begun to add Agrastim(R) to its
equine vitamin supplement, Equi-Match, which has been designed to be fed as a
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top-dress supplement for horses in training, competition and recovery. Mid South
Feeds has over 175 distributors in Florida, Georgia, Alabama, Virginia,
Kentucky, North Carolina and South Carolina. Besides manufacturing dog and horse
feed, Mid South also manufactures fish and shrimp feed, and starter feed for
dairy cattle and swine. To date, sales of Agrastim(R) by MidSouth have been
limited.
MANAGEMENT
MANAGERS AND OFFICERS
BioAgra is a manager-managed Georgia limited liability company. The
managers and officers of BioAgra are as follows:
NAME POSITION
------------------------ --------------------------------------
Neal Bartoletta Manager, President and Chief Executive
Officer
Paul H. Metzinger Manager, Executive Vice President,
Chief Financial Officer and Secretary
BIOGRAPHICAL INFORMATION
Biographical information regarding Mr. Metzinger is set forth in "Item
9--Directors and Executive Officers of the Company." The following is
biographical information about Mr. Bartoletta:
Mr. Bartoletta has served as the President and a Manager of BioAgra,
LLC since December 2004. From 1980 to 1991, Mr. Bartoletta served as the
President of Bart Warehousing Corp in South Kearny, New Jersey, and from 1978 to
1999, as the President of N.J. Bart Corp, Elizabeth, New Jersey. From 1998 to
the present, he has served as the President of Xact Resource International, Inc.
of Boca Raton, Florida. In 2006, Mr. Bartoletta was appointed the President of
Justin Holdings, Inc. of Boca Raton, Florida. Justin Holdings is the owner of
the other 50% equity interest in BioAgra. Mr. Bartoletta is a graduate of the
Academy of Advanced Traffic.
JOINT VENTURE PARTNER
As described elsewhere in this report, we own a 50% interest in
BioAgra. The remaining 50% of BioAgra is owned by Justin Holdings, Inc., a
Florida corporation. Justin Holdings, Inc. is a holding company that currently
has no other investments and no other substantial business activities other than
its ownership interest in BioAgra. All of the outstanding capital stock of
Justin Holdings is owned by Neal Bartoletta, who is also the sole officer and
director of Justin Holdings and is the manager, president and CEO of BioAgra.
Justin Holdings acquired a 50% ownership interest in BioAgra as the result of
the assignment by Xact Resources of its membership interest in BioAgra in
February 2006.
PARTICLE TECHNOLOGY
On February 26, 1998, we acquired the intellectual property rights
related to our particle interconnect technology from Particle Interconnect
Corporation, a Colorado corporation. We acquired the particle technology to
pursue a more focused, strategic application and development of the particle
technology and to commercialize the technology as the NanoPierce Connection
System (NCSTM). NCS is an alternative method of providing temporary or permanent
electrical connections between different flexible, rigid, metallic and
non-metallic surfaces. Through the use of the particle technology, we can also
attach semiconductors directly to various surfaces. While we do not plan, at
this time, to continue efforts to manufacture or develop products that utilize
our particle technology, we will pursue the licensing of our technology to third
parties.
-7-
In January 2007, we signed a separate six-month technology licensing
agreement to permit a different prospective licensee the non-exclusive
opportunity to conduct a market survey relating to our particle interconnect
technology that was extended in July 2007 for an additional six-month period. If
either market survey is favorable, that technology licensing agreement may
mature into a royalty-paying commercial license.
RESEARCH AND DEVELOPMENT
Our research and development activities were formerly conducted through
NanoPierce Connection, with additional activities occurring at ExypnoTech. For
the fiscal years ended June 30, 2008 and 2007, we incurred no research and
development expenses.
We anticipate that a substantial amount of research and development
activities will occur at BioAgra, LLC. The expected activities include testing
Agrastim(R) and Purestim(TM) for quality control and the development of new
premixed products containing Agrastim(R) that will allow BioAgra to market and
sell to a broader range of customers. BioAgra expects to fund and build an
extensive research and development laboratory at its main facility and has
adequate space at the facility to build such a laboratory. The laboratory is
currently in the design stages.
BioAgra sponsors independent university research projects for
Agrastim(R). One past research project was an equine study completed by Fort
Valley State University in Fort Valley, Georgia. Another research project was
conducted by the University of Georgia relating to the application of
Agrastim(R) in chicken feed as an alternative to antibiotics to treat necrotic
enteritis, a deadly disease affecting poultry and turkey.
BioAgra and Agra Nutrition, LLC have conducted, in the past, and are
currently conducting numerous field trials of Agrastim(R) in all market
applications. These trials provide valuable data relating to the benefits of
using Agrastim(R) in the feeds of animals. The dairy market is of particular
interest to BioAgra and Agra Nutrition, LLC because of the dramatic reduction on
somatic cell count in milk after application of Agrastim(R) in the feed of dairy
cattle. A reduction in somatic cell count is directly related to an increase in
overall milk production and can contribute to longer shelf life of the milk.
COMPETITION
BIOAGRA
Competition for beta glucan products in the markets targeted by BioAgra
is currently limited. The United States and many other countries are in the
process of eliminating or plan to eliminate the use of growth promotion
antibiotics in the feed of animals intended for human consumption. There are a
limited number of alternatives to growth promotion antibiotics. Such
alternatives include organic acids, plant extracts such as oregano oil, and
mannoproteins. These alternatives have not experienced a great success rate to
date.
Other potential competitors to BioAgra include those companies already
producing beta glucan for human consumption. This type of "purified" beta glucan
is considered too expensive to use in markets other than for direct human
consumption. Other competitors are those producing beta glucan with a 60% or
less bioactivity level for the markets addressed by BioAgra. "Bioactivity" is
the ability to activate the cells of the immune system, specifically white blood
cells that help to kill and digest foreign materials and infectious
microorganisms. The greater the bioactivity level, the greater the ability to
activate the cells of the immune system. Based upon data provided to us, beta
glucan having less than 80% bioactivity is not effective in the animal feed
markets chosen by BioAgra. BioAgra intends to produce beta glucan with at least
80% bioactivity and intends to provide a written guarantee to its customers that
its beta glucan products will have a bioactivity level of at least 80%.
Competition will also consist of established producers of growth
promotion antibiotic products. These are large companies with vast resources
allocated to the protection of the brand recognition and market share of their
products. Success will require people switching from the artificial antibiotic
growth products to beta glucan products.
-8-
We are also aware of one company, Fibona Health Products GmbH, which is
promoting yeast beta glucan products in Europe and the United Kingdom. We do not
believe its products will compete with BioAgra's beta glucan products.
INTELLECTUAL PROPERTY
BIOAGRA
PROGRESSIVE BIOACTIVES LICENSE TERMINATION AGREEMENT
On July 11, 2007, BioAgra, LLC entered into a Termination and Mutual
General Release Agreement with Progressive Bioactives, Inc. to terminate the
parties' Technology License Agreement dated April 15, 2005 that had granted
BioAgra the license to produce and process a yeast beta glucan product. As
consideration for termination of the Technology License Agreement, BioAgra
agreed to pay to Progressive Bioactives 2.5% of its gross sales of beta glucan
products from July 1, 2007 through June 30, 2017. Additionally, for a period of
two years beginning on July 1, 2007, BioAgra agreed to use its best efforts not
to pursue marketing and sales of its beta glucan products in the field of
livestock, companion animal, and aquaculture in Canada, South Africa, Australia,
Chile, and South Korea. BioAgra also agreed to indemnify and hold Progressive
Bioactives harmless from any third-party claim arising from any sale of beta
glucan into the human nutrition and cosmetic markets.
The termination and mutual release agreement further provided that
BioAgra has the right to manufacture beta glucan products utilizing its own
intellectual property, methods and processes, such methods and processes being
independent of and separate from any patent or other intellectual property
rights of Progressive Bioactives. BioAgra and Progressive Bioactives (and its
affiliates) each acknowledged and agreed that their respective beta glucan
technology does not infringe on the technology of the other party and agreed not
to sue each other or any agent, customer, affiliate, representative distributor
or other person acting on behalf of such party for infringement of any current
or future intellectual property rights based on each party's use of its own
methods and processes for producing beta glucan or any reasonable modifications
thereof.
Progressive Bioactives and BioAgra each unconditionally released and
discharged each other from any and all claims, defenses, demands, causes of
action, liability, damages, costs and expenses arising from or related to the
subject matter of the license agreement, which they have or may have up through
and including the date of execution of the termination and mutual release
agreement, whether such claims were known or unknown at the time of the
agreement.
DEVELOPMENT OF BETA GLUCAN PRODUCTS
BioAgra has developed, and continues to work towards new modifications
to, its beta glucan manufacturing process. BioAgra may file for patent
protection for its beta glucan products or may keep its processes and procedures
as a trade secret.
PARTICLE TECHNOLOGY
We are currently in the process of attempting to license our NCS(TM)
technology to third parties. NCS(TM) is a method where metallized, hard,
microscopic particles are deposited onto one of two contact surfaces, through
electrolytic or electro-less plating methods or other methods. When the two
surfaces are pressed together, the conductive particles penetrate the second
contact surface and create an electrical connection. Bonding of the contact
surfaces can be achieved using nonconductive adhesives or ultrasonic welding.
NCS provides advantages to potential users including lower costs through the
usage of less expensive materials, the elimination of manufacturing steps,
improved thermal and electrical properties, elimination of special environments
for application, decreased production time, easy integration into existing
production lines, increased design miniaturization, adaptability for specific
applications, and RF (radio frequency) performance.
-9-
OTHER INTELLECTUAL PROPERTY
We currently hold 11 patents with the U.S. Patent and Trademark Office.
To reduce expenses, during the fiscal years ended June 30, 2006 and 2005, we
abandoned several of our patent applications. We also hold several trademarks
with the U.S. Patent and Trademark Office in connection with our former name,
logo and services.
GOVERNMENT REGULATION
BioAgra has self-certified that all components of its beta glucan
products are generally recognized as safe or GRAS according to the U.S. Food and
Drug Administration regulations. A GRAS designation exempts the beta glucan
products from the regulations of the U.S. Department of Agriculture, permitting
the sale of the beta glucan products anywhere in the United States without
obtaining a license. Should BioAgra determine that the beta glucan products can
no longer be recognized as GRAS, it will be required to sell the beta glucan
products as food additives by obtaining a license to sell from each individual
state in which sales would occur. There is no assurance that BioAgra will be
able to successfully obtain or maintain licenses in all states in which sales
are expected to be made or that the cost of obtaining and maintaining these
licenses will not limit BioAgra's ability to sell the beta glucan products.
We believe that we are in compliance with all federal and state laws
and regulations governing our limited operations. Further, we believe that we
are in compliance with all German laws and regulations governing our limited
operations in Germany. Compliance with federal and state environmental laws and
regulations did not have a material effect on our capital expenditures, earnings
or competitive position during the fiscal years ended June 30, 2008 or 2007.
EMPLOYEES
As of October 10, 2008, we and our subsidiaries had one employee. Mr.
Metzinger is our only executive officer and has a signed employment agreement
with us.
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED IN EVALUATING OUR BUSINESS AND FINANCIAL CONDITION.
WE BELIEVE THE RISKS AND UNCERTAINTIES DESCRIBED BELOW MAY MATERIALLY AFFECT OUR
LIQUIDITY AND OPERATING RESULTS. THERE ALSO COULD BE ADDITIONAL RISKS AND
UNCERTAINTIES THAT WE ARE CURRENTLY UNAWARE OF, OR THAT WE ARE AWARE OF BUT
CURRENTLY DO NOT CONSIDER TO BE MATERIAL. THESE COULD BECOME IMPORTANT IN THE
FUTURE OR PROVE TO BE MATERIAL AND AFFECT OUR FINANCIAL CONDITION OR RESULTS OF
OPERATIONS.
RISKS RELATING TO OUR BUSINESS AND THE BUSINESS OF OUR UNCONSOLIDATED INVESTEES
WE HAVE A HISTORY OF LOSSES
We expect that BioAgra's manufacturing, developing and marketing of
Agrastim(R) as a feed additive in the poultry, equine, cattle, swine and
aquaculture industries and Purestim(TM) for human consumption will be expensive.
We recently have incurred increased operating expenses without any increase in
revenues. We reported a net loss of $1,930,791 and $4,460,541 for our fiscal
years ended June 30, 2008 and 2007, respectively.
WE MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN
Our independent registered public accounting firm's audit report on our
consolidated financial statements as of June 30, 2008 includes an explanatory
paragraph expressing substantial doubt about our ability to continue as a going
concern. As a result of the conditions that gave rise to this going concern
modification in our auditor's report on our financial statements, we may have a
difficult time obtaining significant additional financing. If we are unable to
secure significant additional
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financing, we may be obligated to seek protection under the bankruptcy laws and
our stockholders may lose their investment.
OUR JOINT VENTURE INVESTMENTS COULD BE ADVERSELY AFFECTED BY OUR LACK OF SOLE
DECISION-MAKING AUTHORITY, OUR RELIANCE ON CO-VENTURERS' FINANCIAL CONDITION AND
DISPUTES BETWEEN OUR CO-VENTURERS AND US
Our primary business is our 50% interest in BioAgra. Investments in
joint ventures involve risks that would not be present were another party not
involved, including the possibility that our co-venturer, Justin Holdings, Inc.
with respect to BioAgra, LLC (of which is an entity over which we have no
control), might become bankrupt, fail to fund their share of required capital
contributions or fail to perform their responsibilities under our agreements
with them. Our co-venturers' and our licensees also may have economic or other
business interests or goals that are inconsistent with our business interests or
goals, and they may be in a position to make decisions or to take actions that
are contrary to our preferences, policies or objectives.
We do not have sole decision making control regarding the BioAgra joint
ventures. With respect to BioAgra, in which we have a 50% interest, we have the
potential risk of impasses on decisions, such as the business policies,
practices and procedures relating to the production and marketing of beta glucan
products or a sale of the joint venture, because neither we nor the other 50%
owner, Justin Holdings, Inc., has full control over the joint venture. Disputes
between us and our co-venturer may result in litigation or arbitration that
would increase our expenses and prevent our officers and/or directors from
focusing their time and effort exclusively on our business. Consequently,
actions by or disputes with our co-venturer might result in subjecting
properties owned by the joint ventures to additional risk. In addition, we may,
in certain circumstances, be liable for the actions of our co-venturer.
IF OUR PRODUCTS INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS, WE MAY PAY
UNEXPECTED LITIGATION COSTS OR DAMAGES FOR SELLING OUR PRODUCTS
We intend to avoid infringing (and to cause entities in which we hold
equity interests to avoid infringing) the intellectual property rights of
others; however, no assurances can be given that the manufacture and sale of our
products (or products of entities in which we hold an equity interest) may not
infringe or otherwise violate the intellectual property rights of others. If
this were to be the case, we (or the entities in which we hold equity interests)
may be subject to legal proceedings and claims, including claims of alleged
infringement by us (or the entities in which we hold equity interests) of the
patents and other intellectual property rights of third parties. Intellectual
property litigation is expensive and time-consuming, regardless of the merits of
any claim.
If it were to be found that our products (or the products of an entity
in which we hold an equity interest) potentially infringe or violate the
intellectual property rights of others, we may need to obtain licenses from
these parties, substantially re-engineer products in order to avoid infringement
or renegotiate existing licenses to avoid future infringement. We (or the
applicable entity in which we hold an equity interest) might not be able to
obtain the necessary licenses on acceptable terms, or at all, or be able to
re-engineer products successfully. Moreover, if we are (or an entity in which we
hold an equity interest is) sued for infringement and lose the suit, we (or such
entity) could be required to pay substantial damages and/or be enjoined from
using or selling the infringing products. Any of the foregoing could cause us to
incur significant costs and prevent us (or such entity) from selling the
products subject to any legal action.
BioAgra entered into a Termination and Mutual General Release Agreement
with Progressive Bioactives. Pursuant to the termination agreement, BioAgra and
Progressive Bioactives agreed not to sue each other for infringement of any
current or future intellectual property rights based on each party's use of its
own methods and processes or any reasonable modifications thereof, for the
development and manufacture of beta glucan products. However, we can provide no
assurance that Progressive Bioactives will not allege that BioAgra has violated
its intellectual property rights through the production and sale of the beta
glucan product, which could result in substantial monetary damages or
injunctions prohibiting the production of the beta glucan products.
