##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended June 30, 2005
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from to
 Commission File Number: 33-7106-A
 NATURADE, INC.
  Delaware
(State or other jurisdiction of incorporation or
organization)
    
    23-2442709
(I. R. S. Employer Identification No.)
 14370 Myford Rd., Irvine, California 92606
  (714) 573-4800
  
 þ o
 o þ




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FORM 10-Q
 QUARTERLY REPORT
Quarter Ended June 30, 2005
 TABLE OF CONTENTS
 PAGEPART I. FINANCIAL INFORMATIONItem 1. Financial StatementsBalance Sheets as of June 30, 2005 (unaudited) and December 31, 2004 (audited)
    
    
    3Statements of Operations for the three and six months ended June 30, 2005
(unaudited) and June 30, 2004 (unaudited)
    
    
    4Statements of Cash Flows for the six months ended June 30, 2005 (unaudited) and June
30, 2004 (unaudited)
    
    
    5Notes to Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    28Item 4. Controls and Procedures
    
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    30Item 3. Defaults Upon Senior Equity Securities
    
    
    30Item 4. Submission of Matters to a Vote of Security Holders
    
    
    30Item 5. Other Information
    
    
    30Item 6. Exhibits
    
    
    31SIGNATURES
    
    
    32EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1




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##### Table of Contents



PART I. Financial Information
 
 ITEM 1. Financial Statements
 NATURADE, INC.
 
 Balance Sheets
As of June 30, 2005 and December 31, 2004
 June 30, 2005
    
    December 31, 2004(Unaudited)
    
    
    (Audited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    260,428
    
    
    $
    210,573Accounts receivable, net
    
    
    1,576,366
    
    
    
    2,186,431Inventories, net
    
    
    951,042
    
    
    
    1,598,685Prepaid expenses and other current assets
    
    
    313,965
    
    
    
    268,810Total current assets
    
    
    3,101,801
    
    
    
    4,264,499Property and equipment, net
    
    
    64,587
    
    
    
    94,890Other assets
    
    
    42,002
    
    
    
    42,002Total assets
    
    $
    3,208,390
    
    
    $
    4,401,391LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED
STOCK AND STOCKHOLDERS DEFICITCurrent liabilities:Accounts payable
    
    $
    2,608,775
    
    
    $
    2,666,425Accrued expenses
    
    
    595,635
    
    
    
    513,544Current portion of Notes Payable to Related Parties
    
    
    1,237,345
    
    
    
    1,067,954Revolving Credit Facility
    
    
    1,170,739
    
    
    
    1,875,897Total current liabilities
    
    
    5,612,494
    
    
    
    6,123,820Total Liabilities
    
    
    5,612,494
    
    
    
    6,123,820COMMITMENTS AND CONTINGENCIESREDEEMABLE CONVERTIBLE PREFERRED STOCKRedeemable convertible preferred stock, Series B
including accumulated preferred stock dividends of
$822,586 at June 30, 2005 and $686,578 at December
31, 2004, less discount of $1,000,001 at June 30,
2005, and $1,142,858 at December 31, 2004, par value
$0.0001 per share: authorized 50,000,000 shares;
issued and outstanding, 13,540,723 at June 30, 2005
and December 31, 2004 ($2,000,000 redemption value)
    
    
    1,587,984
    
    
    
    1,309,119STOCKHOLDERS DEFICIT:Common stock, par value $0.0001 per share;
authorized, 100,000,000 shares; issued and
outstanding, 44,533,886 at June 30, 2005 and
December 31, 2004
    
    
    4,453
    
    
    
    4,453Preferred stock, Series A, par value $0.0001 per
share; authorized, 2,000,000 shares; issued and
outstanding, 0 at June 30, 2005 and December 31,
2004
    
    
    0
    
    
    
    0Non-Voting Common stock, par value $0.0001 per
share; authorized, 2,000,000 shares; issued and
outstanding, 117,284 at June 30, 2005 and December
31, 2004
    
    
    12
    
    
    
    12Additional paid-in capital
    
    
    18,987,458
    
    
    
    18,987,458Accumulated deficit
    
    
    (22,984,011
    )
    
    
    (22,023,471
    )Total stockholders deficit
    
    
    (3,992,088
    )
    
    
    (3,031,548
    )Total liabilities, redeemable convertible
preferred stock and stockholders deficit
    
    $
    3,208,390
    
    
    $
    4,401,391
  3




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NATURADE, INC
 
 Statements of Operations for the Three Months and Six Months
 Ended June 30, 2005 and June 30, 2004
 Three Months
    
    Three Months
    
    Six Months
    
    Six MonthsEnded
    
    Ended
    
    Ended
    
    EndedJune 30, 2005
    
    June 30, 2004
    
    June 30, 2005
    
    June 30, 2004(Unaudited)
    
    (Unaudited)
    
    (Unaudited)
    
    (Unaudited)Net sales
    
    $
    2,761,811
    
    
    $
    3,343,906
    
    
    $
    5,675,342
    
    
    $
    6,896,530Cost of sales
    
    
    1,549,520
    
    
    
    1,845,053
    
    
    
    3,087,034
    
    
    
    3,788,668Gross profit
    
    
    1,212,291
    
    
    
    1,498,853
    
    
    
    2,588,308
    
    
    
    3,107,862Costs and expenses:Selling, general and administrative expenses
    
    
    1,476,538
    
    
    
    1,790,986
    
    
    
    3,068,951
    
    
    