-11-
IF BIOAGRA'S BETA GLUCAN PRODUCTS DO NOT SATISFY CERTAIN GOVERNMENTAL
REGULATIONS, BIOAGRA MAY BE UNABLE TO OBTAIN REGULATORY APPROVAL OR MAY BE
REQUIRED TO OBTAIN MULTIPLE LICENSES TO SELL OUR BETA GLUCAN PRODUCTS
BioAgra has self-certified that all components of its beta glucan
products are generally recognized as safe or GRAS according to the U.S. Food and
Drug Administration regulations. A GRAS designation exempts the beta glucan
products from the regulations of the U.S. Department of Agriculture, permitting
the sale of the beta glucan products anywhere in the United States without
obtaining a license. Should the beta glucan products lose their GRAS
designation, BioAgra will be required to sell the beta glucan products as feed
additives by obtaining a license to sell from each individual state in which
sales would occur. There is no assurance that BioAgra would be able to
successfully obtain or maintain licenses in all states in which sales are
expected to be made or that the cost of obtaining and maintaining these licenses
would not limit its ability to sell the beta glucan products.
OPERATIONS OF BIOAGRA MAY BE DELAYED OR COST MORE THAN WE ANTICIPATE
Operations at the beta glucan production plant commenced in March of
2006. BioAgra produced approximately 7,600 kilograms of finished product, of
which 5,600 kilograms remains in inventory, and has halted production pending
the sale of at least 50% of the existing inventory. Once production is
recommenced, there can be no assurances that there will not be future delays in
operations or that the average cost to operate the plant will not be higher than
anticipated.
WE CANNOT GUARANTEE THE QUALITY, PERFORMANCE OR RELIABILITY OF BIOAGRA'S
PRODUCTS
Except as described in the prior risk factor, we have no prior
experience manufacturing or producing beta glucan products or any other
products. We are relying upon the skill and experience of BioAgra's managers and
our co-joint venturer to timely and cost effectively manufacture the beta glucan
product. We expect that BioAgra's customers will demand quality, performance and
reliability. We cannot assure you that we or our co-joint venturer will be able
to meet the quality control standards that may be established by various
industries for feed additives. BioAgra intends to provide a written guarantee or
other assurance to its customers that its beta glucan products will have a
bioactivity level of at least 80%. "Bioactivity" is the ability to activate the
cells of the immune system, specifically white blood cells that help to kill and
digest foreign materials and infectious microorganisms. The greater the
bioactivity level, the greater the ability to activate the cells of the immune
system. However, BioAgra cannot guarantee that all batches of the beta glucan
products produced for inclusion in various animal feed products will meet that
bioactivity level. Should BioAgra be unable to meet the standard, it may lose
existing customers and be unable to acquire new customers.
THERE MAY BE INSUFFICIENT DEMAND FOR BIOAGRA'S BETA GLUCAN PRODUCTS
Sales of the beta glucan products have been limited to date. The market
acceptance of new products and technologies, including the beta glucan products,
is subject to a number of factors, including the ability of the product to more
effectively and efficiently meet potential customers' needs than current
products. Antibiotics and growth hormone supplements are widely used in animal
feed. BioAgra must convince potential customers that Agrastim(R) is safe and
effective as a feed additive and can be manufactured efficiently and cost
effectively before animal producers will be willing to use the product rather
than existing products such as antibiotics and growth hormone supplements. In
addition, BioAgra must convince potential customers that Purestim(TM) is safe
for human consumption. To create this consumer demand, BioAgra will have to
successfully market and sell its products. BioAgra has been conducting
independent research studies and field trials as part of its overall marketing
efforts, which has delayed market acceptance of Agrastim(R) and Purestim(TM).
While results in such research studies and field trials have been favorable, the
beta glucan products may not be viewed by consumers as an improvement over
existing products and may not achieve commercial acceptance.
-12-
WE MAY BE UNABLE TO MEET OUR ONGOING NEEDS FOR ADDITIONAL CAPITAL
We cannot accurately predict how much funding we will need to implement
our strategic business plan or to continue operations. Our future capital
requirements, the likelihood that we can obtain money and the terms of any
financing will be influenced by many different factors, including:
O our revenues and the revenues of our joint ventures;
O the status of competing products in the marketplace;
O our performance in the marketplace;
O our overall financial condition;
O our business prospects;
O the perception of our growth potential by the public,
including potential lenders;
O our ability to enter into joint venture or licensing
relationships to achieve a market presence; and
O our progress in developing, marketing and selling the beta
glucan products.
If we cannot obtain adequate financing or if the terms on which we are able to
acquire financing are unfavorable, our business and financial condition could be
negatively affected. We may have to delay, scale back or eliminate some or all
of our development and marketing programs, if any. We may also have to go to
third parties to seek financing and, in exchange, we may have to give up rights
to some of our technologies, patents, patent applications, potential products or
other assets.
In addition, the United States is experiencing severe instability in
the commercial and investment banking systems which is likely to continue to
have far-reaching effects on the economic activity in the country for an
indeterminable period. The long-term impact on the United States economy and the
Company's operating activities and ability to raise capital cannot be predicted
at this time, but may be substantial.
WE MAY BE UNABLE TO HIRE AND RETAIN KEY PERSONNEL
Our future success depends on our ability to attract qualified
personnel. We may be unable to attract or retain these necessary personnel. If
we fail to attract or retain skilled employees, or if our key employee fails to
perform in his current position, we may be unable to assist in bringing the beta
glucan products to the marketplace and to generate sufficient revenues to offset
operating costs.
BIOAGRA MAY BE UNABLE TO HIRE AND RETAIN INDEPENDENT DISTRIBUTORS
BioAgra's future success depends on its ability to attract qualified
independent distributors for the beta glucan products. It may be unable to
attract or retain these independent distributors. If BioAgra fails to attract or
retain independent distributors, or if its existing independent distributors
fail to find end users for the beta glucan products, it may be unable to
successfully bring the beta glucan products to the marketplace and to generate
sufficient revenues to offset operating costs.
WE MAY BE UNABLE TO OBTAIN AND RETAIN APPROPRIATE PATENT, COPYRIGHT AND
TRADEMARK PROTECTION OF OUR PRODUCTS OR MANUFACTURING PROCESS
We protect our intellectual property rights through patents,
trademarks, trade names, trade secrets and a variety of other measures. However,
these measures may be inadequate to protect our intellectual property or other
proprietary information. Should we encounter any of the following issues with
our intellectual property, our business and financial condition could be
negatively affected.
-13-
O TRADE SECRETS MAY BECOME KNOWN BY THIRD PARTIES. Our trade
secrets or proprietary information may become known or be
independently developed by competitors.
O RIGHTS TO PATENTS AND TRADE SECRETS MAY BE INVALIDATED.
Disputes may arise with third parties over the ownership of
our intellectual property rights. Our patents may be
invalidated, circumvented or challenged, and the rights
granted under those patents that provide us with a competitive
advantage may be nullified.
O PROBLEMS WITH FUTURE PATENT APPLICATIONS. Our pending or
future patent applications may not be approved, or the scope
of the granted patent may be less than the coverage sought.
O THIRD PARTIES MAY DEVELOP SIMILAR PRODUCTS OR MANUFACTURING
PROCESS. Competitors may develop similar products, duplicate
our products or may design around the patents that are owned
by us. Competitors may develop a similar manufacturing
process, duplicate our manufacturing process or may design
around any patents that are owned by us in relation to the
manufacturing process.
O LAWS IN OTHER COUNTRIES MAY INSUFFICIENTLY PROTECT
INTELLECTUAL PROPERTY RIGHTS ABROAD. Foreign intellectual
property laws may not adequately protect our intellectual
property rights abroad. Our failure to protect these rights
could adversely affect our business and financial condition.
O LITIGATION MAY BE REQUIRED TO PROTECT INTELLECTUAL PROPERTY
RIGHTS. Litigation may be necessary to protect our
intellectual property rights and trade secrets, to determine
the validity of and scope of the rights of third parties or to
defend against claims of infringement or invalidity by third
parties. This litigation could be expensive, divert resources
and management's time from our sales and marketing efforts,
and could have a materially adverse effect on our business,
financial condition and results of operations and on our
ability to enter into joint ventures or partnerships with
others.
ECONOMIC FACTORS OUTSIDE OUR CONTROL MAY HAVE AN ADVERSE EFFECT ON OUR REVENUES
AND INCOME
BioAgra's income may be impacted by economic factors that are beyond
its control such as fluctuations in the price of animal feed and human dietary
supplements, outbreaks of diseases in animals, and demand for products related
to cattle, dairy, poultry, equine, swine, aquatic animals and human
neutraceuticals and dietary supplements. Rising animal feed prices and increases
in production costs for livestock producers may cause a reduction in overall
production, which, in turn, could adversely impact BioAgra's revenues. An
outbreak of disease, such as avian influenza or mad cow disease, could result in
increased government regulation of the livestock industry, a serious drop in
demand for livestock products, and adverse publicity materially affecting the
animal producers for a significant period of time, which could adversely impact
BioAgra's business, revenues, prospects, financial condition, and results of
operation.
In addition, the United States is experiencing severe instability in
the commercial and investment banking systems which is likely to continue to
have far-reaching effects on the economic activity in the country for an
indeterminable period. The long-term impact on the United States economy and
BioAgra's business, revenues, financial condition, and results of operations
cannot be predicted at this time, but may be substantial.
THE MARKET FOR FEED ADDITIVES IS COMPETITIVE
The feed additive market is competitive. BioAgra will compete with
producers of growth promotion antibiotic products, many of which are large
companies with vast resources allocated to the protection of brand recognition
and market share of their products. BioAgra may also compete with companies
producing beta glucan for other purposes, and companies that produce existing
alternatives to growth promotion antibiotic products, such as organic acids,
plant extracts, and mannoproteins. BioAgra has a competitive disadvantage
against many of these competitors in several different areas, including:
O financial resources;
O manufacturing capabilities;
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O diversity of revenue sources and business opportunities;
O personnel and human resources; and
O research and development capabilities.
Larger companies have long-term advantages over BioAgra in research and new
product development and have a greater ability to withstand periodic downturns
in the feed additive market because they have diverse product lines that can
provide revenue even when there is a downturn in the feed additive market.
IF BIOAGRA BECOMES UNABLE TO USE ITS MANUFACTURING FACILITY, IT MAY BE UNABLE TO
MANUFACTURE ITS BETA GLUCAN PRODUCTS FOR AN EXTENDED PERIOD OF TIME
BioAgra manufactures at a single location in Georgia, which currently
runs a single production line. Manufacturing products at a single site presents
risks because a disaster, such as a fire or hurricane, may interrupt
manufacturing capability. In such an event, BioAgra will have to resort to
alternative sources of manufacturing that could increase costs, as well as
result in significant delays. Any increase in costs of manufacturing, slowdowns
or shutdowns by BioAgra could have a material adverse affect on our future
business, financial condition and results of operations.
BIOAGRA'S USE OF A SINGLE MANUFACTURING FACILITY MAY RESTRICT ITS ABILITY TO
ATTRACT CUSTOMERS
BioAgra will fulfill the needs of varied livestock producers, human
dietary supplement producers and horse owners based on the use of a single
manufacturing plant and a single production line. BioAgra's manufacturing
limitations may restrict its ability to attract large customers who require
certainty in the production process. If BioAgra is successful, it anticipates
expanding manufacturing operations. However, while our production area has
enough space for three separate production lines, there is no assurance that
BioAgra will have the financial resources required to expand its production
facilities beyond the single production line currently existing at the Georgia
manufacturing facility.
MANUFACTURING CAPACITY RESTRAINTS AND LIMITED EXPERIENCE MAY HAVE AN ADVERSE
AFFECT ON BIOAGRA
BioAgra has limited manufacturing capacity and experience. BioAgra may
encounter some difficulties, such as significant unexpected costs and delays, in
scaling up the manufacturing operations of BioAgra to produce quantities
required for it to achieve profitability. The failure to scale-up BioAgra's
manufacturing operations in a timely and cost-effective manner may adversely
affect our income. We believe that we have adequate capacity to meet anticipated
demand for 2007. However, in the event the demand for the beta glucan products
rapidly increases or spikes in a certain period, BioAgra may not have the
manufacturing ability to fulfill demand, either in its own facilities or through
agreements with third parties. A potential lack of manufacturing capacity may
materially affect BioAgra's and our reputation, prospects, revenue, income and
results of operation.
AN INCREASE IN THE COST OR A DISRUPTION IN THE FLOW OF BIOAGRA'S IMPORTED YEAST
PRODUCT MAY DECREASE ITS SALES AND PROFITS
BioAgra obtains its entire supply of spent yeast product, which is used
to manufacture the beta glucan products, from a Brazilian supplier. Risks
associated with BioAgra's use of imported spent yeast include: disruptions in
the flow of imported goods because of factors such as electricity or raw
material shortages, work stoppages, strikes and political unrest; problems with
oceanic shipping, including shipping container shortages; economic crises and
international disputes; increases in the cost of purchasing or shipping foreign
merchandise resulting from the failure to maintain normal trade relations with
source countries; adverse fluctuations in currency exchange rates; and import
duties, import quotas, trade embargoes and other trade sanctions. A disruption
-15-
in the flow of spent yeast from the Brazilian supplier or an increase in the
cost of the spent yeast may limit or decrease BioAgra's sales and profits.
REPLACING BIOAGRA'S SOLE SUPPLIER OF KEY MATERIALS COULD RESULT IN UNEXPECTED
DELAYS AND EXPENSES
BioAgra obtains key materials and services for the beta glucan products
from sole source suppliers, primarily with respect to spent brewer's or
distillery yeast. Specifically, BioAgra obtains its spent yeast product from a
sole source in Brazil. Should the Brazilian supplier become unable to supply
BioAgra with the spent yeast product, BioAgra will be forced to purchase
substitute products. All of these materials are commercially available
elsewhere. However, if BioAgra is required to locate a new supplier, the
substitute or replacement materials may need to be tested for equivalency. The
process of locating a new supplier and any testing of materials, if necessary,
may cause a delay in production of the beta glucan products and may cause
BioAgra to incur additional expense.
RISKS RELATING TO THE OWNERSHIP OF OUR EQUITY SECURITIES
WE HAVE A SINGLE CONTROLLING SHAREHOLDER, WHO HAS THE POWER TO ELECT A MAJORITY
OF OUR BOARD OF DIRECTORS AND CONTROL OUR STRATEGIC DIRECTION
As of October 10, 2008, Arizcan Properties Ltd. owned approximately 26%
of our outstanding common stock assuming all securities held by Arizcan
Properties and other holders that are convertible into common stock or
exercisable for common stock were converted or exercised. In addition, as a
result of our March 2007 private placement transaction, we issued to Arizcan
Properties warrants and shares of series A nonconvertible preferred stock. As a
result, Arizcan Properties acquired approximately 51% of our voting power, and,
on a fully diluted basis, Arizcan Properties would hold approximately 80% of our
voting power if they exercise the warrant. These shares give Arizcan Properties
Ltd. the power to elect a majority of our board of directors and, through that
board control, control our operations. The ability of other shareholders to
influence our direction (for example, through the election of directors) is
therefore limited or not available.
SALES OF COMMON STOCK BY OUR CONTROLLING SHAREHOLDER MAY RESULT IN A CHANGE OF
CONTROL
As of October 10, 2008, Arizcan Properties, Ltd. is our controlling
shareholder. Arizcan Properties, Ltd. may cause us to have a change of control
if they sell enough of our common stock. We are not aware of any present
intention of Arizcan Properties, Ltd. to cause us to have a change of control
and we are not aware of any other arrangements that may result in a change of
control.