    3,787,305Depreciation and amortization
    
    
    15,033
    
    
    
    17,577
    
    
    
    30,303
    
    
    
    35,478Total operating costs and expenses
    
    
    1,491,571
    
    
    
    1,808,563
    
    
    
    3,099,254
    
    
    
    3,822,783Operating loss
    
    
    (279,280
    )
    
    
    (309,710
    )
    
    
    (510,946
    )
    
    
    (714,921
    )Interest expense
    
    
    87,568
    
    
    
    77,277
    
    
    
    173,375
    
    
    
    144,198Other expense (income)
    
    
    (1,772
    )
    
    
    (1,423
    )
    
    
    (3,446
    )
    
    
    (5,088
    )Loss before provision for income taxes
    
    
    (365,076
    )
    
    
    (385,564
    )
    
    
    (680,875
    )
    
    
    (854,031
    )Provision for income taxes
    
    
    -0-
    
    
    
    800
    
    
    
    800
    
    
    
    800Net loss
    
    
    (365,076
    )
    
    
    (386,364
    )
    
    
    (681,675
    )
    
    
    (854,831
    )Less:Preferred stock dividend
    
    
    (68,844
    )
    
    
    (62,369
    )
    
    
    (136,008
    )
    
    
    (123,217
    )Deemed dividend
    
    
    (71,429
    )
    
    
    (71,428
    )
    
    
    (142,857
    )
    
    
    (142,857
    )Net loss applicable to common shares
    
    $
    (505,349
    )
    
    $
    (520,161
    )
    
    $
    (960,540
    )
    
    $
    (1,120,905
    )Basic and diluted loss per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )Weighted average number of shares used in
computation of basic and diluted loss per
share
    
    
    44,651,170
    
    
    
    44,533,886
    
    
    
    44,651,170
    
    
    
    44,533,886
  4




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##### Table of Contents



NATURADE, INC
 
 Statements of Cash Flows for the Six Months
Ended June 30, 2005 and June 30, 2004
 Six Months Ended
    
    Six Months EndedJune 30, 2005
    
    June 30, 2004(Unaudited)
    
    (Unaudited)Cash flows from operating activities:Net loss
    
    
    ($681,675
    )
    
    
    ($854,831
    )Adjustments to reconcile net loss to net cash
provided by operating activities:Depreciation and amortization
    
    
    30,303
    
    
    
    35,478Changes in assets and liabilities:Accounts receivable
    
    
    610,065
    
    
    
    1,011,030Inventories
    
    
    647,643
    
    
    
    (143,972
    )Prepaid expenses and other current assets
    
    
    (45,155
    )
    
    
    (126,097
    )Other assets
    
    
    0
    
    
    
    (12,000
    )Accounts payable and accrued expenses
    
    
    24,441
    
    
    
    463,174Net cash provided by operating activities:
    
    
    585,622
    
    
    
    372,782Cash flows from financing activities:Net borrowings under line of credit
    
    
    (705,158
    )
    
    
    (732,754
    )Proceeds from issuance of debt to related parties
    
    
    175,000
    
    
    
    300,000Payments of long-term debt
    
    
    (5,609
    )
    
    
    (65,743
    )Net cash used in financing activities:
    
    
    (535,767
    )
    
    
    (498,497
    )Net increase (decrease) in cash and cash equivalents
    
    
    49,855
    
    
    
    (125,715
    )Cash and cash equivalents, beginning of period
    
    
    210,573
    
    
    
    144,102Cash and cash equivalents, end of period
    
    $
    260,428
    
    
    $
    18,387Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:Interest
    
    $
    69,656
    
    
    $
    90,843Taxes
    
    $
    800
    
    
    $
    800Non-cash financing activities:Preferred stock dividend accrued
    
    $
    136,008
    
    
    $
    123,217Deemed dividend
    
    $
    142,857
    
    
    $
    142,857
  5




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##### Table of Contents



NATURADE, INC.
 
 Notes to Financial Statements
 1.
    
    Basis of Presentation The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial statements. The
preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.The results of operations for the interim periods shown in this report are not necessarily
indicative of results to be expected for the fiscal year. In the opinion of management, the
information contained herein includes all adjustments necessary for the fair presentation of the
financial statements. All such adjustments are of a normal recurring nature. These financial
statements do not include all disclosures associated with the Companys annual audited financial
statements included in the Companys Annual Report on Form 10-K and, accordingly, should be read
in conjunction with such statements.The Companys financial statements have been prepared based upon the assumption that the Company
will continue as a going concern. The Companys independent registered public accounting firm
has qualified their report on the Companys financial statements for the fiscal year ended
December 31, 2004 with a statement that substantial doubt exists as to the Companys ability to
continue as a going concern. The financial statements do not include any adjustments that might
result from a negative outcome of this uncertainty.2.
    
    Inventories Inventories are stated at the lower of weighted average cost or market.
Weighted average cost is determined on a first-in, first-out basis. Inventories at June 30,
2005 and December 31, 2004 consisted of the following:
 June 30, 2005
    
    December 31, 2004(Unaudited)
    
    (Audited)Raw Materials
    
    $
    216,017
    
    
    $
    203,610Finished Goods
    
    
    816,336
    
    
    
    1,476,386Subtotal
    
    
    1,032,353
    
    
    
    1,679,996Less: Reserve for Excess and Obsolete Inventories
    
    
    (81,311
    )
    
    
    (81,311
    )$
    951,042
    
    
    $
    1,598,685
 3.
    