WE HAVE A THINLY-TRADED STOCK AND PUBLIC SALE OF SHARES BY OUR CONTROLLING
SHAREHOLDER COULD CAUSE THE MARKET PRICE OF OUR SHARES TO DROP SIGNIFICANTLY
As of October 10, 2008, Arizcan Properties, Ltd. owned approximately
26% of our outstanding common stock assuming all securities held by Arizcan
Properties, Ltd. and other holders that are convertible into common stock or
exercisable for common stock were converted or exercised. If Arizcan Properties,
Ltd. were to begin selling shares in the market rather than holding all of those
shares over a longer term, the added available supply of shares could cause the
market price of our shares to drop. Furthermore, in light of the large number of
shares that it holds and its generally lower acquisition cost of those shares,
Arizcan Properties, Ltd. could be willing to sell it shares at a price lower
than the currently-prevailing market price, thereby depressing that price.
THE SALE OF SECURITIES BY CURRENT STOCKHOLDERS COULD CAUSE DILUTION OF EXISTING
HOLDERS OF OUR COMMON STOCK BY DECREASING THE PRICE OF OUR COMMON STOCK
The market price of our common stock could be adversely affected by
sales of substantial amounts of common stock in the public market, by investor
perception that substantial amounts of common stock could be sold or by the fact
or perception of other events that could have a dilutive effect on the market
for our common stock. As of October 10, 2008, we had 45,013,178 shares of our
common stock outstanding. If all of our outstanding options and warrants were
exercised and all of our reserved shares of common stock were issued, we could
-16-
have up to 54,600,312 shares of common stock outstanding. Future transactions
with other investors could further depress the price of our common stock because
of additional dilution.
THE PRICE OF OUR COMMON STOCK COULD BE AFFECTED BY THE ABILITY OF HOLDERS OF OUR
COMMON STOCK TO SELL THEIR STOCK
The market price of our common stock will be influenced by the ability
of common stockholders to sell their stock. As of October 10, 2008,
approximately 22,064,326 shares of our common stock were freely transferable and
constitute the "float" in the public market for our common stock. If all of our
outstanding options and warrants were exercised and all of our reserved shares
were issued, the "float" for our common stock could increase to a total of
54,600,312 shares. As of October 10, 2008, approximately 22,948,852 shares of
our common stock were "restricted" or "control" securities within the meaning of
Rule 144 under the Securities Act of 1933. These restricted securities cannot be
sold unless they are registered under the Securities Act of 1933, or unless an
exemption from registration is otherwise available, including the exemption that
is contained in Rule 144. If all of our outstanding options and warrants were
exercised and all of our reserved shares were issued, the number of "restricted"
or "control" shares of our common stock could increase to a total of 8,754,844
shares.
WE COULD ISSUE PREFERRED STOCK THAT COULD ADVERSELY AFFECT THE RIGHTS OF OUR
COMMON STOCKHOLDERS
We are authorized to issue up to 5,000,000 shares of preferred stock,
$.0001 par value per share. Our articles of incorporation give our board of
directors the authority to issue preferred stock without the approval of our
common stockholders. We may issue preferred stock to finance our operations. We
may authorize the issuance of our preferred stock in one or more series. In
addition, we may set several of the terms of the preferred stock, including:
O dividend and liquidation preferences;
O voting rights;
O conversion privileges;
O redemption terms; and
O other privileges and rights of the shares of each authorized
series.
The issuance of large blocks of preferred stock could have a dilutive effect on
our existing stockholders and could negatively impact our existing stockholders'
liquidation preferences. In addition, while we include preferred stock in our
capitalization to improve our financial flexibility, we could possibly issue our
preferred stock to third parties as a method of discouraging, delaying or
preventing a change in control in our present management.
THE RESALE OF OUR COMMON STOCK BY YOU MAY BE LIMITED BECAUSE OF ITS LOW PRICE,
WHICH COULD MAKE IT MORE DIFFICULT FOR BROKER/DEALERS TO SELL OUR COMMON STOCK
The Securities Enforcement and Penny Stock Reform Act of 1990, as
amended, requires additional disclosure relating to the market for penny stocks
in connection with trades in any stock defined as a penny stock. Regulations
enacted by the SEC generally define a penny stock as an equity security that has
a market price of less than $5.00 per share, subject to some exceptions. Unless
an exception applies, a disclosure schedule explaining the penny stock market
and the risks associated with investing in penny stocks must be delivered before
any transaction in penny stock can occur.
Our common stock is not a reported security and is currently subject to
the Securities and Exchange Commission's "penny stock" rules. It is anticipated
that trading in our common stock will continue to be subject to the penny stock
rules for the foreseeable future.
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Until such time as our common stock meets an exception to the penny
stock regulations cited above, trading in our securities is covered by Rule
15g-2 and Rule 15g-9 promulgated under the Securities Exchange Act of 1934.
Under Rule 15g-2, before a broker/dealer can consummate a trade in penny stock,
the broker/dealer must send an additional disclosure, receive a written
acknowledgement of such disclosure from the purchaser of the penny stock, and
wait two business days from the date the additional disclosure was sent. Under
Rule 15g-9, broker/dealers who recommend penny stocks to persons who are not
established customers or accredited investors must make a special determination
in writing for the purchaser that the investment is suitable, and must also
obtain the purchaser's written agreement to a transaction before the sale.
The penny stock regulations could limit the ability of broker/dealers
to sell our securities and, thus, the ability of purchasers of our securities to
sell their securities in the secondary market for so long as our common stock
has a market price of less than $5.00 per share.
WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FORESEEABLE FUTURE
We have never paid cash dividends on our common stock. We do not expect
to pay cash dividends on our common stock at any time in the foreseeable future.
The future payment of dividends directly depends upon our future earnings,
capital requirements, financial requirements and other factors that our board of
directors will consider. Since we do not anticipate paying cash dividends on our
common stock, return on your investment, if any, will depend solely on an
increase, if any, in the market value of our common stock.
ITEM 2. DESCRIPTION OF PROPERTY
Our corporate headquarters are located at 370 17th Street, Suite 3640,
Denver, Colorado 80202. We moved into our current office space on June 27, 2001
and had a five-year lease on the property, which expired September 2006 and was
extended for a five-year term expiring December 2011. The base rent is
approximately $3,110 per month for the first year of the lease, with annual
increases of approximately $100 per month for each successive year of the lease,
plus certain occupancy costs.
ITEM 3. LEGAL PROCEEDINGS
HARVEST COURT LITIGATION
FINANCING AGREEMENT SUIT:
The Company is a plaintiff and counter-claim defendant in a suit
pending in the United States District Court for the Southern District of New
York (the "District Court"). In this suit, the Company filed claims for
securities fraud, common-law fraud, and breach of contract against the
defendants. One defendant, Harvest Court, LLC ("Harvest Court"), has
counterclaimed for alleged violations of the federal securities laws. In January
2008 the Court granted summary judgment against the Company on all of its
claims, which the Company intends to appeal when the judgment becomes final. The
Court also dismissed certain counterclaims against the Company. The Company
intends to vigorously defend itself against the remaining claims. In a
disclosure statement filed by Harvest Court, it set forth a damage computation
of approximately $4.1 million, as well as other categories of damages, such as
out-of-pocket, statutory, punitive, and other for unspecified amounts.
Harvest Court has also sued the Company in New York state court (the
"State Court") for breach of contract relating to its failure to issue certain
shares of stock allegedly due under a pre-2007 financing agreement. The Company
has counterclaimed in this case for fraud. The State Court issued an injunction
requiring the company to reserve and set aside a certain amount of stock, which
the Company has done. The Company intends to vigorously defend itself and
prosecute its counterclaims.
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If management believes that a loss arising from these matters is
probable and can reasonably be estimated, the Company records the amount of the
loss, or the minimum estimated liability when the loss is estimated using a
range, and no point within the range is more probable than another. As
additional information becomes available, any potential liability related to
these matters is assessed and the estimates are revised, if necessary. Based on
currently available information, management believes that the ultimate outcome
of these matters, individually and in the aggregate, will not have a material
adverse effect on the Company's financial position or overall trends in results
of operations. However, litigation is subject to inherent uncertainties, and an
unfavorable ruling could result in a material adverse impact on the financial
position and results of operations of the period in which the outcome is
determined.
DEPOSITORY TRUST LAWSUIT
In May 2004, we filed suit against the Depository Trust and Clearing
Corporation ("DTCC"), The Depository Trust Company ("DTC"), and the National
Securities Clearing Corporation ("NSCC") in the Second Judicial District Court
of the County of Washoe, State of Nevada. The suit alleges multiple claims under
the Nevada Revised Statutes 90.570, 90.580, 90.660 and 598A.060 and on other
legal bases. The complaint alleges, among other things, that the DTCC, DTC and
NSCC acted in concert to operate the "Stock Borrow Program," originally created
to address short term delivery failures by sellers of securities in the stock
market. According to the complaint, the DTCC, NSCC and DTC conspired to maintain
significant open fail deliver positions of millions of shares of our common
stock for extended periods of time by using the Stock Borrow Program to cover
these open and unsettled positions. We were seeking damages in the amount of
$25,000,000 and treble damages. Responsive pleadings were filed by the
defendants. In April 2005, the court granted a motion to dismiss the lawsuit. We
filed an appeal to the Supreme Court of the State of Nevada to overturn the
motion to dismiss the lawsuit. Oral argument on the appeal was presented before
the Nevada State Supreme Court in February 2007. In September 2007, the Nevada
Supreme Court ruled that all of our claims were preempted by federal law and
affirmed the district court's dismissal of our complaint. We subsequently filed
a Petition For Writ of Certiorari with the U.S. Supreme Court. The Petition was
denied before the end of the term in June 2008.
OTHER LITIGATION
On September 15, 2008, the Company filed collection and foreclosure
proceedings against BioAgra in the City and County Court of Denver, Colorado.
The collection and foreclosure proceedings are directly related to principal and
accrued interest of approximately $4 million in loans advanced to BioAgra,
including the $3,963,982 loaned through a series of secured promissory notes,
and an additional $37,788 for open advances not represented by a promissory
note.
Upon the successful conclusion of the litigation, the Company intends
to be the sole holder of the assets of BioAgra and plans to continue the
operations of BioAgra, and the manufacturing and the marketing of the AgraStrim
product.
Other than the above mentioned lawsuits, to the knowledge of our
management, there are no material legal proceedings pending or threatened (other
than routine litigation incidental to business) to which we (or any officer,
director, affiliate of beneficial owner of more than 5% of our voting
securities) are party, or to which our property is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to security holders during the fourth
quarter of the fiscal year covered by this report.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is presently quoted on the over-the-counter bulletin
board maintained by the Financial Industry Regulatory Authority (formerly known
as the National Association of Securities Dealers) ("FINRA") under the symbol
"VYTC.OB." Our common stock is also traded on the Berlin Stock Exchange, the
Frankfurt Stock Exchange, the Munich Stock Exchange and the Xetra Stock Exchange
under the symbols indicated in the table below:
FOREIGN EXCHANGE TRADING SYMBOL
------------------------ --------------
Berlin Stock Exchange NPI1.BE
Frankfurt Stock Exchange NPI1.F
Munich Stock Exchange NPI1.MU
Xetra Stock Exchange NPI1.DE
The following table sets forth the range of high and low quotations for
our common stock on the over-the-counter bulletin board for each full quarterly
period during the fiscal year or equivalent period for the fiscal periods ending
on the dates indicated below after giving effect to the reverse stock split of
our common stock that occurred on January 31, 2006 that is described elsewhere
in this report. The quotations were obtained from information published by FINRA
and reflect interdealer prices, without retail mark-up, markdown or commission
and may not represent actual transactions.
2008 FISCAL YEAR HIGH LOW
---------------- ---- ---
September 30, 2007 $ 0.42 $ 0.428
December 31, 2007 0.23 0.165
March 31, 2008 0.24 0.20
June 30, 2008 0.17 0.17
2007 FISCAL YEAR
----------------
September 30, 2006 $ 0.49 $ 0.41
December 31, 2006 0.41 0.41
March 31, 2007 0.32 0.32
June 30, 2007 0.42 0.35
As of June 30, 2008, there were approximately 557 holders of record of
our common stock.
DIVIDENDS
Our board of directors determines any payment of dividends. We have not
paid any cash dividends on our common stock in the past, and we do not
anticipate paying any dividends in the foreseeable future. Earnings, if any, are
expected to be retained to fund our future operations. There can be no assurance
that we will pay dividends at any time in the future.
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RECENT SALES OF UNREGISTERED SECURITIES
We made the following unregistered sales of its securities from April
1, 2008 through June 30, 2008.
DATE OF SALE TITLE OF SECURITIES NO. OF SHARES CONSIDERATION CLASS OF PURCHASER
------------------------ ------------------------ ------------------ ---------------------- ------------------------
7/1/07 - 6/30/08 Common Stock 6,168,333 $930,125 Controlling Shareholder
EXEMPTION FROM REGISTRATION CLAIMED
All of the sales by us of our unregistered securities were made in
reliance upon Section 4(2) of the Securities Act of 1933, as amended (the "1933
Act"). The entity listed above that purchased the unregistered securities was an
existing shareholder, known to us and our management, through pre-existing
business relationships, as a long standing business associate. The entity was
provided access to all material information, which it requested, and all
information necessary to verify such information and was afforded access to our
management in connection with the purchases. The purchaser of the unregistered
securities acquired such securities for investment and not with a view toward
distribution, acknowledging such intent to us. All certificates or agreements
representing such securities that were issued contained restrictive legends,
prohibiting further transfer of the certificates or agreements representing such
securities, without such securities either being first registered or otherwise
exempt from registration in any further resale or disposition.
PURCHASES OF EQUITY SECURITIES BY THE SMALL BUSINESS ISSUER AND AFFILIATED
PURCHASERS
Not applicable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This Annual Report on Form 10-KSB includes "forward-looking statements"
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. We base these forward looking statements on our current expectations
and projections about future events. These forward looking statements are
subject to risks, uncertainties, and assumptions about us, including:
O the operations and potential profitability of BioAgra, LLC, a
company in which we have a 50% interest;
O the rate of market development and acceptance of our beta
glucan products in the animal and aquatic animal feed industry
within which we are concentrating our business activities;
O the rate of market development and acceptance of our beta
glucan products for human consumption;
O our ability to compete successfully with growth promotion
antibiotic manufacturers and other providers of feed
additives;
O the operations and potential profitability of ExypnoTech,
Gmbh, a company in which we have a 49% interest that is
manufacturing and developing inlay components used in the
manufacturing of radio frequency identification devices
("RFID"), such as smart labels, smart cards and smart tags;
-21-
O the limited revenues and significant operating losses
generated by us to date;
O the possibility of significant ongoing capital requirements
and our ability to secure financing as and when necessary;
O our ability to retain the services of our key management, and
to attract new members to the management team; and
O our ability to obtain and retain appropriate patent, copyright
and trademark protection for our intellectual properties and
any of our products.
These forward-looking statements include statements regarding our
expectations, beliefs, or intentions about the future, and are based on
information available to us at this time. We assume no obligation to update any
of these statements and specifically decline any obligation to update or correct
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events. Actual events and results could differ materially from our expectations
as a result of many factors, including those identified in the section titled
"Item 1. Business--Risk Factors" and other sections of this report. We urge you
to review and consider those factors, and those identified from time to time in
our reports and filings with the Securities and Exchange Commission, for
information about risks and uncertainties that may affect our future results.
All forward-looking statements we make after the date of this filing are also
qualified by this cautionary statement and identified risks.
Our registered public accounting firm's audit report on our
consolidated financial statements as of June 30, 2008, and for each of the years
in the two-year period then ended, includes a "going concern" explanatory
paragraph that describes substantial doubt about our ability to continue as a
going concern. Management's plans in regard to the factors prompting the
explanatory paragraph are discussed below and also in Note 2 to Notes to the
Consolidated Financial Statements included in this report.
PLAN OF OPERATIONS
At June 30, 2008, we had cash on hand of $54,550, which we do not
believe is sufficient to fund our operations for the next twelve months. We
intend to use our cash funds to continue to support operations. We intend to
continue to develop the business opportunity presented by our investment in an
unconsolidated investee, BioAgra and the Agrastim(R) product. The development of
the business opportunity includes continued marketing efforts and product
testing over the next twelve months.