    Leases The Company rents property and equipment under certain non-cancelable operating
leases expiring in various years through 2006. Future minimum commitments under operating
leases as of June 30, 2005 are as follows:
 Year
    
    Amount2005 (July-December)
    
    $
    241,1502006
    
    
    299,5882007
    
    
    15,320Total
    
    $
    556,028
 4.
    
    Loan Agreement with Majority Shareholders and Other Investors- In August 2000, the Company
entered into a Loan Agreement (the Investor Notes) with Health Holdings and Botanicals, LLC
( Health Holdings), a principal shareholder of the Company, and other investors (the Lender
Group). The Investor Notes allowed for advances (the Loan Advances) of up to $1.2 million
at an interest rate of 8% per annum with due dates of September 11, 2002 for $50,000 and
August 31, 2003 for the remaining balance outstanding.The Loan Agreement further provided that the Lender Group could elect to convert all or any part
of the Loan Advances into shares of the Companys Common Stock at a conversion price equal to
the lower of (a) the average closing bid of the Companys Common Stock for the ten trading days
prior to the making of a Loan
 6




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##### Table of Contents



5.
    
    Line of Credit- On January 27, 2000, the Company entered into a three year Credit and
Security Agreement (the Credit Agreement) with Wells Fargo Business Credit, Inc. (Wells
Fargo), which initially allowed for maximum borrowings of up to $3,000,000, based on certain
percentages of eligible accounts receivable and inventories as defined. In consideration of
the extension of credit under the Loan Agreement on April 14, 2003, Wells Fargo waived all
defaults of the Company as of December 31, 2002 under the Credit Agreement and amended the
agreement to, among other things, reduce the covenants regarding minimum net income and
minimum book net worth and increased the interest rate to the prime rate plus 4.5%. On
November 6, 2003, the terms of the Credit Agreement were modified to extend the maturity date
until March 31, 2004 and on March
 7




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6.
    
    Private Equity Transaction- On January 2, 2002, the Company privately sold 13,540,723 shares
of Series B Convertible Preferred Stock (the Shares) for $2 million, and warrants, which
expire on December 31, 2004, to purchase an additional 33,641,548 shares of Series B
Convertible Preferred Stock at an aggregate exercise price of $3.5 million (the Warrants),
for $500,000. The Shares and Warrants were purchased by Westgate Equity Partners, L.P.
(Westgate). The Series B Convertible Preferred Stock bears dividends at a rate of 10% per
annum, which will accumulate and compound semi-annually if not paid in cash. The Series B
Convertible Preferred Stock may be converted into Common Stock at any time at the option of
the holder. On the seventh anniversary of its issuance, any unconverted shares of Series B
Convertible Preferred Stock will be automatically redeemed by the Company at the original
issuance price plus accrued and unpaid dividends, provided the Company is legally able to do
so. Two members of the Board of Directors of the Company are elected exclusively by the
holders of the Series B Convertible Preferred Stock voting as a separate class.The Company had the right to redeem the Series B Convertible Preferred Stock at any time prior
to December 31, 2004 if the Company received a bona fide offer from a third party to invest
equity capital in the Company and the holders of the Series B Convertible Preferred Stock did
not make a counter offer satisfying certain price requirements. No bona fide offer was made and
the Company did not redeem the Series B Convertible Preferred Stock. The Series B Convertible
Preferred Stock has a beneficial conversion feature of $2,000,000, which was recorded as a
discount and is being amortized over seven years.As part of this transaction (the Private Equity Transaction), the Company entered into a
Management Services Agreement under which certain principals of Westgate or its affiliates will
provide management and consulting services to the Company.
 Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity.
   7.
    
    Stock-Based CompensationEmployee Stock Option Plan- In February 1998, the Company adopted an Incentive Stock Option
Plan (the Plan) to enable participating employees to acquire shares of the Companys Common
Stock. The Plan provided for the granting of incentive stock options up to an aggregate of
850,000 shares, as amended. In October 2001, the Company amended the Plan by increasing to
2,000,000 the number of shares of the
 8




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##### Table of Contents



Director Stock Options
 Warrants
  WeightedAverage
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    AverageNumber of
    
    Price per
    
    Number
    
    ExerciseShares
    
    Share
    
    Exercisable
    
    priceOutstanding at December 31, 2004
    
    
    1,631,000
    
    
    $
    0.19
    
    
    
    1,233,875
    
    
    $
    0.24Granted
    
    
    0
    
    
    $
    0Excercised
    
    
    0
    
    
    $
    0Expired
    
    
    3,500
    
    
    $
    0.025Outstanding at June 30, 2005
    
    
    1,627,500
    
    
    $
    0.18
    
    
    
    1,627,500
    
    
    $
    0.18
  Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Weighted
    
    
    
    
    
    AverageRemaining
    
    Average
    
    
    
    
    
    Exercise PriceRange of
    
    Options
    
    Contract Life
    
    Exercise
    
    Options
    
    for ExercisableExercise Prices
    
    Outstanding
    
    In Years
    
    Price
    
    Exercisable
    
    Options$0.025 - $0.08
    
    
    1,230,000
    
    
    
    6
    
    
    $
    0.04
    
    
    
    1,230,000
    
    
    $
    0.04$0.15 - $0.50
    
    
    170,000
    
    
    
    3
    
    
    $
    0.21
    
    
    