In the continuance of our business operations, we do not intend to
purchase or sell any significant assets and we do not expect a significant
change in the number of employees.
We are dependent on raising additional equity and/or, debt to fund any
negotiated settlements with our outstanding creditors and meet our ongoing
operating expenses. There is no assurance that we will be able to raise the
necessary equity and/or debt that we will need to be able to negotiate
acceptable settlements with our outstanding creditors or fund our ongoing
operating expenses. We cannot make any assurances that we will be able to raise
funds through such activities.
RESULTS OF OPERATIONS
During the fiscal years ended June 30, 2008 and 2007, we did not have
any revenues from operations.
General and administrative expenses during the fiscal year ended June
30, 2008 were $663,270 compared to $1,835,973 for the fiscal year ended June 30,
2007. The decrease of $1,172,703 is mainly attributable to a decrease in
stock-based compensation expense of $743,750 and the $440,612 decrease in
consulting expenses.
During the fiscal year ended June 30, 2008, we recognized a net loss of
$1,930,791 compared to a net loss of $4,460,541 during the fiscal year ended
June 30, 2007. The decrease of $2,529,750 primarily resulted from the decrease
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of $1,172,703 in general and administrative expenses, discussed above and the
$1,198,000 provision for loss on the note receivable owed by BioAgra, which was
recorded in 2007.
We recorded a net loss applicable to common shareholders of $1,970,901
during the year ended June 30, 2008 compared to $4,473,691 during the fiscal
year ended June 30, 2007. The decrease of $2,502,790 was a result of the
decrease of $1,172,703 in general and administrative expenses combined with the
$1,198,000 provision for loss on the note receivable owed by BioAgra, which was
recorded in 2007. We recognized a $40,110 deemed dividend on preferred stock
issued during the fiscal year ended June 30, 2008 compared to $13,150 during the
year ended June 30, 2007.
LIQUIDITY AND FINANCIAL CONDITION
Net cash used in operating activities in 2008 was $598,599, compared to
net cash used in operating activities in 2007 of $612,724. In 2008, the net cash
used represented a net loss of $1,930,791, adjusted for certain non-cash items
consisting of depreciation expense of $4,612, equity in net loss of
unconsolidated investees of $1,431,774 and a gain on the sale of investment in
unconsolidated investee of $164,234.
In 2007, the net cash used represented a net loss of $4,460,541,
adjusted for certain non-cash items consisting of non cash consulting expense
and depreciation expense of $441,584, equity in net losses of unconsolidated
investees of $1,426,590, a provision for loss on a note receivable of
$1,198,000, and $743,750 in options issued for compensation.
During the fiscal year ended June 30, 2008, we raised $930,125 cash
through the sale of 6,168,333 shares of its restricted common stock to our
controlling shareholder, Arizcan.
During the fiscal year ended June 30, 2007, we raised $1,255,950 cash
through the sale of 8,373,000 shares of its restricted common stock.
During the fiscal year ended June 30, 2007, we raised $251,900 through
the sale of a warrant to purchase 6,000,000 shares of restricted common stock.
The warrant has an exercise price of $0.50 per share and provides for a cashless
exercise.
During the fiscal year ended June 30, 2007, we raised $500,000 through
the sale of 500,000 shares of its Series A nonconvertible preferred stock to
Arizcan. The shares provide that when voting as a single class, the shares have
the votes and voting power that at all times is greater by 1% than the combined
voting power of all other classes of securities entitled to vote on any matter.
As a result of the issuance, Arizcan acquired approximately 51% of the voting
power of the Company. We have a right, solely at the Company's discretion, to
redeem the shares in ten years at 130% of deemed par value.
During the fiscal year ended June 30, 2008, we raised $89,500 through
advances from our majority shareholder, Arizcan. These funds are unsecured and
due on demand. During the year ended June 30, 2008, we repaid $50,000 of the
advances and currently owe $39,500.
During the fiscal year ended June 30, 2007, we raised $50,000 through
an unsecured, 8% promissory note, due in March 2008. In June 2007, the holder of
the note agreed to accept 333,333 shares of our common stock as payment on the
note.
During the year ended June 30, 2006, we loaned $1,686,570 to BioAgra
through a series of secured, 7.5% promissory notes, which were due over the
period from June 30 through October 31, 2006. On June 26, 2006, we agreed to
combine all of the promissory notes and accrued interest of $40,257 into a
$1,726,827 secured, 7.5% promissory note with payments to be made monthly
starting October 31, 2006, through October 31, 2007. The funds were loaned to
facilitate BioAgra's completion of its first production line and to support
operations. The promissory note is collateralized by all BioAgra assets.
Additionally, the promissory note is to be paid in full prior to any
distributions being made to the members of the joint venture. During the year
-23-
ended June 30, 2007, the note was reduced by $1,371,269, which represents the
excess of the BioAgra losses recognized by us over the adjusted basis of our
equity investment in BioAgra remaining at June 30, 2007.
During the year ended June 30, 2007, we advanced $1,182,784 to BioAgra
at 7.5% interest. During the year ended June 30, 2008, we advanced $921,237 to
BioAgra at 7.5% interest. We have classified these notes receivable as
non-current assets on the balance sheet and are not accruing interest on these
notes receivable, as they are currently in default and non-performing. In
September 2008, we filed foreclosure proceedings in connection with the failure
to make payment on the notes.
During the fourth quarter of the year ended June 30, 2007, we made a
decision to provide for a loss on the value of the note receivable. This
decision was based on factors including our evaluation of past and current
operating results, failure of BioAgra to make scheduled payments and our
continuing support of the operational efforts of BioAgra. We also considered the
estimated fair value of BioAgra's assets and liabilities in making the decision.
As a result of this decision, we recorded a charge of $1,198,000 in the fourth
quarter ended June 30, 2007.
During the year ended June 30, 2008, we did not have any significant
operations, and our management spent a majority of the fiscal year, raising
additional funds for the BioAgra investment and supporting it marketing and
sales efforts. During the 2009 fiscal year we intend to continue our efforts to
aid BioAgra with the continuing development of its sales, nationally and
internationally in other animal feed markets, such as the equine and the swine
markets.
To the extent our operations are not sufficient to fund our capital
requirements, we may enter into a revolving loan agreement with financial
institutions or attempt to raise capital through the sale of additional capital
stock or through the issuance of debt. At the present time we do not have a
revolving loan agreement with any financial institution nor can we provide any
assurance that we will be able to enter into any such agreement in the future or
be able to raise funds through the further issuance of debt or equity.
In addition, the United States is experiencing severe instability in
the commercial and investment banking systems which is likely to continue to
have far-reaching effects on the economic activity in the country for an
indeterminable period. The long-term impact on the United States economy and the
Company's operating activities and ability to raise capital cannot be predicted
at this time, but may be substantial.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2007, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 141 (Revised 2007), BUSINESS COMBINATIONS, ("SFAS No.
141R"). SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all the
assets acquired and liabilities assumed in a transaction at the acquisition-date
fair value with limited exceptions. SFAS No. 141R will also change the
accounting treatment and disclosure for certain specific items in a business
combination. SFAS No. 141R applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Accordingly, any
business combinations the Company engages in will be recorded and disclosed
following existing GAAP until July 1, 2009. The Company's management expects
SFAS No. 141R will have an impact on accounting for business combinations once
adopted, but the effect is dependent upon acquisitions at that time.
In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING
INTERESTS IN CONSOLIDATED FINANCIAL STATEMENTS--AN AMENDMENT OF ARB NO. 51, OR
SFAS NO. 160. SFAS No. 160 establishes new accounting and reporting standards
for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. Management believes that SFAS 160 will not have a material
impact on the Company's financial position or results of operations.
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1
"ACCOUNTING FOR CONVERTIBLE DEBT INSTRUMENTS THAT MAY BE SETTLED IN CASH UPON
CONVERSION (INCLUDING PARTIAL CASH SETTLEMENT)" (FSP APB 14-1). FSP APB 14-1
requires the issuer of certain convertible debt instruments that may be settled
in cash (or other assets) on conversion to separately account for the liability
(debt) and equity (conversion option) components of the instrument in a manner
that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis and will be adopted by the Company in the first quarter of fiscal 2009.
The Company does not expect the adoption of FSP APB 14-1 to have a material
effect on its results of operations and financial condition.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets
and liabilities, revenues and expenses and related disclosures of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to deferred revenues; depreciation or property and
equipment, intangible assets such as our intellectual property, financing
operations, currency valuations and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
We believe that the following are some of the more critical accounting
policies and estimates (that is those that require the application of
significant judgments by management as to their selection and valuation) used by
us:
O stock based compensation;
O long-lived assets;
O investments in and notes and advances receivable from
unconsolidated investees;
O international operations;
O revenue recognition and deferred revenue;
O litigation; and
O contractual obligations.
STOCK-BASED COMPENSATION
Beginning July 1, 2006, we adopted the provisions of and account for
stock-based compensation in accordance with Statement of Financial Accounting
standards No. 123 - revised 2004 ("SFAS 123R"), SHARE-BASED PAYMENT, which
replaced Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
ACCOUNTING FOR STOCK-BASED COMPENSATION, and supersedes APB Opinion No. 25 ("APB
25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense on
a straight-line basis over the requisite service period, which is the vesting
period. We elected the modified-prospective method, under which prior periods
are not revised for comparative purposes. The valuation provisions of SFAS 123R
apply to new grants and to grants that were outstanding as of the effective date
and are subsequently modified. All options granted prior to the adoption of SFAS
123R and outstanding during the periods presented were fully-vested.
LONG-LIVED ASSETS
We assess the impairment of long-lived assets whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. Factors we consider important that could trigger an impairment
review include negative projected operating performance by us and significant
negative industry or economic trends. We do not believe that there has been any
impairment to long-lived assets as of June 30, 2008.
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INVESTMENTS IN AND NOTES AND ADVANCES RECEIVABLE FROM UNCONSOLIDATED INVESTEES
Entities where we can exercise significant influence, but not control,
are accounted for under the equity method of accounting. Whether or not we
exercise significant influence with respect to a company depends on an
evaluation of several factors including, among others, representation on the
company's board of directors and ownership level, generally 20% to 50% interest
in the voting securities of the company including voting rights associated with
our holdings in common, preferred and other convertible instruments in the
company. Under the equity method of accounting, our share of the earnings or
losses of these companies is included in the equity income (loss) section of the
consolidated statements of operations.
A loss in value of an investment in or in the expected relizability of
notes and advances receivable from an unconsolidated investee that is other than
a temporary decline is recognized as a charge to operations. Evidence of a loss
in value might include, but would not necessarily be limited to, absence of an
ability to recover the carrying amount of the investment or notes and advances
receivable or inability of the investee to sustain an earnings capacity that
would justify the carrying amount of the investment or notes and advances
receivable.
NOTES AND ADVANCES RECEIVABLE
Notes and advances receivable consist of promissory notes and advances
made to our unconsolidated investee, BioAgra. Notes and advances receivable are
recorded net of an allowance for uncollectible receivables. Allowances for
estimated losses from uncollectible loans are recorded when it is probable that
the counterparty (BioAgra) will be unable to pay all amounts due according to
the terms of the promissory notes and advances receivable.
The Company stops accruing interest on a loan when the borrower's
ability to meet contractual payments is in doubt. For notes which are on
nonaccrual status, it is the Company's policy to reverse interest previously
accrued on the loan against interest income. Interest on such loans is
thereafter recorded on a cash basis and is included in earnings only when
actually received in cash and when full payment of principal is no longer
doubtful.
A receivable is considered impaired when it is probable that all
amounts will not be collected as they become due according to the terms of the
loan. Generally, impaired loans are accounted for on a nonaccrual basis. The
extent of impairment is measured based upon a comparison of the recorded
investment in the loan with either the expected cash flows discounted using the
loan's original effective interest rate or the fair value of the underlying
collateral if the loan is collateral dependent.
INTERNATIONAL OPERATIONS
Our previously held foreign equity investee (ExypnoTech) operations are
located in Germany. ExypnoTech transactions are conducted in currencies other
than the U.S. dollar, (the currency into which the subsidiaries' historical
financial statements have been translated) primarily the Euro. As a result, we
are exposed to adverse movements in foreign currency exchange rates. In
addition, foreign political and economic environment, trade barriers, managing
foreign operations and potentially adverse tax consequences. Any of these
factors could have a material adverse effect on our financial condition or
results of operations in the future.
REVENUE RECOGNITION AND DEFERRED REVENUE
Our revenue recognition policy is significant because future revenue
could be a key component of our results or operations. Revenue results are
difficult to predict, and any shortfall in revenue or delay in recognizing
revenue could cause operating results to vary significantly.
-26-
LITIGATION
We are involved in certain legal proceedings, as described in Item 3 of
this report and Note 9 to the consolidated financial statements included in this
report.
We intend to vigorously prosecute these legal proceedings and does not
believe the outcome of these proceedings will have a material adverse effect on
the financial condition, results of operations or our liquidity. However, it is
too early at this time to determine the ultimate outcome of these matters or to
estimate the minimum losses, if any, to be incurred in these matters.
CONTRACTUAL OBLIGATIONS
For more information on our contractual obligations on operating
leases, refer to Note 9 of the consolidated financial statements included in
this report. At June 30, 2008, our commitments under these obligations were as
follows:
YEAR ENDING JUNE 30, OPERATING LEASES
2009 $ 39,415
2010 40,618
2011 41,822
2012 10,531
-------------------
$ 132,386
===================
OFF-BALANCE SHEET ARRANGEMENTS
We do not maintain any off-balance sheet arrangements that have, or
that are reasonably likely to have, a material current or future effect on our
financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
ITEM 7. FINANCIAL STATEMENTS
The consolidated financial statements and related financial information
required to be filed with this report are indexed on page F-1 and are
incorporated herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 8A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer/Acting Chief
Financial Officer, performed an evaluation of the effectiveness of the design
and operation of the Company's disclosure controls and procedures as of June 30,
2008. Based on that evaluation, the Chief Executive Officer/Acting Chief
Financial Officer concluded that, because of the material weakness in internal
control over financial reporting described below, the Company's disclosure
controls and procedures were not effective as of June 30, 2008.
-27-
ITEM 8(A)T. INTERNAL CONTROLS AND PROCEDURES
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in the
Securities Exchange Act of 1934 Rule 13a-15(f). Our Chief Executive
Officer/Acting Chief Financial Officer conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
framework in Internal Control - Integrated Framework, issued by the Committee of
Sponsoring Organizations of the Treadway Commission ("COSO Framework").
Based on this evaluation, management has concluded that our internal
control over financial reporting was not effective as of June 30, 2008. Our
principal Chief Executive Officer/Acting Chief Financial Officer concluded we
have a material weakness in our ability to produce financial statements free
from material misstatements. Management reported a material weakness resulting
from the combination of the following significant deficiencies:
- a lack of segregation of duties in accounting and financial
reporting activities; and
- a lack of a sufficient number of qualified accounting
personnel; and
- a lack of documentation and review of financial information by
accounting personnel with direct oversight responsibility.
Our Chief Executive Officer has also served as our Chief Financial
Officer since February 2007. We believe that the lack of a full-time Chief
Financial Officer has resulted in a significant deficiency in internal controls
over financial reporting due to the lack of qualified accounting personnel with
sufficient time to regularly and adequately review complex, nonrecurring
transactions. In addition, the Company employs only one individual that is
responsible for the processing of all recurring transactions. While management
is actively involved in the daily activities of the Company, including the
review of transactions, it is difficult to adequately segregate accounting
duties within the Company in a manner to prevent a material weakness in internal
controls over financial reporting.
Subsequent to the discovery of the material weakness in internal
control over financial reporting described above and beginning in the fiscal
quarter ending September 30, 2007, we initiated and plan to undertake changes to
our internal control over financial reporting to remediate the aforementioned
deficiency and to strengthen our internal control processes, including the
seeking of additional accounting staff and/or the consultation with outside
resources as we deem appropriate. While the costs of remediation are unknown at
this time, we expect that the costs may exceed $300,000, which would include the
hiring of a new Chief Financial Officer and, in the interim, the contracting of
accounting staff and/or the consultation with outside resources. Our ability to
initiate and undertake changes is confined by our financial resources.