    170,000
    
    
    $
    0.21$0.75 - $1.13
    
    
    227,500
    
    
    
    1
    
    
    $
    0.91
    
    
    
    227,500
    
    
    $
    0.911,627,500
    
    
    
    4
    
    
    $
    0.18
    
    
    
    1,627,500
    
    
    $
    0.18
  WeightedAverage
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    AverageNumber of
    
    Price per
    
    Number
    
    ExerciseShares
    
    Share
    
    Exercisable
    
    priceOutstanding at December 31, 2004
    
    
    600,000
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00Granted
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Exercised
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Expired
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0Outstanding at June 30, 2005
    
    
    600,000
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00
  Weighted
    
    
    
    
    
    
    
    
    
    WeightedAverage
    
    Weighted
    
    
    
    
    
    AverageRemaining
    
    Average
    
    
    
    
    
    Exercise PriceWarrants
    
    Contract Life
    
    Exercise
    
    Warrants
    
    for ExercisableRange of Exercise Prices
    
    Outstanding
    
    In Years
    
    Price
    
    Exercisable
    
    Warrants$1.00
    
    
    600,000
    
    
    
    5
    
    
    $
    1.00
    
    
    
    600,000
    
    
    $
    1.00
 9




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Accounting for Stock Based Compensation Accounting for Stock Issued to
Employees
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,
    
    June 30,
    
    June 30,2005
    
    2004
    
    2005
    
    2004Net loss: As reported
    
    $
    (365,076
    )
    
    $
    (386,364
    )
    
    $
    (681,675
    )
    
    $
    (854,831
    )Add: Stock-based employee
compensation expense included in
reported net lossDeduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards
    
    
    (599
    )
    
    
    (280
    )
    
    
    (1,198
    )
    
    
    (560
    )Pro forma
    
    $
    (365,675
    )
    
    $
    (386,644
    )
    
    $
    (682,873
    )
    
    $
    (855,391
    )Basic and Diluted net loss per share:As reported
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )Pro forma
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 8.
    
    Segment Reporting- Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the Companys chief
decision-maker, or decision-making group, in deciding how to allocate resources and in
assessing performance.
   Distribution ChannelsHealth Food
    
    Mass Market
    
    TotalThree months ended June 30, 2005Sales
    
    $
    1,328,956
    
    
    $
    1,432,855
    
    
    $
    2,761,811Cost of sales
    
    
    707,697
    
    
    
    841,823
    
    
    
    1,549,520Gross profit
    
    $
    621,259
    
    
    $
    591,032
    
    
    $
    1,212,291Three months ended June 30, 2004Sales
    
    $
    1,831,140
    
    
    $
    1,512,766
    
    
    $
    3,343,906Cost of sales
    
    
    1,044,872
    
    
    
    800,181
    
    
    
    1,845,053Gross profit
    
    $
    786,268
    
    
    $
    712,585
    
    
    $
    1,498,853Six months ended June 30, 2005Sales
    
    $
    2,868,758
    
    
    $
    2,806,584
    
    
    $
    5,675,342Cost of sales
    
    
    1,499,975
    
    
    
    1,587,059
    
    
    
    3,087,034Gross profit
    
    $
    1,368,783
    
    
    $
    1,219,525
    
    
    $
    2,588,308Six months ended June 30, 2004Sales
    
    $
    3,768,343
    
    
    $
    3,128,187
    
    
    $
    6,896,530Cost of sales
    
    
    2,106,255
    
    
    
    1,682,413
    
    
    
    3,788,668Gross profit
    
    $
    1,662,088
    
    
    $
    712,585
    
    
    $
    3,107,862
 10




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United States
    
    International
    
    TotalThree months ended June 30, 2005Sales
    
    $
    2,722,719
    
    
    $
    39,092
    
    
    $
    2,761,811Cost of sales
    
    
    1,528,632
    
    
    
    20,888
    
    
    
    1,549,520Gross profit
    
    $
    1,194,087
    
    
    $
    18,204
    
    
    $
    1,212,291Three months ended June 30, 2004Sales
    
    $
    3,282,367
    
    
    $
    61,539
    
    
    $
    3,343,906Cost of sales
    
    
    1,807,222
    
    
    
    37,831
    
    
    
    1,845,053Gross profit
    
    $
    1,475,145
    
    
    $
    23,708
    
    
    $
    1,498,853Six months ended June 30, 2005Sales
    
    $
    5,595,552
    
    
    $
    79,790
    
    
    $
    5,675,342Cost of sales
    
    
    3,041,925
    
    
    
    45,108
    
    
    
    3,087,034Gross profit
    
    $
    2,553,627
    
    
    $
    34,681
    
    
    $
    2,588,308Six months ended June 30, 2004Sales
    
    $
    6,649,189
    
    
    $
    247,341
    
    
    $
    6,896,530Cost of sales
    
    
    3,651,426
    
    
    
    137,242
    
    
    
    3,788,688Gross profit
    
    $
    2,997,763
    
    
    $
    100,759
    
    
    $
    3,107,862
  Major Customer Table
 Customer One
    
    Customer Two
    
    Customer ThreeAccounts
    
    
    
    
    
    Accounts
    
    
    
    
    
    AccountsReceivable
    
    
    
    
    
    Receivable
    
    
    
    
    
    ReceivableBalance
    
    
    
    
    
    Balance
    
    
    
    
    
    BalanceSales
    
    Quarter-end
    
    Sales
    
    Quarter-end
    
    Sales
    
    Quarter-endThree Months
ended June 30, 2005
    
    $
    688,058
    
    
    $
    443,691
    
    
    $
    518,829
    
    
    $
    362,473
    
    
    $
    351,952
    
    
    $
    126,956Six Months ended
June 30, 2005
    
    $
    1,485,321
    
    
    $
    443,691
    
    
    $
    1,181,257
    
    
    $
    362,473
    
    
    $
    663,929
    
    
    $
    126,956Three Months ended
June 30, 2004
    
    $
    670,970
    
    
    $
    347,595
    
    
    $
    732,614
    
    
    $
    244,603
    
    
    $
    465,217
    
    
    $
    255,620Six Months ended
June 30, 2004
    
    $
    1,365,700
    
    
    $
    347,595
    
    
    $
    1,507,700
    
    
    $
    244,603
    
    
    $
    887,200
    
    
    $
    255,620
 9.
    
    Guarantees-In November 2002, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation Number (FIN) 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, including Indirect Guarantees of Indebtedness of Others-an interpretation of FASB
Statements No.5,57 and /07 and rescission of FIN34. The following is a summary of the
Companys agreements that the Company has determined are within the scope of FIN 45.
  11




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##### Table of Contents



10. Subsequent Events 
 Master Investment Agreement
  
    
    Quincy will negotiate, and arrange the financing for, the acquisition by the Company
of selected assets of The Ageless Foundation, Inc. (Ageless), Symco, Inc. (Symco)
and Symbiotics, Inc. (Symbiotics);
    
    Quincy will remain a co-obligor on, and a principal of Quincy will personally
guarantee, the payment of a portion of the purchase price of each such acquisition;
    
    The Company will issue to Quincy (i) 30,972,345 shares of Common Stock, (ii)
warrants to purchase 14,000,000 shares of Common Stock (the Quincy Warrants), and
(iii) 4,200,000 shares of Series C Convertible Preferred Stock (the Series C) all in
consideration of Quincy negotiating, and arranging the financing for the Companys
acquisition of the selected assets of Ageless, Symco and Symbiotics and guaranteeing
the payment of a portion of the purchase price of each such transaction;
    
    HHB will surrender the 41,054,267 shares of Common Stock held by it for conversion
into (i) 12,600,000 shares of Series C and (ii) a warrant to purchase 10,000,000 shares
of Common Stock (the HHB Warrant);
    
    Westgate will surrender the 13,540,723 shares of Series B Convertible Preferred
Stock (the Series B) held by it, including any accrued and unpaid dividends, for
conversion into 4,200,000 shares of Series C;
    
    HHB, Stewart and Weil (the Noteholders) will extend the term of the Secured
Promissory Notes issued to them pursuant to that certain Loan Agreement dated April 23,
2003, from December 31, 2005 to December 31, 2006;
    
    The Company will grant to HHB, Westgate and Quincy certain registration rights with
respect to the Common Stock issuable upon conversion of the Series C or exercise of the
HHB Warrant or the Quincy Warrants; and
    
    Quincy will grant to HHB and Westgate certain co-sale rights.
  12




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##### Table of Contents



For each fiscal year, the holders of Series C will be entitled to receive a cash dividend equal
to 20% of the amount, if any, by which the Companys pre-tax profits for such year exceed $10
million, which dividend will be distributed within 120 days of the end of such fiscal year.The Company will have the right to require the conversion of all shares of Series C into Common
Stock at any time within ten days following a period of 20 consecutive trading days for which
the closing bid price of the Common Stock equals or exceeds $1.50 per share (as adjusted).Each holder of Series C will have the right, at such holders option, at any time after July 22,
2006, to convert any such shares initially into one share of Common stock at $1.00 per share.
The number of shares of Common Stock will be increased to protect the holder against dilution in
the event of a stock dividend, stock split, combination or reclassification or the issuance of
Common Stock at a price less tha $1.00 per share (as adjusted).On December 31, 2012, the Company will redeem the Series C for $1.00 per share (subject to
adjustment), plus accrued but unpaid dividends, provided the Company is then legally able to do
so.Before the transactions contemplated by the Master Investment Agreement:
 
    
    HHB owned 41,054,267 shares of Common Stock (or 92.2% of the outstanding Common Stock)
and warrants to purchase 600,000 shares of Non-Voting Common Stock, none of which are
outstanding. In addition, William B. Doyle, Jr. and Lionel P. Boissiere, each of whom is a
director of the Company, is a principal and a managing member of Doyle & Boissiere Fund I,
LLC, a controlling shareholder of HHB.
    
    Westgate owned 13,540,723 shares of Series B (or 100% of the outstanding Series B),
which was convertible into 13,540,723 shares of Common Stock. In addition, Jay W. Brown
and Robert V. Vitale, each of whom is a director of the Company, is a principal with
Westgate Group, LLC, the general partner of Westgate. Bill D. Stewart is the Chairman of
the Board and the Chief Executive Officer of the Company, and David A. Weil is a director
of the Company.
    
    The Company was indebted to HHB, Stewart and Weil in the amount of $1,075,000, $100,000,
and $75,000, respectively, under the Loan Agreement dated April 23, 2003.
 Laurus Master Fund, Ltd.
 On July 26, 2005, the Company entered into a Security and Purchase Agreement (the Agreement),
by and between the Company, and Laurus Master Fund, LTD (Laurus), pursuant to which:
 
    
    Laurus provided the Company a $4,000,000 convertible financing facility composed of a
$3,000,000 revolving facility and a $1,000,000 term facility. The Indebtedness under the
facility can be converted to the Companys Common Stock at $0.80 per share, subject to
mutually agreed upon amounts of the facility that may be converted from time to time and
subject to certain provisions regarding the maximum amount of Common Stock that can be held
by Laurus at any given time.
    