This annual report does not include an attestation report of the
Company's independent registered public accounting firm regarding internal
control over financial reporting. Management's report was not subject to
attestation by the Company's independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only management's report on internal control in
this annual report.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in internal control over financial reporting that
occurred during the last fiscal quarter covered by this report that have
materially affected, or are reasonably likely to affect, the Company's internal
control over financial reporting.
ITEM 8B. OTHER INFORMATION
None.
-28-
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Our executive officers and directors are as follows:
NAME, AGE AND YEAR FIRST PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
ELECTED OR APPOINTED
-------------------------------- -----------------------------------------------------
Paul H. Metzinger Mr. Metzinger was our President and Chief Executive
Age: 69 Officer from February 26, 1998 to May 6, 1998 and has
1998 served in that same capacity from December 1, 1998 to
present. In addition, Mr. Metzinger has been serving
as acting Chief Financial Officer since February of
2007. He has been a director since February 26, 1998.
He has served as a Manager and Vice President of
BioAgra since August 15, 2005. He served as the
General Manager of NanoPierce Card from January 2000
to June 2003. Prior to becoming a director, Mr.
Metzinger practiced securities law in Denver,
Colorado for over 32 years. Mr. Metzinger received
his J.D. degree in 1967 from Creighton University Law
School and his L.L.M. from Georgetown University in
1969.
Herbert J. Neuhaus Dr. Neuhaus has been a director since January 1,
Age: 47 1999. Since January 1999, he has been our Executive
1999 Vice President of Marketing and Technology. He was
the President and Chief Executive Officer of
NanoPierce Connection from January 2002 to September
2003. Dr. Neuhaus previously served as the Managing
Director of Particle Interconnect Corporation from
August 18, 1997 to November 1, 1997. From August 1989
to August 1997, he was associated with the Electronic
Material Venture Group in the New Business
Development Department of Amoco Chemical Company,
Naperville, Illinois. While associated with Amoco
Chemical Company he held among other positions:
Business Development Manager/Team Leader; Project
Manager--High Density Interconnect; Product Manager
MCM Products and as a research scientist. Dr. Neuhaus
received his Ph.D. degree in Physics from the
Massachusetts Institute of Technology, Cambridge,
Massachusetts in 1989 and his BS in Physics from
Clemson University, Clemson, South Carolina in 1980.
Robert Shaw, Ph.D. Dr. Shaw has been our director since October 31,
Age: 69 2000. Dr. Shaw currently is an Assistant Professor of
2000 Physics at Farleigh Dickinson University where he has
served on the faculty since September 1988. Dr. Shaw
also performs professional research in his academic
areas of specialty, and has held, among others, the
positions of Research Chemist at the American
Cyanamid Research Laboratories, Stamford; Senior
Research Physicist at Exxon Research and Engineering
Company; Manager of New Business Development at Exxon
Enterprises, Exxon Corporation, New York, NY; and
President of Robert Shaw Associates, Inc., Chatham,
NJ. Dr. Shaw received his Ph.D. in Solid State
Physics form Cambridge University, Cambridge,
England. He was among the first to conduct academic
research on electronic conduction mechanisms in
amorphous semiconductors. He received a B.S. in
Inorganic Chemistry with a minor in Nuclear Physics
from North Carolina State University, Raleigh, NC.
John Hoback Mr. Hoback has been our director since April 2002.
Age: 69 Mr. Hoback currently serves as the President of Z&H
2002 Enterprises Solutions, Ltd., which position he has
held since 2000. Among other positions, Mr. Hoback
was the Director of Marketing and Sales of CTS from
1999 to 2000 and was the Venture Manager of
Electronics with Amoco Chemical from 1988 to 1999.
-29-
There are no family relationships that exist between any director or
executive officer.
CODE OF ETHICS
Vyta Corp has adopted a Code of Ethics that applies to the Chief
Executive Officer, Chief Financial Officer, Controller, Principal Accounting
Officer and those employees performing similar functions. A copy of the
Company's Code of Ethics is available on the Company's website
(www.vytacorp.com). We intend to disclose amendments to, or waivers from,
provisions of the Code of Ethics by posting such information on its website. The
contents of our website are not part of this Annual Report on Form 10-KSB.
CHANGES IN DIRECTOR NOMINATION
There have been no material changes to the procedures by which security
holders may recommend nominees to our board of directors.
AUDIT COMMITTEE AND FINANCIAL EXPERT
Since the Company is not required to have, and does not have an audit
committee, our board of directors perform the responsibilities of an audit
committee, providing oversight of our accounting and financial reporting
functions and internal controls. Our board of directors is likewise not required
to designate and has not designated a Financial Expert, as defined by the SEC.
-30-
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the
compensation paid or earned during the fiscal year ended June 30, 2008 and 2007
by our Chief Executive Officer (Principal Executive Officer and Principal
Financial Officer) who served in such capacity during the fiscal year ended June
30, 2008 ("Named Executive Officers"), in all capacities in which they served.
2008 SUMMARY COMPENSATION TABLE
----------- ---- -------- ------- ------- --------- -------------- -------------- -------------- ---------
NAME AND YEAR SALARY BONUS STOCK OPTION NON-EQUITY CHANGE IN
PRINCIPAL ($) ($) AWARDS AWARDS INCENTIVE PLAN PENSION VALUE
POSITION ($) ($) COMPENSATION AND
($) NON-QUALIFIED
DEFERRED
COMPENSATION ALL OTHER
EARNINGS COMPENSATION TOTAL
($) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
----------- ---- -------- ------- ------- --------- -------------- -------------- -------------- ---------
Paul 2008 $ 96,250 -- -- $ -- -- -- -- $ 96,250
Metzinger 2007 105,000 -- -- 305,000 -- -- -- 410,000
CEO,
President,
Acting CFO
----------- ---- -------- ------- ------- --------- -------------- -------------- -------------- ---------
2008 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION AWARDS STOCK AWARDS
------------------------------------------------------------- ------------------------------------------
EXERCISABLE UNEXERCISABLE
----------- ------------ -------------- ----------- -------- ---------- --------- -------- --------- -----------
NAME NUMBER OF NUMBER OF EQUITY OPTION OPTION NUMBER MARKET EQUITY EQUITY
SECURITIES SECURITIES INCENTIVE EXERCISE EXPIRATION OF VALUE OF INCENTIVE INCENTIVE
UNDERLYING UNDERLYING PLAN PRICE DATE SHARES SHARES PLAN PLAN
UNEXERCISED UNEXERCISE AWARDS: ($) OR UNITS OR UNITS AWARDS: AWARDS:
OPTIONS OPTIONS NUMBER OF OF STOCK OF STOCK NUMBER MARKET
(#) (#) SECURITIES THAT THAT OF OR
UNDERLYING HAVE NOT HAVE NOT UNEARNED PAYOUT
UNEXERCISED VESTED BEEN SHARES, VALUE OF
UNEARNED (#) VESTED UNITS OR UNEARNED
OPTIONS ($) OTHER SHARES,
(#) RIGHTS UNITS OR
THAT OTHER
HAVE NOT RIGHTS
VESTED THAT
(#) HAVE NOT
VESTED
($)
(A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
----------- ------------ -------------- ----------- -------- ---------- --------- -------- --------- -----------
Paul 3/12/99
Metzinger 15,000 -- -- 10.40 3/12/09 -- -- -- --
Paul 3/17/07
Metzinger 1,000,000 -- -- 0.32 3/17/17 -- -- -- --
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2008 GRANTS OF PLAN-BASED AWARDS
There were no grants of plan-based awards to any of the Named Executive
Officers during the fiscal year ended June 30, 2008.
2008 OPTION EXERCISES AND STOCK VESTED
There were no exercises of options or vesting of stock awards by any of
the Named Executive Officers during the fiscal year ended June 30, 2008.
2008 PENSION BENEFITS
We do not have a benefit pension plan.
2008 NON-QUALIFIED DEFERRED COMPENSATION
We do not have a nonqualified defined contribution or other
nonqualified deferred compensation plans.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
On March 15, 2004, we entered into an employment agreement with Paul H.
Metzinger to serve as our President and Chief Executive Officer. The employment
agreement with Mr. Metzinger expires March 14, 2008. The employment agreement
was renewed for an additional five (5) years ended March 13, 2013. Pursuant to
his employment agreement, we agreed to pay Mr. Metzinger an annual salary of
$150,000. In March 2005, Mr. Metzinger took a salary cut to receive an annual
salary of $105,000.
In connection with the employment agreements, generally, we or the
employee may terminate the employment agreement at any time with or without
cause. In the event we terminate an employment agreement for cause or the
employee terminates his or her employee agreement without cause, all of such
employee's rights to compensation would cease upon the date of such termination.
If we terminate an employment agreement without cause, then such employee
terminates his or her employment agreement for cause, or in the event of a
change in control, we are required to pay to such employee all compensation and
other benefits that would have accrued and/or been payable to that employee
during the full term of the employment agreement.
A change of control is considered to have occurred when, as a result of
any type of corporate reorganization, execution of proxies, voting trusts or
similar arrangements, a person or group of persons (other than incumbent
officers, directors and our principal stockholders) acquires sufficient control
to elect more than a majority of our board of directors, acquires 50% or more of
our voting shares, or we adopt a plan of dissolution of liquidation. The
employment agreement also include a non-compete and nondisclosure provisions in
which each employee agrees not to compete with or disclose confidential
information regarding us and our business during the term of the employment
agreement and for a period of one year thereafter.
On March 15, 2004, we entered into an employment agreement with Kristi
Kampmann to serve as our Chief Financial Officer. Ms. Kampmann resigned on
February 28, 2007 and we have no further obligations under the agreement.
However, pursuant to the agreement, Ms. Kampmann agreed to a twelve month
non-compete clause that prohibits working in certain industries, as well as
requires confidentiality.
STOCK OPTION PLANS
We have two Stock Option Plans. As of October 10, 2008, 206,127 options
are outstanding under the 1998 Compensatory Stock Option Plan and 2,437,000
options are outstanding under the 2000 Compensatory Stock Option Plan, for a
total of 2,643,127 options outstanding. A total of 2,643,127 options are
exercisable at October 10, 2008, under these plans. During the year ended June
30, 2008, we did not issue or grant any options.
-32-
During the year ended June 30, 2007, we issued 2,350,000 options under
the 2000 Compensatory Stock Option Plan to officers, directors and one employee.
We have reserved 375,000 shares of common stock for issuance under the 1998
Compensatory Stock Option Plan. In January 2002, our board of directors passed a
resolution closing the 1998 Compensatory Stock Option Plan for issuance of new
options. We have reserved 2,480,000 shares of common stock for issuance under
the 2000 Compensatory Stock Option Plan. During the fiscal years ended June 30,
2008 and 2006, there was no action taken to reprice any options held by any
officers, directors or employees.
DIRECTOR COMPENSATION
We hold quarterly meetings of the board of directors. Although we do
not have any standard arrangements pursuant to which our directors are
compensated for any services provided as a director or for attendance at
meetings of the board of directors, if our financial situation is adequate, we
compensate directors $1,000 per meeting, plus reasonable travel expenses. During
the fiscal year ended June 30, 2008, our officers and directors were not
compensated for attendance at board meetings.
DIRECTOR COMPENSATION IN FISCAL 2008
CHANGE IN
PENSION VALUE
AND
FEES NONQUALIFIED
EARNED OR NON-EQUITY DEFERRED
PAID IN STOCK OPTION INCENTIVE PLAN COMPENSATION ALL OTHER
CASH AWARDS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
NAME ($) ($) ($) ($) ($) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H)
Paul Metzinger $ -- -- $ -- -- -- $ 96,250 $ 96,250
Herbert Neuhaus -- -- -- -- -- -- --
Robert Shaw -- -- -- -- -- -- --
John Hoback -- -- -- -- -- -- --
COMPENSATION DISCUSSION AND ANALYSIS
GENERAL PHILOSOPHY AND OBJECTIVES
In 2004, we began changing our principal business and investments from
electronics technology to biotechnology. Through our 50% interest in BioAgra,
LLC, we and BioAgra hope to generate revenue through the production and sale of
Agrastim(R) and Purestim(TM). While BioAgra has recently signed its first
agreement for the distribution of Agrastim(R), BioAgra has generated no revenue
and is currently incurring net losses in each quarter. Due to our lack of
revenue and continuing net losses, the board of directors has not established a
general philosophy pertaining to the compensation of our executive officers.
However, should we begin to generate revenue in the future, the board will
establish formal objectives and policies for the compensation of our executives
that is tied to the generation of value for our stockholders.
BASE SALARIES
We believe that the base salary level of our executive officer is
reasonably related to our current revenue levels. Base salaries are reviewed
annually, and any increases in base salary take into account such factors as
individual past performance, changes in responsibilities, changes in pay levels
of companies deemed comparable by us, inflation and our overall financial
-33-
position. The annual base salary for Mr. Metzinger was $150,000 as required by
the terms of his employment agreement with us. However, due to our net losses,
Mr. Metzinger has voluntarily chosen to reduce his annual salary to $105,000
until such time as we begin generating revenues.
ANNUAL CASH BONUSES
At this time, we do not pay annual cash bonuses to our Named Executive
Officers.
LONG-TERM INCENTIVE COMPENSATION
At this time, we do not award equity compensation to our Named
Executive Officers.
PARTICIPATION OF NAMED EXECUTIVE OFFICERS IN COMPENSATION DECISIONS RELATING TO
THEM
Compensation decisions for the Named Executive Officers are made by the
board of directors. To the extent that a Named Executive Officer is a member of
the board, they recuse themselves from the discussions or and do not participate
in compensation decisions that relate to them.
TAX DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Code disallows a tax deduction for any publicly
held corporation for individual compensation of more than $1.0 million in any
taxable year to any named executive officers, other than compensation that is
performance-based under a plan that is approved by the Stockholders and that
meets certain other technical requirements. Our policy with respect to Section
162(m) is to make every reasonable effort to ensure that compensation is
deductible to the extent permitted while simultaneously providing our executives
with appropriate rewards for their performance. In the appropriate
circumstances, however, we are prepared to exceed the limit on deductibility
under Section 162(m) to the extent necessary to ensure our executive officers
are compensated in a manner consistent with our best interests and those of our
Stockholders.
-34-
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding the
beneficial ownership of outstanding shares of our common stock as of October 10,
2008 on a fully diluted basis, by (a) each person known by us to own
beneficially 5% or more of the outstanding shares of common stock, (b) our
directors, Named Executive Officers, and (c) all our directors and executive
officers as a group.
NAME, ADDRESS & NATURE OF
BENEFICIAL OWNER AMOUNT PERCENT OF CLASS(7)
------------------------------- -------------- -------------------
Arizcan Properties, Ltd. 12,002,770 (1) 26%
625 South Alten Way, Suite 3A
Denver, CO 80247
The Paul H. Metzinger Trust 1,186,585 (2) 2.64
Paul H. Metzinger
President, CEO & CFO, Director
370 Seventeenth Street
Suite 3640
Denver, CO 80202
The Cheri L. Metzinger Trust 1,186,585 (3) 2.64
Cheri L. Metzinger
Wife of Paul H. Metzinger
3236 Jellison Street
Wheatridge, CO 80033
Dr. Herbert J. Neuhaus 317,500 (4) 0.71
Director
770 Maroonglen Court
Colorado Springs, CO 80906
Dr. Robert E. Shaw, Director 270,000 (5) 0.60
8 Nicklaus Court
Florham Park, NJ 07932
John Hoback, Director 270,000 (6) 0.60
20 White Heron Lake
East Stroudsburg, PA 18301
All Officers & Directors as a Group 2,044,085 4.54
(4 persons)
--------------------
*Less than 0.01%.
(1) Arizcan Properties is wholly-owned by Triumphant Partners, LLC, a
Colorado limited liability company, which is owned by Stan Richards.
Includes 11,995,000 common shares held directly and beneficially and
7,770 common shares that are held by Stan Richards.
(2) Includes 53,697 common shares held directly and beneficially; 47,888
common shares that Mr. Metzinger owns beneficially though his wife and
options held by Mr. Metzinger consisting of options to purchase 10,000
shares exercisable at $10.40 per share, options to purchase 75,000
shares exercisable at $6.50 per share and options to purchase 1,000,000
shares exercisable at $0.32 per share.
-35-
(3) Cheri L. Metzinger is the wife of Mr. Paul H. Metzinger, our Chief
Executive Officer, Chief Financial Officer and President. This includes
47,888 shares held directly and beneficially and 53,697 common shares,
1,085,000 common shares subject to options owned beneficially by her
husband.
(4) Based on options to purchase 25,000 shares exercisable at $42.50 per
share, options to purchase 5,000 shares exercisable at $55.00 per
share, options to purchase 12,500 shares exercisable at $10.40 per
share, options to purchase 25,000 shares exercisable at $4.00 per share
and options to purchase 250,000 shares exercisable at $0.32 per share.
(5) Based on options to purchase 12,500 shares exercisable at $19.40 per
share, options to purchase 2,500 shares exercisable at $13.40 per
share, options to purchase 5,000 shares exercisable at $40.00 per share
and options to purchase 250,000 shares exercisable at $0.32 per share.
(6) Based on options to purchase 15,000 shares exercisable at $14.00 per
share, options to purchase 5,000 shares exercisable at $14.00 per share
and options to purchase 250,000 shares exercisable at $0.32 per share.
(7) Shares of our common stock subject to options and warrants currently
exercisable or convertible, or exercisable or convertible within 60
days of October 10, 2008, are deemed outstanding for purposes of
computing the percentage beneficially owned by the person or entity
holding those securities, but are not deemed outstanding for purposes
of computing the percentage beneficially owned by any other person or
entity. Percentage of beneficial ownership is based on 45,013,178
shares of our common stock outstanding as of the close of business on
October 10, 2008.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table provides information as of June 30, 2008 regarding
compensation plans (including individual compensation arrangements) under which
shares of our common stock are authorized for issuance. No class of our
securities other than our common stock or options to purchase our common stock
is authorized for issuance under any of our equity compensation plans.
NUMBER OF WEIGHTED-AVERAGE NUMBER OF
SECURITIES TO BE EXERCISE PRICE OF SECURITIES
ISSUED UPON OUTSTANDING REMAINING
EXERCISE OF OPTIONS, WARRANTS AVAILABLE FOR
OUTSTANDING AND RIGHTS FUTURE ISSUANCE
OPTIONS, WARRANTS (B) UNDER EQUITY
AND RIGHTS COMPENSATION
(A) PLANS (EXCLUDING
SECURITIES
REFLECTED IN
COLUMN (A)
PLAN CATEGORY (C)
--------------------------------------------------- ----------------- ------------------ ------------------
Equity compensation plans approved by security
holders 0 -- 0
Equity compensation plans not approved by security
holders(1) 2,643,127 $ 3.00 226,173
Total 2,643,127 $ 3.00 226,173
--------------------
(1) The material features of the plans not approved by the security holders are
described herein under "ITEM 10--EXECUTIVE COMPENSATION--Stock Option Plans."
CHANGE IN CONTROL
As of October 10, 2008, Arizcan Properties, Ltd. is our controlling
shareholder. Arizcan Properties Ltd. may cause us to have a change of control if
they sell enough of our common stock. We are not aware of any present intention
of Arizcan Properties, Ltd. to cause us to have a change of control and we are
not aware of any other arrangements that may result in a change of control.
-36-
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH RELATED PERSONS
During the year ended June 30, 2008, we issued to Arizcan Properties a
total of 6,168,333 shares of restricted common stock in exchange for $930,125
cash.
During the year ended June 30, 2008, Arizcan Properties advanced us
cash of $39,500. We have repaid $5,000 at October 10, 2008.
On March 2, 2007, in a private placement transaction, we issued to
Arizcan Properties a total of 500,000 shares of our newly-designated series A
nonconvertible preferred stock for a total purchase price of $500,000, in cash.
In addition to the purchase of the series A nonconvertible preferred stock,
Arizcan Properties purchased for a purchase price of $251,900 a warrant
exercisable for 6,000,000 shares of common stock. This warrant has an exercise
price of $0.50 per share and provides for cashless exercise. As a result,
Arizcan Properties acquired approximately 51% of our voting power, and, on a
fully diluted basis, Arizcan Properties would have approximately 89% of our
voting power if they exercise the warrant.
Mr. Metzinger, an officer and director, during the year ended June 30,
2007, advanced us a total of $25,203. We have repaid these funds.
During the year ended June 30, 2007, we issued options to purchase
2,350,000 shares of common stock to our officer and directors. The options are
fully vested, have a term of 10 years and an exercise price of $0.41 per share.
The options were determined to have a value of $743,750 using the Black-Scholes
Model of valuation and certain assumptions considered appropriate by management.
RELATED PARTY TRANSACTION POLICY
The board of directors recognizes that related party transactions can
present conflicts of interest and questions as to whether the transactions are
in our best interests. Accordingly, effective in September 2007, the board of
directors adopted a written policy formalizing the policy for the review,
approval and ratification of transactions with related persons. For the purposes
of this policy, a "related party transaction" is a transaction or relationship
involving a director, executive officer or 5% stockholder or their immediate
family members that is reportable under the SEC's rules regarding such
transactions.
Under our policy, a related party transaction should be approved or
ratified based upon a determination that the transaction is in, or not opposed
to, our best interests and on terms no less favorable to us than those available
with other parties. The policy provides for the board of directors to review and
approve all related party transactions, other than transactions involving
amounts less than $100,000 in aggregate. Pursuant to the policy, management
shall recommend any related party transaction, including the proposed aggregate
value of the transaction, if applicable. After review, the board of directors
shall approve or disapprove of such transaction.
DIRECTOR INDEPENDENCE
We have voluntarily adopted the NASDAQ Marketplace Rules for
determining whether a director is independent and our board of directors has
determined that three of our four directors, Messrs. Neuhaus, Shaw and Hoback,
are "independent" within the meaning of Rule 4200(a)(15) of the NASDAQ Manual.
Mr. Metzinger is not independent under those standards.
ITEM 13. EXHIBITS
The following documents are filed as a part of this report.
(i) FINANCIAL STATEMENTS. See Index to Financial Statements on page F-1
of this report.
-37-
(ii) EXHIBITS. The following is a complete list of exhibits filed as
part of this Form 10-KSB. Exhibit numbers correspond to the numbers in the
Exhibit Table of Item 601 of Regulation S-K.
EXHIBIT NO. DESCRIPTION
---------- ------------------------------------------------------------------------------------------------------
3.01* Certificate of Designation of Series A Nonconvertible Preferred Stock (Incorporated by reference
to the company's Current Report on Form 8-K, dated March 6, 2007)
10.01* Termination and Mutual General Release Agreement dated July 11, 2007 by and between Progressive
Bioactives, Inc. and BioAgra LLC (Incorporated by reference to the company's Current Report on Form
8-K, dated July 11, 2007)
10.02* Agreement, dated April 1, 2007 by and between AHD International, Inc. and BioAgra LLC (Incorporated by
reference to the company's Current Report on Form 8-K, dated April 18, 2007)
10.04* Operating Agreement, dated August 15, 2005, between the company and Xact Resources International (now
Justin Holdings, Inc. as a result of the assignment by Xact Resources in February 2006), Inc. for
BioAgra, LLC (Incorporated by reference to the company's Current Report on Form 8-K, dated August 12, 2005)
21# Subsidiaries of the Company
23# Consent of Independent Registered Public Accounting Firm, GHP Horwath, P.C.
31.1# Certification of Chief Executive Officer Pursuant to Rule 13A-14(a)/15d-14(a) as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2# Certification of Chief Financial Officer Pursuant to Rule 13A-14(a)/15d-14(a) as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1# Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2# Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
--------------------
* Indicates a management contract or compensatory plan or arrangement.
# Filed herewith.
ITEM 14. PRINCIPAL ACCOUNTANTS' FEES AND SERVICES
The aggregate fees billed and expected to be billed by GHP Horwath,
P.C., our independent registered public accounting firm, for professional
services for the fiscal years ended June 30, 2008 and 2007 are as follows:
SERVICES RENDERED 2008 2007
----------------------------------------------- ----------- -----------
Audit Fees $ 75,000 $ 90,000
Audit Related Fees 0 0
All Other Fees 0 0
The engagement of our independent registered public accounting firm was
approved by our board of directors functioning as our audit committee prior to
the start of the audit of our consolidated financial statements for the fiscal
year ended June 30, 2008.
-38-
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VYTA CORP
Date: October 13, 2008 By: /s/ Paul H. Metzinger
-----------------------------------
Paul H. Metzinger, Chief Executive
Officer, President and acting
Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Date: October 13, 2008 By: /s/ Paul H. Metzinger
-----------------------------------
Paul H. Metzinger, Director, Chief
Executive Officer, President and
acting Chief Financial Officer
(Principal Executive Officer,
Principal Financial Officer and
Principal Accounting Officer)
Date: October 13, 2008 By: /s/ Herbert J. Neuhaus
-----------------------------------
Herbert J. Neuhaus, Director
Date: October 13, 2008 By: /s/ Robert Shaw
-----------------------------------
Robert Shaw, Director
Date: October 13, 2008 By: /s/ John Hoback
-----------------------------------
John Hoback, Director
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS
Neither an annual report covering our fiscal year ended June 30, 2008,
nor any proxy material, has been sent to our security holders.
-39-
VYTA CORP AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
------
Report of Independent Registered Public Accounting Firm F-1
Consolidated Financial Statements:
Consolidated Balance Sheet - June 30, 2008 F-2
Consolidated Statements of Operations -
Years ended June 30, 2008 and 2007 F-3
Consolidated Statements of Comprehensive Loss -
Years ended June 30, 2008 and 2007 F-4
Consolidated Statements of Changes in Shareholders'
Equity Deficiency -
Years ended June 30, 2008 and 2007 F-5
Consolidated Statements of Cash Flows -
Years ended June 30, 2008 and 2007 F-7
Notes to Consolidated Financial Statements F-9
-40-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Vyta Corp
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Vyta
Corp and subsidiaries (the "Company") as of June 30, 2008, and the related
consolidated statements of operations, comprehensive loss, changes in
shareholders' equity deficiency and cash flows for each of the years in the
two-year period ended June 30, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Vyta Corp
and subsidiaries as of June 30, 2008, and the results of their operations and
their cash flows for each of the years in the two-year period ended June 30,
2008, 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
2 to the consolidated financial statements, the Company reported a net loss
applicable to common shareholders of approximately $1,971,000, substantially all
derived from its equity in development stage net losses of its principal
investee, a 50%-owned joint venture, whose ability to continue as a going
concern also is in substantial doubt, and significant cash outflows from
operations for the year ended June 30, 2008, and a deficit of approximately
$32,428,000 as of June 30, 2008. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters, which do not include any direct revenue-producing activities
in the foreseeable future, are also described in Note 2. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ GHP HORWATH, P.C.
-------------------------
Denver, Colorado
October 14, 2008
F-1
VYTA CORP AND SUBSIDIARIES
Consolidated Balance Sheet
June 30, 2008
ASSETS
Current assets:
Cash and cash equivalents $ 54,550
Prepaid expenses and other 1,096
-------------
Total current assets 55,646
-------------
Property and equipment:
Office equipment and furniture 67,107
Less accumulated depreciation (66,282)
------------
825
------------
Other assets:
Deposit 19,272
------------
Total assets $ 75,743
============
LIABILITIES AND SHAREHOLDERS' EQUITY DEFICIENCY
Current liabilities:
Accounts payable $ 135,305
Advances payable, related party (Note 5) 39,500
Accrued expenses 31,385
Obligation to unconsolidated investee (Note 4) 173,153
------------
Total liabilities (all current) 379,343
------------
Commitments and contingencies (Note 7)
Shareholders' equity deficiency (Note 6):
Preferred stock; $0.0001 par value; 5,000,000 shares authorized; Series A, 8%;
deemed par value $1.00 per share; 500,000 shares
issued and outstanding; liquidation preference of $553,260 553,260
Common stock; $0.0001 par value; 200,000,000 shares authorized;
37,518,178 shares issued and outstanding 3,752
Additional paid-in capital 31,567,860
Deficit (32,428,472)
-------------
Total shareholders' equity deficiency ( 303,600)
-------------
Total liabilities and shareholders' equity deficiency $ 75,743
=============
See notes to consolidated financial statements.
F-2
VYTA CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended June 30, 2008 and 2007
2008 2007
--------- ---------
General and administrative expense $( 663,270) (1,835,973)
--------- ---------
Loss from operations ( 663,270) (1,835,973)
--------- ---------
Other income (expense):
Interest income 19 22
Gain on sale of investment in
unconsolidated investee (Note 4) 164,234 -
Equity losses of unconsolidated
investees (Note 4) (1,431,774) (1,426,590)
Provision for loss on note
receivable, unconsolidated investee
(Note 3) - (1,198,000)
--------- ---------
(1,267,521) (2,624,568)
--------- ---------
Net loss (1,930,791) (4,460,541)
--------- ---------
Accumulated dividends on preferred
stock (Note 6) ( 40,110) ( 13,150)
--------- ----------
Net loss applicable to common
shareholders $(1,970,901) (4,473,691)
========= =========
Net loss per common share, basic
(Note 1) $( 0.06) ( 0.19)
========= =========
Weighted average number of common
shares outstanding (Note 1) 34,526,402 23,884,955
========== ==========
See notes to consolidated financial statements.
F-3
VYTA CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
Years Ended June 30, 2008 and 2007
2008 2007
------------ ------------
Net loss $(1,930,791) ( 4,460,541)
Change in unrealized gain on
securities - ( 619)
Change in foreign currency
translation adjustments, net of
reclassification adjustment for
gain included in net loss
(Note 4) ( 10,340) ( 8,197)
------------ ------------
Comprehensive loss $(1,941,131) ( 4,469,357)
============ ============
See notes to consolidated financial statements.
F-4
VYTA CORP AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity Deficiency
Years Ended June 30, 2008 and 2007
TOTAL
ADDITIONAL ACCUMULATED OTHER SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK PAID IN COMPREHENSIVE EQUITY
SHARES DOLLARS SHARES DOLLARS CAPITAL INCOME DEFICIT DEFICIENCY
------- -------- ---------- --------- ----------- ----------- ------------ -------------
Balances, July 1, 2006 - $ - 22,643,512 $ 2,264 $28,390,883 $ 130,359 $(26,037,140) $ 2,486,366
Series A preferred stock
issued in exchange for
advance payable related
party and cash 500,000 500,000 - - - - - 500,000
Warrant issued for cash - - - - 251,900 - - 251,900
Common stock issued for
cash - - 8,373,000 838 1,255,112 - - 1,255,950
Common stock issued in
settlement of note
payable, stockholder - - 333,333 33 49,967 - - 50,000
Options issued for
compensation - - - - 743,750 - - 743,750
Net loss - - - - - - ( 4,460,541) (4,460,541)
Accumulated dividends on
Series A preferred
stock - 13,150 - - ( 13,150) - - -
Other comprehensive
loss:
Unrealized gain on
securities - - - - - ( 619) - ( 619)
Foreign currency
translation
adjustments - - - - - ( 8,197) - ( 8,197)
-------- --------- ----------- ------- ---------- ---------- ------------ -----------
Balances,
June 30, 2007 500,000 $ 513,150 31,349,845 $ 3,135 $30,678,462 $ 121,543 $(30,497,681) $ 818,609
======== ========= =========== ======= ========== ========== ============ ===========
(Continued)
F-5
VYTA CORP AND SUBSIDIARIES
Consolidated Statement of Changes in Shareholders' Equity Deficiency
Years Ended June 30, 2008 and 2007
(Continued)
TOTAL
ADDITIONAL ACCUMULATED OTHER SHAREHOLDERS'
PREFERRED STOCK COMMON STOCK PAID IN COMPREHENSIVE EQUITY
SHARES DOLLARS SHARES DOLLARS CAPITAL INCOME DEFICIT DEFICIENCY
------- -------- ---------- ------- ----------- ----------- ------------ -------------
Balances, July 1, 2007 500,000 $513,150 31,349,845 $ 3,135 $30,678,462 $ 121,543 $(30,497,681) $ 818,609
Common stock issued for
cash - - 6,168,333 617 929,508 - - 930,125
Net loss - - - - - - ( 1,930,791) (1,930,791)
Accumulated dividends on
Series A preferred
stock - 40,110 - - ( 40,110) - - -
Other comprehensive
loss:
Foreign currency
translation
adjustment (Note 4) - - - - - ( 121,543) - ( 121,543)
-------- -------- ----------- ------ ---------- ---------- ------------ -----------
Balances,
June 30, 2008 500,000 $553,260 37,518,178 $ 3,752 $31,567,860 $ - $(32,428,472) $( 303,600)
======== ======== =========== ====== ========== ========== ============ ===========
See notes to consolidated financial statements.