    Indebtedness under the revolving facility are based upon 35% of eligible inventory and
90% of eligible accounts receivable.
    
    The financing facility has a term of three years ending on July 26, 2008 and carries an
interest rate of prime plus 2% per annum (8.25% at July 28, 2005), subject to certain
reductions based upon growth of the Companys stock price.
    
    The term loan is guaranteed by Peter H. Pocklington, a principal of Quincy, and will be
repaid in 33 equal installments of $30,303 commencing November 1, 2005.
    
    The Company is subject to certain reporting covenants such as the timely filing of
financial reports with the Securities and Exchange Commission, monthly financial reporting
deadlines and collateral reporting.
    
    The loans are secured by all of the assets of the Company.
 13




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##### Table of Contents




    
    The Company used a portion of the proceeds of the facility to payoff its current bank
credit facility and will utilize the remainder for working capital and future acquisitions.
 In consideration for entering into the Agreement, the Company issued to Laurus, an option (the
Laurus Option) and a warrant (the Laurus Warrant) to purchase shares of the Companys Common
Stock (subject to certain provisions to protect against dilution). The Laurus Option entitles
the holder to purchase up to 8,721,375 shares of Common Stock, subject to certain limitations on
the amount of Common Stock held by Laurus, at a purchase price of $0.001 per share at any time
on or after July 26, 2005. The Laurus Warrant entitles the holder to purchase up to 1,500,000
shares of Common Stock at a purchase price of $0.80 per share at any time on or after July 26,
2005 through July 26, 2010. The exercise price of the Laurus Option and the Laurus Warrant may
be paid, at the option of Laurus, by the cancellation of indebtedness under the financing
facility. In conjunction with the Agreement, Health Holdings and Botanicals, LLP, Bill D.
Stewart and David A. Weil extended the term of the Secured Promissory Notes issued to them
pursuant to that certain Loan Agreement dated April 23, 2003, from December 31, 2005 to December
31, 2006.
 Acquisitions
 On July 22, 2005, Quincy, Symco and Symbiotics entered into an Asset Purchase Agreement (the
Symco/Symbiotics Agreement), pursuant to which Quincy has the right to acquire certain assets
relating to Symco and Symbiotics health-related products retail business. As consideration for
the assets, Quincy would (a) assume current accounts payable and the obligations under certain
contracts, (b) pay all outstanding amounts owed under certain credit facilities, (c) issue a
promissory note payable to Symco and Symbiotics in the principal amount of $2,000,000, (x) less
the amount necessary to repay the credit facilities, and (y) subject to a working capital
adjustment, (d) pay an additional $60,000 in cash fifteen (15) days after the closing date and
an additional $60,000 every thirty (30) days thereafter until the note is paid in full and (e)
for a three (3) year period following the closing date, Quincy would pay to Symco and Symbiotics
ten percent (10%) of the amount of the increase in contribution profit over a baseline amount
of $2,000,000 based on the sale of products for each 12 month period during the three year
period.On July 27, 2005, Quincy and Ageless entered into an Asset Purchase Agreement (the Ageless
Agreement), pursuant to which Quincy has the right to acquire certain assets relating to
Ageless health-related products retail business. As consideration for the assets, Quincy would
(a) assume current accounts payable, (b) assume an obligation to an employee of the company in
an amount equal to $600,000 and (c) issue a promissory note payable to Ageless in the principal
amount of $700,000, subject to a working capital adjustment.On July 28, 2005, pursuant to an Assignment and Assumption Agreement, Quincy assigned to the
Company all of its right, title and interest in and to the Symco/Symbiotics Agreement and the
Ageless Agreement, and the Company agreed to perform all of Quincys obligations under the
Symco/Symbiotics Agreement and the Ageless Agreement. In connection with these transactions,
the Company entered into consulting agreements with certain key employees of Symco/Symbiotics
and Ageless. In addition, the Company is a co-maker on each of the promissory notes described
above. Pursuant to the Consulting Agreement entered into by the Company and Naomi Balcombe
(Balcombe), the founder of Ageless, (i) for a three (3) year period following the closing
date, the Company shall pay to Balcombe ten percent (10%) of the amount of the increase in
contribution profit over a baseline amount of $900,000 based on the sale of products for each 12
month period during the three year period and (ii) issued to Ms. Balcombe 1,800,000 shares of
Common Stock. Pursuant to the Consulting Agreements entered into by the Company and Douglas
Wyatt, the founder of Symco and Symbiotics, and David W. Brown, the President of Symco and
Symbiotics, the Company issued to Messrs. Wyatt and Brown 2,850,000 shares and 150,000 shares,
respectively, of Common Stock.
  14




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##### Table of Contents



ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 This discussion contains forward-looking statements within the meaning of Section 27A of the
Securities Act of as amended, and Section 21E of the Securities Exchange Act of as
amended. Although the Company believes that the expectations reflected in such forward-looking
statements are reasonable, such statements are inherently subject to risk and the Company can give
no assurances that such expectations will prove to be correct. Such forward-looking statements
involve risks and uncertainties, and actual results could differ from those described herein.
Future results may be subject to numerous factors, many of which are beyond the control of the
Company. Such risk factors include, without limitation, the risks set forth below under Risk
Factors. The Company undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or circumstances after the date
hereof or to reflect the occurrence of unexpected events.
  General
 Nutrition Business Journal
  Major trends that affected the Companys results of operations in 2005
 
    
    The sale of the Aloe Vera brand in November 2004 resulted in the elimination of
approximately $497,790 and $911,923 in revenues for these products from the quarter and six
months ended June 30, 2005, respectively.
    