F-6
VYTA CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2008 and 2007
2008 2007
----------- -----------
Cash flows from operating activities:
Net loss $ (1,930,791) ( 4,460,541)
----------- -----------
Adjustments to reconcile net loss to net cash used
in operating activities:
Noncash consulting expense - 436,197
Depreciation expense 4,612 5,387
Provision for loss on note receivable,
unconsolidated equity investee - 1,198,000
Equity in net losses of unconsolidated investees 1,431,774 1,426,590
Gain on sale of investment in unconsolidated investee ( 164,234) -
Options issued for compensation - 743,750
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other 744 14,742
Increase in accounts payable and accrued expenses 59,296 23,151
---------- ----------
Total adjustments 1,332,192 3,847,817
---------- ----------
Net cash used in operating activities ( 598,599) ( 612,724)
---------- ----------
Cash flows from investing activities:
Sale of investment securities 59 -
Increase in notes and advances receivable,
unconsolidated investee ( 921,237) ( 1,182,784)
Sale of investment in unconsolidated investee 250,000 -
---------- ----------
Net cash used in investing activities ( 671,178) ( 1,182,784)
---------- ----------
Cash flows from financing activities:
Exercise of warrants, and common stock and warrants issued
for cash 930,125 1,255,950
Proceeds applied to preferred stock and
warrant purchase - 651,900
Proceeds from advance and note payable 89,500 50,000
Payment of advance and note payable ( 50,000) -
---------- ----------
Net cash provided by financing activities 969,625 1,957,850
---------- ----------
Net (decrease) increase in cash and cash equivalents ( 300,152) 162,342
Cash and cash equivalents, beginning 354,702 192,360
---------- ---------
Cash and cash equivalents, ending $ 54,550 354,702
========== =========
(Continued)
See notes to consolidated financial statements.
F-7
VYTA CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended June 30, 2007 and 2006
Continued
2008 2007
---------- ---------
Supplemental disclosure of non-cash investing and financing activities:
Advances, related party converted to preferred stock - $ 100,000
=========
Issuance of common stock for payment of note payable - 50,000
=========
See notes to consolidated financial statements.
F-8
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
1. BASIS OF PRESENTATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of Vyta
Corp, a Nevada corporation, its wholly-owned subsidiaries, NanoPierce Connection
Systems, Inc., a Nevada corporation (NCOS), and ExypnoTech, LLC (ET LLC), a
Colorado limited liability company (collectively referred to as the "Company").
The Company has two investments which are accounted for using the equity method
of accounting. These equity method investments consist of BioAgra, LLC (BioAgra)
and through December 27, 2007, ExypnoTech, GmbH (EPT) (Note 4). All significant
intercompany accounts and transactions have been eliminated in consolidation.
BUSINESS:
NCOS and ET LLC had no revenues or business activities of its own in 2008 and
2007. The Company has two unconsolidated investees which are accounted for using
the equity method of accounting, ExypnoTech, GmbH (EPT), and BioAgra, LLC
(BioAgra), which operate in two segments, the RFID industry and the animal feed
industry, respectively. EPT's activities primarily consist of manufacturing
inlay components used in, among other things, Smart Labels, which is a paper
sheet holding a chip-containing module that is capable of memory storage and/or
processing. BioAgra (a development stage enterprise) manufactures and plans to
sell a beta glucan product, Agrastim(R), to be used as a replacement for hormone
growth steroids and antibiotics in products such as poultry feed.
On December 27, 2007, the Company sold its 49% equity interest in EPT to
TagStar, GmbH (TagStar), the 51% equity interest owner of EPT, for cash of
$250,000 (Note 4).
On September 15, 2008, the Company filed collection and foreclosure proceedings
against BioAgra in connection with the secured promissory notes it holds from
BioAgra (Notes 3 and 4).
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS:
The preparation of the 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 disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The fair values of the Company's cash and cash equivalents and accounts payable
approximate their carrying amounts due to the short maturities of these
instruments. The fair values of the notes and advances receivable from the
unconsolidated equity investee, the advances receivable from an officer of the
Company and advances payable, related party, are not subject to reasonable
estimation, based upon the related party nature of the underlying transactions.
F-9
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investments with an original maturity of
three months or less and money market instruments to be cash equivalents.
DEFERRED CONSULTING COSTS:
In June 2006, the Company entered into a one-year consulting services agreement
with two unrelated parties, in which the parties agreed to provide lobbying and
public relations services. Compensation consisted of 200,000 shares of the
Company's common stock with a market value of approximately $182,000 (based on a
closing market price of $0.91 per share at the date the transaction was entered
into) and a warrant to purchase 500,000 shares of the Company's common stock,
with an exercise price of $0.91 per share and a term of 3 years. The warrant was
valued at $283,000 using the Black-Scholes pricing model. The deferred cost was
amortized on a straight-line basis as earned over the one-year period from the
date of the agreement. During the year ended June 30, 2007, the value of the
shares and warrant was amortized in full, and the Company recognized the
remaining expense of $436,197.
AVAILABLE FOR SALE SECURITIES:
Available for sale securities consist of 1,180 shares of common stock of
Intercell International Corporation (Intercell). These securities were carried
at no value, which was their estimated fair value based upon the absence of
quoted market prices or any other objective basis for estimation. During the
year ended June 30, 2008, the Company sold all of the 1,180 shares of available
for sale securities for cash of $59.
NOTES AND ADVANCES RECEIVABLE
Notes and advances receivable consist of promissory notes and advances made to
the Company's unconsolidated investee, BioAgra. Notes and advances receivable
are recorded net of an allowance for uncollectible receivables. Allowances for
estimated losses from uncollectible loans are recorded when it is probable that
the counterparty (BioAgra) will be unable to pay all amounts due according to
the terms of the promissory notes and advances receivable.
The Company stops accruing interest on a loan when the borrower's ability to
meet contractual payments is in doubt. For notes which are on nonaccrual status,
it is the Company's policy to reverse interest previously accrued on the loan
against interest income. Interest on such loans is thereafter recorded on a cash
basis and is included in earnings only when actually received in cash and when
full payment of principal is no longer doubtful.
A receivable is considered impaired when it is probable that all amounts will
not be collected as they become due according to the terms of the loan.
Generally, impaired loans are accounted for on a nonaccrual basis. The extent of
impairment is measured based upon a comparison of the recorded investment in the
loan with either the expected cash flows discounted using the loan's original
effective interest rate or the fair value of the underlying collateral if the
loan is collateral dependent.
EQUITY METHOD INVESTMENTS:
Investee entities in which the Company can exercise significant influence, but
not control, are accounted for under the equity method of accounting. Whether
the Company exercises significant influence with respect to an investee depends
on an evaluation of several factors including, among others, representation on
F-10
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
the company's board of directors and ownership level, generally 20% to 50%
interest in the voting securities of the company including voting rights
associated with the Company's holdings in common, preferred and other
convertible instruments in the company. Under the equity method of accounting,
the Company's share of the earnings or losses of these companies is included in
the equity income (loss) section of the consolidated statements of operations.
A loss in value of an investment that is other than a temporary decline is
recognized as a charge to operations. Evidence of a loss in value might include,
but would not necessarily be limited to, absence of an ability to recover the
carrying amount of the investment or inability of the investee to sustain an
earnings capacity that would justify the carrying amount of the investment.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. Depreciation expense is provided by
use of accelerated and straight-line methods over the estimated useful lives of
the assets, which range from five to seven years.
INCOME TAXES
On July 1, 2007, the Company adopted Financial Accounting Standards Board
("FASB") Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES, AN
INTERPRETATION OF FASB STATEMENT 109 ("FIN 48"). Based on management's
evaluation, the Company did not have any unrecognized tax benefits, and there
was no effect on the Company's opening deficit, current operations or cash
flows, or its net operating loss carryforwards and related deferred tax
valuation allowance as a result of implementing FIN 48. The Company is no longer
subject to tax examinations for years before 2006. The Company will recognize
any tax-related interest and penalties as a component of income tax expense.
LEGAL DEFENSE COSTS:
The Company does not accrue for estimated future legal and related defense
costs, if any, to be incurred in connection with outstanding or threatened
litigation and other disputed matters (Note 7), but rather records such as
period costs when the services are rendered.
STOCK-BASED COMPENSATION:
Beginning July 1, 2006, the Company adopted the provisions of and accounts for
stock-based compensation in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 123 - revised 2004 ("SFAS 123R"), SHARE-BASED PAYMENT.
Under the fair value recognition provisions of this statement, stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. The Company elected the
modified-prospective method, under which prior periods were not revised for
comparative purposes. The valuation provisions of SFAS 123R apply to new grants
and to grants that were outstanding as of the effective date and are
subsequently modified. All options granted prior to the adoption of SFAS 123R
and outstanding during the periods presented were fully-vested. The Company did
not grant any options during the year ended June 30, 2008. The Company granted
2,350,000 options during the year ended June 30, 2007 (Note 6). As a result of
the adoption of SFAS No. 123R, the net loss for the year ended June 30, 2007
increased by $743,750 ($0.03 per share).
F-11
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
The Company used the following assumptions to determine the fair value of stock
option grants during the year ended June 30, 2007, (and did not grant any
options during the year ended June 30, 2008):
Expected term 5 years
Volatility 172% - 183%
Risk-free interest rate 4.82% - 4.94%
Dividend yield 0
The expected term of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected term of the related stock options. The
dividend yield represents our anticipated cash dividend over the expected term
of the stock options.
FOREIGN CURRENCY TRANSLATION:
The financial statements of the Company's foreign equity investment (EPT) were
measured using the local currency (the Euro) as the functional currency. Assets
and liabilities of EPT were translated at exchange rates as of the balance sheet
date. Revenues and expenses were translated at average rates of exchange in
effect during the period. The resulting cumulative translation adjustments have
been recorded as a component of comprehensive income (loss), included as a
separate item in shareholders' equity.
LOSS PER SHARE:
Basic loss per share of common stock is computed based on the average number of
common shares outstanding during the year. Stock options and warrants are not
considered in the calculation, as the impact of the potential common shares
(14,754,844 shares at June 30, 2008 and 14,859,844 shares at June 30, 2007)
would be to decrease loss per share (anti-dilutive). Therefore, diluted loss per
share is not presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In December 2007, the FASB issued SFAS No. 141 (Revised 2007), BUSINESS
COMBINATIONS, ("SFAS No. 141R"). SFAS No. 141R will change the accounting for
business combinations. Under SFAS No. 141R, an acquiring entity will be required
to recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS No. 141R will also
change the accounting treatment and disclosure for certain specific items in a
business combination. SFAS No. 141R applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008.
Accordingly, any business combinations the Company engages in will be recorded
and disclosed following existing GAAP until July 1, 2009. The Company's
management expects SFAS No. 141R will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.
In December 2007, the FASB issued SFAS No. 160, NONCONTROLLING INTERESTS IN
CONSOLIDATED FINANCIAL STATEMENTS--AN AMENDMENT OF ARB NO. 51, OR SFAS NO. 160.
SFAS No. 160 establishes new accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after
F-12
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
December 15, 2008. Management believes that SFAS 160 will not have a material
impact on the Company's financial position or results of operations.
In May 2008, the FASB issued SFAS No. 162, "THE HIERARCHY OF GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES" (SFAS 162). SFAS 162 identifies the sources of accounting
principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (the GAAP
hierarchy). SFAS 162 will become effective 60 days following the SEC's approval
of the Public Company Accounting Oversight Board amendments to AU Section 411,
"The Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles." The Company does not expect the adoption of SFAS 162 to have a
material effect on its results of operations and financial condition.
In May 2008, the FASB issued FASB Staff Position (FSP) No. APB 14-1 "ACCOUNTING
FOR CONVERTIBLE DEBT INSTRUMENTS THAT MAY BE SETTLED IN CASH UPON CONVERSION
(INCLUDING PARTIAL CASH SETTLEMENT)" (FSP APB 14-1). FSP APB 14-1 requires the
issuer of certain convertible debt instruments that may be settled in cash (or
other assets) on conversion to separately account for the liability (debt) and
equity (conversion option) components of the instrument in a manner that
reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is
effective for fiscal years beginning after December 15, 2008 on a retroactive
basis and will be adopted by the Company in the first quarter of fiscal year
2009. The Company does not expect the adoption of FSP APB 14-1 to have a
material effect on its results of operations and financial condition.
2. GOING CONCERN UNCERTAINTY AND MANAGEMENT'S PLANS:
The Company's financial statements for the year ended June 30, 2008 have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of
business. The Company reported a net loss of $1,930,971 (net loss applicable to
common shareholders of $1,970,901) for the year ended June 30, 2008, and an
accumulated deficit of $32,428,472 as of June 30, 2008. The Company had negative
working capital of $323,697 at year end and the Company had no revenues from its
activities during the year ended June 30, 2008.
The Company's ability to continue as a going concern may be dependent on the
success of management's plan discussed below. The financial statements do not
include any adjustments relating to the recoverability and classification of
assets or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
During the 2009 fiscal year, the Company intends to continue its efforts in
connection with the Agristim product (Note 4) with the continuing development of
its sales, nationally and internationally in other animal feed markets, such as
the equine and the swine markets. Management intends to continue to raise funds
to support the efforts through the sale of its equity securities.
To the extent the Company's operations are not sufficient to fund the Company's
capital requirements, the Company may attempt to enter into a revolving loan
agreement with financial institutions or attempt to raise capital through the
sale of additional capital stock or through the issuance of debt. At the present
time, the Company does not have a revolving loan agreement with any financial
institution nor can the Company provide any assurance that it will be able to
enter into any such agreement in the future, particularly in light of current
economic conditions, or be able to raise funds through the further issuance of
debt or equity in the Company.
In addition, the United States is experiencing severe instability in the
commercial and investment banking systems which is likely to continue to have
far-reaching effects on the economic activity in the country for an
indeterminable period. The long-term impact on the United States economy and the
Company's operating activities and ability to raise capital cannot be predicted
at this time, but may be substantial.
F-13
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
3. NOTES AND ADVANCES RECEIVABLE - UNCONSOLIDATED INVESTEE:
During the year ended June 30, 2006, the Company loaned $1,686,570 to BioAgra
through a series of secured, 7.5% promissory notes, which were due over the
period from June 30 through October 31, 2006. On June 26, 2006, the Company
agreed to combine all of the promissory notes and accrued interest of $40,257
into a $1,726,827 secured, 7.5% promissory note with payments to be made monthly
starting October 31, 2006, through October 31, 2007. The funds were loaned to
facilitate BioAgra's completion of its first production line and to support
operations. The promissory note is collateralized by all BioAgra assets.
Additionally, the promissory note is to be paid in full prior to any
distributions being made to the members of the joint venture. During the year
ended June 30, 2007, the note was reduced by $1,371,269, which represents the
excess of the BioAgra losses recognized by the Company over the adjusted basis
of the Company's equity investment in BioAgra.
During the year ended June 30, 2007, the Company advanced an additional
$1,182,784 to BioAgra. In October 2007, the Company executed a second, 7.5%
promissory note for $1,182,784 with BioAgra with the same terms as the note
above, but the note did not provide for scheduled payments.
During the year ended June 30, 2007, the Company made a decision to provide for
a loss on the value of the note receivable. This decision was based on factors
including the Company's evaluation of past and current operating results,
failure of BioAgra to make scheduled payments and the Company's continuing
support of the development stage activities of BioAgra. The Company also
considered the estimated fair value of BioAgra's assets and liabilities in
making the decision. As a result of this decision, the Company recorded a
provision for loss of $1,198,000 in the quarter ended June 30, 2007.
During the year ended June 30, 2008, the Company advanced an additional $921,237
to BioAgra at 7.5% interest. On March 31, 2008, the Company executed a third,
7.5% promissory note for $486,939 with BioAgra with the same terms as the note
above, but did not provide for scheduled payments. On July 14, 2008, BioAgra
executed a fourth 7.5% promissory note for $195,164, with BioAgra with the same
terms as above, but the note did not provide for scheduled payments.
The Company is not accruing interest on these notes receivable, as they are
currently in default and non-performing.
The notes and advances receivable were reduced to $0 at June 30, 2008 by
applying the losses of BioAgra (Note 4). The losses of BioAgra for the year
ended June 30, 2008 were in excess of the carrying value of the notes by
$173,153. This amount has been recorded as a current liability by the Company,
as the Company was committed to provide further financial support to BioAgra as
of June 30, 2008.
4. INVESTMENTS IN UNCONSOLIDATED INVESTEES:
INVESTMENT IN EPT:
On December 27, 2007, the Company executed a Share Purchase Agreement with
TagStar, GmbH, the holder of the 51% equity interest in EPT, pursuant to which
the Company sold its 49% equity interest to TagStar for cash of $250,000. The
Company recorded a gain of $164,234 in connection with the sale of its equity
interest in EPT.
At December 27, 2007, the Company's investment in EPT was $217,649. The
Company's proportionate share of its net income was approximately $3,000 and
$43,800 for the years ended June 30, 2008 and 2007, respectively. The cumulative
translation adjustment was $121,543 and $131,883 at July 1, 2007 and December
F-14
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
27, 2007, respectively. On December 27, 2007, a $131,883 reduction to other
comprehensive income was recorded by the Company and recognized as a component
of the gain on the sale of EPT. Summarized financial information of EPT for the
period from July 1, 2007 through December 27, 2007, and the year ended June 30,
2007 is as follows:
PERIOD FROM
JULY 1, 2007
THROUGH YEAR ENDED
DECEMBER 27, 2007 JUNE 30, 2007
-------------------- -------------------
Revenues(1) $ 2,158,689 $ 3,714,845
Expenses(2) ( 2,152,831) ( 3,625,463)
-------------------- -------------------
Net income $ 5,858 $ 89,382
===================== ===================
(1) Revenues include $2,155,669 and $1,842,199 for the period from
July 1, 2007 through December 27, 2007 and the year ended June
30, 2007, respectively, of sales to the 51% owner of EPT.
(2) Expenses include $211,508 and $229,754 for the period from
July 1, 2007 through December 27, 2007 and the year ended June
30, 2007, respectively, of charges paid to the 51% owner of
EPT.
INVESTMENT IN BIOAGRA
The Company has a 50% equity interest in the joint venture, BioAgra, which
manufactures and sells a beta glucan product, YBG-2000 also known as
AgraStim(TM), which can be used as a replacement for hormone growth steroids and
antibiotics in animal feed products such as poultry feed. As of June 30, 2008,
BioAgra (a development stage company) has completed construction of a production
line; however BioAgra has not yet recognized any significant revenues from
product sales. At each reporting period, management makes an assessment to
determine if the investment in BioAgra represents a variable interest entity
subject to consolidation. Through June 30, 2008, management has determined that
BioAgra was not subject to consolidation.
On September 15, 2008, the Company filed collection and foreclosure proceedings
against BioAgra in the City and County Court of Denver, Colorado. The collection
and foreclosure proceedings are directly related to principal and accrued
interest of approximately $4 million in loans advanced to BioAgra, including the
$3,963,982 loaned through a series of secured promissory notes, and an
additional $37,788 for advances not represented by a promissory note.
Upon the successful conclusion of the litigation, the Company intends to become
the sole holder of the assets of BioAgra and plans to continue the operations of
BioAgra, and the manufacturing and marketing of the AgraStrim product.
The terms of the joint venture provide for the Company to share in 50% of joint
venture net income, if any, or net losses. The Company is accounting for its
investment in BioAgra as an equity method investment. Net losses incurred by
BioAgra have exceeded the underlying equity attributed to BioAgra's other joint
venture investor. As a result, the excess of the losses attributable to the
other joint venture investor have been charged to the Company. Since September
30, 2006 and through June 30, 2008, the carrying value of the Company's
investment in BioAgra was $0. BioAgra losses for the years ended June 30, 2008
F-15
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
and 2007 were $1,434,742 and $1,478,585, respectively. Losses of $1,261,589 and
$1,371,269, respectively, were applied to reduce the value of the notes
receivable from BioAgra.
Summarized financial information of BioAgra as of June 30, 2008 and for the
years ended June 30, 2008 and 2007, is as follows:
Assets:
Current assets $ 113,069
Land, building and equipment, net(2) 1,229,019
--------------------
Total assets $ 1,342,088
====================
Liabilities and members' deficiency:
Current liabilities(1) $ 4,424,757
Obligation under capital lease(2) 909,796
--------------------
Total liabilities 5,334,553
Members' deficiency ( 3,992,465)
--------------------
Total liabilities and members'
deficiency $ 1,342,088
====================
(1) Includes $3,830,850 owed to the Company. The Company has
classified this amount as notes receivable in non-current
assets on the balance sheet and is not accruing interest on
these notes receivable, as they are currently in default and
non-performing. The notes and advances receivable on the
Company's balance sheet were reduced to $0 at June 30, 2008 by
applying the losses of BioAgra.
(2) BioAgra leases land and a building under a ten-year lease
expiring in February 2015, which requires a monthly lease
payment of $12,000.
YEAR ENDED YEAR ENDED
JUNE 30, 2008 JUNE 30, 2007
----------------- -------------------
Revenues $ 114,545 $ 68,754
Expenses (1,549,287) (1,547,339)
----------------- -------------------
Net loss $ (1,434,742) $ (1,478,585)
================= ====================
5. ADVANCES PAYABLE, RELATED PARTY
At June 30, 2008, the Company owes its majority shareholder $39,500 for
advances. This amount is unsecured, non-interest bearing and is due on demand.
In September 2008, the Company made a payment of $5,000 against the advances
payable.
F-16
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
6. SHAREHOLDERS' EQUITY DEFICIENCY:
PREFERRED STOCK:
In February 2007, the Company sold 500,000 shares of Series A nonconvertible
preferred stock for $500,000 cash to Arizcan Properties, Ltd. (Arizcan), the
majority shareholder of the Company. Arizcan had advanced the funds to the
Company, prior to the issuance of the shares. The shares provide that when
voting as a single class, the shares have the votes and the voting power that at
all times is greater by 1% than the combined votes and voting power of all other
classes of securities entitled to vote on any matter. As a result of the
issuance, Arizcan acquired approximately 51% of the voting power of the Company.
The Company has a right, solely at the Company's discretion, to redeem the
shares in 2017 at 130% of deemed par value.
The holder of the Series A is entitled to a dividend equal to 8% per annum of
the deemed par value ($1.00 per share). Accumulated dividends for the period
from Series A issuance (February 2007) through June 30, 2008, were $53,260
($40,110 and $13,150 during the years ended June 30, 2008 and 2007,
respectively) which have been recorded as an increase to net loss per common
shareholder. Also, the holder is entitled to a liquidation preference of the
deemed par value for each outstanding share and any accrued but unpaid dividends
upon the liquidation of the Company.
COMMON STOCK:
2008 FISCAL YEAR
Between July 1, 2007 and June 30, 2008, the Company issued an aggregate of
6,168,333 shares of its restricted common stock to Arizcan Properties for
$930,125 cash. The shares were sold for $0.15 per share (based upon an
approximate 55% discount from the closing market price at the time of sale,
ranging from $0.39-$0.40 per share on the dates of the transactions).
2007 FISCAL YEAR
Between March and June 2007, the Company issued an aggregate of 8,373,000 shares
of its restricted common stock to Arizcan Properties for cash proceeds of
$1,255,950. The shares were sold for $0.15 per share (based upon an approximate
38% discount from the closing market price, ranging from $0.37-$0.46 per share
on the dates of the transactions).
In June 2007, the Company issued 333,333 shares of its restricted common stock
to a non-related party shareholder as payment on a $50,000 promissory note. The
shares were issued for $0.15 per share, based on the cash proceeds per share in
the transactions noted above.
STOCK OPTIONS:
The Company has two stock option plans which permit the grant of shares to
attract, retain and motivate employees, directors and consultants of up to
2,863,000 shares of common stock. Options are generally granted with an exercise
price equal to the Company's market price of its common stock on the date of the
grant and with vesting rates, as determined by the Board of Directors. All
options outstanding at July 1, 2007 and June 30, 2008 are fully-vested and
exercisable. The aggregate intrinsic value of outstanding fully-vested options
as of June 30, 2008 was approximately $155.
F-17
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
The Company did not grant any options during the year ended June 30, 2008.
During the year ended June 30, 2007, the Company granted 2,350,000 stock options
to an officer, directors and an employee at an exercise prices ranging from
$0.32 to $0.41 per share. The fair value of stock options at the date of grant
was $743,750 and was recorded as compensation expense.
The expected term of stock options represents the period of time that the stock
options granted are expected to be outstanding based on historical exercise
trends. The expected volatility is based on the historical price volatility of
the Company's common stock. The risk-free interest rate represents the U.S.
Treasury bill rate for the expected term of the related stock options. The
dividend yield represents our anticipated cash dividend over the expected term
of the stock options.
A summary of the stock option activity for the year ended June 30, 2008 is as
follows:
Weighted Weighted Average
Average Remaining
Shares Under Option Exercise Price Contractual Life
-------------------- ----------------- -------------------
Outstanding at July 1, 2007 2,748,127 $ 3.00 3.89 years
Granted - - -
Exercised - - -
Expired (105,000) ( 6.50) -
-------------------- ----------------- -------------------
Outstanding at June 30, 2008 2,643,127 $ 3.00 2.86 years
==================== ================= ===================
Exercisable at June 30, 2008 2,643,127 $ 3.00 2.86 years
==================== ================= ===================
A summary of the stock option plans at June 30, 2008 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- -----------------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER OF REMAINING CONTRACTUAL WEIGHTED-AVERAGE NUMBER OF WEIGHTED-AVERAGE
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISE PRICE OPTIONS EXERCISE PRICE
-------------------- ------------- ------------------------- --------------------- ------------------- ---------------------
$ 0.32- 0.41 2,350,000 8.85 $ 0.33 2,350,000 $ 0.33
4.00- 10.00 57,750 0.06 6.25 57,750 6.25
10.20- 20.00 114,777 3.57 13.65 114,777 13.36
20.01- 40.00 43,000 2.77 30.39 43,000 30.39
40.20- 60.00 77,100 1.53 62.21 77,100 62.21
100.20-120.00 500 1.67 120.00 500 120.00
------------- ------------------------- --------------------- ------------------- ---------------------
2,643,127 2.86 $ 3.00 2,643,127 $ 3.00
============= ========================= ===================== =================== =====================
F-18
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
WARRANTS:
At June 30, 2008, the following warrants to purchase common stock were
outstanding:
NUMBER OF COMMON
SHARES COVERED BY WARRANTS EXERCISE PRICE EXPIRATION DATE
------------------------------ -------------- ----------------
22,500 12.00 January 2010
1,250,000 3.00 January 2009
92,500 1.00 January 2009
4,246,717 1.00 February 2009
6,000,000 0.50 March 2012
500,000 0.91 June 2009
------------
12,111,717
============
FISCAL YEAR 2008:
During the year ended June 30, 2008, the Company did not issue or cancel any
warrants. During the year ended June 30, 2008, no warrants were exercised.
FISCAL YEAR 2007:
In February 2007, the Company sold to Arizcan, a warrant exercisable immediately
for up to 6,000,000 shares of restricted common stock for $251,900. The warrant
has an exercise price of $0.50 per share and provides for cashless exercise. The
warrant has a term of 5 years.
In January 2007, warrants to purchase 9,625 shares of common stock expired.
7. COMMITMENTS AND CONTINGENCIES
LITIGATION:
FINANCING AGREEMENT SUIT:
The Company is a plaintiff and counter-claim defendant in a suit pending in the
United States District Court for the Southern District of New York (the
"District Court"). In this suit, the Company filed claims for securities fraud,
common-law fraud, and breach of contract against the defendants. One defendant,
Harvest Court, LLC ("Harvest Court"), has counterclaimed for alleged violations
of the federal securities laws. In January 2008 the Court granted summary
judgment against the Company on all of its claims, which the Company intends to
appeal when the judgment becomes final. The Court also dismissed certain
counterclaims against the Company. The Company intends to vigorously defend
itself against the remaining claims. In a disclosure statement filed by Harvest
Court, it set forth a damage computation of approximately $4.1 million, as well
as other categories of damages, such as out-of-pocket, statutory, punitive, and
other for unspecified amounts.
F-19
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
Harvest Court has also sued the Company in New York state court (the "State
Court") for breach of contract relating to its failure to issue certain shares
of stock allegedly due under a pre-2007 financing agreement. The Company has
counterclaimed in this case for fraud. The State Court issued an injunction
requiring the company to reserve and set aside a certain amount of stock, which
the Company has done. The Company intends to vigorously defend itself and
prosecute its counterclaims.
If management believes that a loss arising from these matters is probable and
can reasonably be estimated, the Company records the amount of the loss, or the
minimum estimated liability when the loss is estimated using a range, and no
point within the range is more probable than another. As additional information
becomes available, any potential liability related to these matters is assessed
and the estimates are revised, if necessary. Based on currently available
information, management does not believe that a loss from the matters described
above is probable, and therefore has not accrued for any asserted damages.
Management believes that the ultimate outcome of these matters, individually and
in the aggregate, will not have a material adverse effect on the Company's
financial position or overall trends in results of operations. However,
litigation is subject to inherent uncertainties, and an unfavorable ruling could
result in a material adverse impact on the financial position and results of
operations of the period in which the outcome is determined.
LEASES:
The Company has entered into certain facilities and equipment leases. The leases
are non-cancelable operating leases that expire through December 31, 2011.
Future minimum lease payments under these operating leases are as follows:
YEAR ENDING
JUNE 30, AMOUNT
------------ -----------
2009 $ 39,415
2010 40,618
2011 41,822
2012 10,531
-----------
$132,386
===========
Rental expense for all operation leases was $68,208 and $54,396 for the years
ended June 30, 2008 and 2007, respectively.
8. INCOME TAXES:
As of June 30, 2008, the Company has net operating loss carryforwards of
approximately $15,823,000, which expire between 2013 and 2028. The Company's net
operating loss carry forwards may be subject to annual limitations, which could
reduce or defer the utilization of the losses as a result of an ownership change
as defined in Section 382 of the Internal Revenue Code.
The tax effects of temporary differences that would give rise to substantially
all deferred tax assets subject to the valuation allowance at June 30, 2008 are
as follows:
Deferred tax asset, non-current amount:
Net operating loss carryforwards $ 5,380,000
Losses in unconsolidated investees 488,000
------------
5,868,000
Less valuation allowance (5,868,000)
------------
Net deferred tax assets $ -
============
F-20
VYTA CORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007
The Company and its subsidiaries did not incur income tax expense for the years
ended June 30, 2008 and 2007. The reconciliation between income taxes computed
at the statutory federal tax rate of 34% and the effective tax rate for the
years ended June 30, 2008 and 2007 is as follows:
2008 2007
------------- -----------
Expected income tax benefit $ ( 656,000) (1,517,000)
Increase in valuation allowance 656,000 1,517,000
------------- -----------
$ - -
============= ===========
9. SUBSEQUENT EVENTS:
In July 2008, Arizcan Properties was issued 6,000,000 shares of the Company's
common stock in connection with the exercise of the warrant it held.
Between July 1, 2008 and September 30, 2008, the Company issued 1,495,000 shares
of its restricted common stock to Arizcan Properties for cash of $204,000.
F-21