    The general softness in the grocery segment related to competition from Wal-Mart and club
stores moved consumers from historical purchasing patterns.
    
    The discontinuance of the ready-to-drink line resulted in a reduction of $106,770 and
$243,661 in sales for the quarter and six months ended June 30, 2005, respectively.
    
    The emergence and subsequent decline in consumer demand for low carbohydrate products
resulted in a modification of the Companys Naturade Total Soy line to a low carbohydrate
formula in late 2004 and the subsequent re-introduction of the Companys original formula in
May 2005. This resulted in restocking charges, product returns and revenue declines related
to conversion of retailer inventory back to the original formula.
 15




---



##### Table of Contents




    
    The removal of Vioxx® and Bextra® prescription arthritis medications by the Food and Drug
Administration resulted in consumer demand for natural pain relief products. The Company
took advantage of this demand with the introduction of the ReVivex® line of products into
approximately 20,000 retail outlets by June 30, 2005.
 Critical Accounting Policies and Use of Estimates
  Revenue Recognition. Revenue Recognition in Financial Statements,
 Inventory Valuation.
 Accounts Receivable and Allowances for Uncollectible Accounts.
 Results of Operations
  Percent of Net Sales
    
    Percentage Dollar Increase (Decrease)Six months Ended June 30,
    
    Six months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    (17.7
    %)
    
    
    (13.2
    %)Gross profit
    
    
    45.6
    %
    
    
    45.1
    %
    
    
    (16.7
    %)
    
    
    (14.3
    %)Selling, general and administrative expenses
    
    
    54.1
    %
    
    
    54.9
    %
    
    
    (19.0
    %)
    
    
    (3.9
    %)Operating loss
    
    
    (9.0
    %)
    
    
    (10.4
    %)
    
    
    (28.5
    %)
    
    
    (103.3
    %)Loss before provision for income taxes
    
    
    (12.0
    %)
    
    
    (12.4
    %)
    
    
    (20.3
    %)
    
    
    (100.7
    %)Provision for income taxes
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Net loss
    
    
    (12.0
    %)
    
    
    (12.4
    %)
    
    
    (20.3
    %)
    
    
    (100.5
    %)
 16




---



##### Table of Contents



Net Sales
  Mass Market Net Sales.
 Health Food Net Sales.
 Channels of Distribution
  17




---



##### Table of Contents



Gross Profit
  Operating Costs and Expenses
  Interest Expense
  Liquidity and Capital Resources
      18




---



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19




---



##### Table of Contents



Impact of Contractual Obligations and Commercial Commitments
  Payments Due by PeriodContractualObligations
    
    Total
    
    Less than 1 Year
    
    1-3 Years
    
    4-5 Years
    
    After 5 YearsLong-term debt
    
    $
    2,408,084
    
    
    $
    2,408,084
    
    
    $
    -0-
    
    
    $
    -0-
    
    
    $
    -0-Operating leases
    
    
    556,028
    
    
    
    241,150
    
    
    
    314,878
    
    
    
    -0-
    
    
    
    -0-Employment agreements
    
    
    1,777,500
    
    
    
    445,500
    
    
    
    666,000
    
    
    
    666,000
    
    
    
    (a
    )Consulting agreements (b)
    
    
    800,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    800,000
    
    
    
    -0-Total contractual cash obligations
    
    
    5,541,612
    
    
    
    3,094,734
    
    
    
    980,878
    
    
    
    1,466,000
    
    
    
    -0-Series B Convertible Redeemable
Preferred Stock
    
    
    2,000,000
    
    
    
    -0-
    
    
    
    -0-
    
    
    
    2,000,000
    
    
    
    -0-Total
    
    $
    7,541,612
    
    
    $
    3,094,734
    
    
    $
    980,878
    
    
    $
    3,466,000
    
    
    $
    -0-
 
 (a)
    
    Employment agreement for Chief Operating Officer/Chief Financial Officer and Executive Vice
President of Sales have indefinite terms.(b)
    
    The consulting agreements and Series B Convertible Redeemable Preferred Stock have been retired
pursuant to the reorganization of the Company on July 22, 2005. (See Note 10). New Accounting Pronouncements
 Accounting for
Stock-Based Compensation Accounting for Stock Issued to
Employees
  Inventory Costs
 20




---



##### Table of Contents



Exchanges of Nonmonetary Assets
 Accounting Changes and Error Correction
  Application of FASB Statement
No.109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
Provided by the American Jobs Creation Act of 2004
 Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004
 21




---



##### Table of Contents



Forward Looking Statements
  Risk Factors
  The Company may incur future losses which may affect its ability to continue as a going concern.
  The Companys success depends on current and ongoing financing.
   22




---



##### Table of Contents



The Companys revenues are dependant on the integration and continued revues of acquired
businesses.
  The Companys revenues are dependant on continued business from the Companys key customers.
  If the Companys third-party manufacturers raise prices or do not comply with FDA manufacturing
guidelines, the Companys profits may be affected.
  The Company is dependant upon third-party suppliers and manufacturers for its products.
   23




---



##### Table of Contents



requirements.
 Restrictions or requirements imposed by government regulation could result in material harm to the
Companys results of operations and financial condition.
    Naturade may not be able to identify suitable strategic partners to realize the Companys growth
strategy.
  24




---



##### Table of Contents



The Companys competitors may develop products that are more effective or less costly.
  Future sales of equity securities could dilute the Companys Common Stock..
  The Companys success depends on its ability to attract and retain qualified personnel.
  Expanding the Companys sales in the mass market resulted in less stable demand for the Companys
products.
  A limited number of shareholders have majority control over the Companys Common Stock.
    25




---



##### Table of Contents



The Companys future success depends on its ability to develop and commercialize products.
  The Company may face interruption of production and services due to increased security measures in
response to terrorism.
  The Company is subject to variability of quarterly results and, therefore, its results of
operations for any period may not be indicative of future periods.
  The Company may not have sufficient resources to address product liability exposure.
  26




---



##### Table of Contents



The dietary supplement industry as a whole is experiencing a decline in sales.
  Adverse publicity may affect the Companys ability to attract and retain distributors.
  The Company may not be able to protect its intellectual property which could enable other companies
to replicate its products.
   27




---



##### Table of Contents



New products are expensive to introduce and may not be successful.
  The Companys stock price may be subject to significant fluctuations.
  The Company may not be able to comply in a timely manner with Section 404 of the Sarbanes-Oxley Act
of 2002, which could harm the Companys operating results.
  
 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
   28




---



##### Table of Contents



ITEM 4. Controls and Procedure
    29




---



##### Table of Contents



PART II. Other Information
 
 ITEM 1. Legal Proceedings.
 NONE
 
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.  NONE
 
 ITEM 3. Defaults Upon Senior Equity Securities.
 NONE.
 
 ITEM 4. Submission of Matters to a Vote of Security Holders.
 NONE
 
 ITEM 5. Other Information.
 NONE
 30




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##### Table of Contents



ITEM 6. Exhibits
  Exhibit No.
    
    Description3.1
    
    Certificate of Incorporation of Naturade, Inc., together with
Amendments and Certificates of Designation relating thereto,
incorporated by reference to the Companys Annual Report on Form
10-K filed for fiscal 1997 and the exhibits and attachments
thereto.3.2
    
    Amended and Restated Bylaws of Naturade, Inc., as amended
December 7, 2001, incorporated by reference to Exhibit 3.6 to
the Companys Current Report on Form 8-K filed on January 3,
2002.3.3
    
    Certificate of Amendment to Certificate of Incorporation of
Naturade, Inc. dated December 20, 2001, incorporated by
reference to Exhibit 3.3 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.4
    
    Certificate of Amendment to Certificate of Incorporation of
Naturade, Inc., dated December 28, 2001, incorporated by
reference to Exhibit 3.4 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.5
    
    Certificate of Designation of
Series B Convertible Preferred Stock, dated December 20, 2001, incorporated by
reference to Exhibit 3.5 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.6
    
    Certificate of Designation of
Series C Convertible Preferred Stock, dated July 28, 2005, incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form
8-K filed on July 28, 2005.3.7
    
    Certificate of Elimination of
Series B Convertible Preferred Stock, dated July 28, 2005, incorporated by
reference to Exhibit 3.2 to the Companys Current Report on Form
8-K filed on July 28, 2005.31.1
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 31




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##### Table of Contents



SIGNATURES
  NATURADE, INC.(Registrant)DATE: August 15, 2005
    
    By
    
    /s/Bill D. StewartBill D. StewartChief Executive OfficerDATE: August 15, 2005
    
    By
    
    /s/Stephen M. KasprisinStephen M. KasprisinChief Financial Officer
 32




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description3.1
    
    Certificate of Incorporation of Naturade, Inc., together with
Amendments and Certificates of Designation relating thereto,
incorporated by reference to the Companys Annual Report on Form
10-K filed for fiscal 1997 and the exhibits and attachments
thereto.3.2
    
    Amended and Restated Bylaws of Naturade, Inc., as amended
December 7, 2001, incorporated by reference to Exhibit 3.6 to
the Companys Current Report on Form 8-K filed on January 3,
2002.3.3
    
    Certificate of Amendment to Certificate of Incorporation of
Naturade, Inc. dated December 20, 2001, incorporated by
reference to Exhibit 3.3 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.4
    
    Certificate of Amendment to Certificate of Incorporation of
Naturade, Inc., dated December 28, 2001, incorporated by
reference to Exhibit 3.4 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.5
    
    Certificate of Designation of
Series B Convertible Preferred Stock, dated December 20, 2001, incorporated by
reference to Exhibit 3.5 to the Companys Current Report on Form
8-K filed on January 3, 2002.3.6
    
    Certificate of Designation of
Series C Convertible Preferred Stock, dated July 28, 2005, incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form
8-K filed on July 28, 2005.3.7
    
    Certificate of Elimination of
Series B Convertible Preferred Stock, dated July 28, 2005, incorporated by
reference to Exhibit 3.2 to the Companys Current Report on Form
8-K filed on July 28, 2005.31.1
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification Pursuant to Rule 15d-14(a) of the Securities
Exchange Act of 1934, Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification Pursuant to 18 U.S.C. 1350, Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 33