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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2002
[ ] 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 0-14983
NUTRITION 21, INC.
------------------
(Exact Name of Registrant as Specified in its Charter)
New York 11-2653613
- -------------------------------------------- ------------------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
4 Manhattanville Road
Purchase, New York 10577-2197
- ----------------------------------------- -----------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including Area Code: (914) 701-4500
----------------------------
Securities registered pursuant to Section 12(b) of the Act:
None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock (par value $.005 per share)
---------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (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 ninety (90) days.
Yes X No
--------- -------
The number of shares outstanding of Registrant's Common Stock as of February 12,
2003: 33,602,990.
NUTRITION 21, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at December 31, 2002
and June 30, 2002 3
Consolidated Statements of Operations for the three
and six months ended December 31, 2002 and 2001 5
Consolidated Statement of Stockholders' Equity for
the six months ended December 31, 2002 6
Consolidated Statements of Cash Flows for the six
months ended December 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 15
ITEM 4 Controls and Procedures 15
PART II OTHER INFORMATION
------- -----------------
ITEM 1 Legal Proceedings 16
ITEM 2 Changes in Securities and Use of Proceeds 16
ITEM 5 Other Information 16
ITEM 6 Exhibits and Reports on Form 8-K 16
2
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, June 30,
2002 2002
---- ----
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $5,140 $3,974
Short-term investments 200 1,000
Accounts receivable (less allowance for doubtful accounts of $19
at December 31, 2002 and June 30, 2002, respectively) 1,616 2,219
Other receivables 299 1,097
Inventories 792 1,075
Prepaid expense and other current assets 1,108 788
----- ---
Total current assets 9,155 10,153
Property and equipment, net 599 654
Patents and trademarks (net of accumulated amortization of
$14,016 at December 31, 2002 and $12,721 at June 30, 2002) 15,997 17,073
Other assets 218 220
--- ---
TOTAL ASSETS $25,969 $28,100
======= =======
See accompanying notes to consolidated financial statements.
3
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
December 31, June 30,
2002 2002
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) (Note 1)
Current liabilities;
Accounts payable and accrued expenses $2,396 $2,102
Contingent payments payable 27 43
Preferred dividends payable 5 6
------ -----
Total current liabilities 2,428 2,151
TOTAL LIABILITIES 2,428 2,151
----- -----
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 5,000,000 shares
Series G convertible preferred, 1,769 shares issued: 188 shares and 471
shares outstanding at December 31, 2002 and June 30, 2002, respectively
(aggregate liquidation value - $193) 188 471
Common stock, $0.005 par value, authorized 65,000,000 shares;
33,838,990 shares issued at December 31, 2002 and 33,048,655
shares issued at June 30, 2002. 168 165
Additional paid-in capital 64,240 63,936
Accumulated deficit (40,895) (38,501)
Less treasury stock, at cost, 236,000 shares (160) (122)
------- -------
TOTAL STOCKHOLDERS' EQUITY $23,541 $25,949
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $25,969 $28,100
======= =======
See accompanying notes to consolidated financial statements.
4
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Ended Six Months Ended
December 31, December 31
2002 2001 2002 2001
---- ---- ---- ----
Net sales $2,284 $2,837 $5,523 $6,632
Other revenues 50 75 125 229
-- -- --- ---
REVENUES 2,334 2,912 5,648 6,861
Cost of goods sold 982 871 1,790 2,111
--- --- ----- -----
GROSS PROFIT 1,352 2,041 3,858 4,750
Research and development
expenses 611 225 840 410
Selling, general and administrative
expenses 2,255 1,776 4,022 3,458
Depreciation and amortization 766 665 1,397 1,321
--- --- ----- -----
OPERATING LOSS (2,280) (625) (2,401) (439)
Interest income 20 20 41 65
Interest expense 10 22 22 50
Other income, net -- -- -- 1,794
-- -- -- -----
(LOSS) INCOME BEFORE
INCOME TAXES (2,270) (627) (2,382) 1,370
Income tax (benefit) -- (252) -- 466
-- ----- -- ---
NET (LOSS) INCOME $(2,270) $(375) $ (2,382) $904
======== ====== ========= ====
Basic (loss) earnings per share $(0.07) $(0.02) $(0.07) $0.02
======= ======= ======= =====
Diluted (loss) earnings per share
$(0.07) $(0.02) $(0.07) $0.02
======= ======= ======= =====
Weighted average number of common
shares - basic 33,041,115 32,242,337 33,020,538 32,291,648
========== ========== ========== ==========
Weighted average number of common
shares and equivalents - diluted
33,041,115 32,242,337 33,020,538 32,308,400
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
5
NUTRITION 21, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Additional
Preferred Stock Paid-In Accumulated Treasury
Series G Common Stock Capital Deficit Stock Total
-------- ------------ ------- ------- ----- -----
Shares $ Shares $ $ $ $ $
------ - ------ - - - - -
Balance at June 30, 2002 471 $471 33,048,655 $165 $63,936 $(38,501) $ (122) $25,949
Preferred stock dividends declared -- -- -- -- -- (12) -- (12)
Issuance of warrants -- -- -- -- 24 -- -- 24
Conversion of Series G stock to
common stock (283) (283) 654,335 3 280 -- -- --
Repurchase of common stock for
treasury -- -- (100,000) -- -- -- (38) (38)
Net loss for the period -- -- -- -- -- (2,382) -- (2,382)
--- ---- ---------- ---- ------- -------- ------ -------
Balance at December 31, 2002 188 $188 33,602,990 $168 $64,240 $(40,895) $(160) $23,541
=== ==== ========== ==== ======= ========= ====== =======
See accompanying notes to consolidated financial statements.
6
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Six Months Ended
December 31,
2002 2001
---- ----
Cash flows from operating activities:
Net (loss) income $(2,382) $904
Adjustments to reconcile net (loss) income to net cash provided by operating
activities:
Depreciation and amortization 1,397 1,321
Gain on sale of assets - (40)
Issuance of warrants 24 --
Changes in operating assets and liabilities:
Accounts receivable 603 2,067
Other receivables 798 76
Inventories 283 125
Prepaid and other current assets (320) (36)
Other assets 2 4
Accounts payable and accrued expenses 293 (1,589)
--- -------
Net cash provided by operating activities 698 2,832
--- -----
Cash flows from investing activities:
Contingent payments for acquisitions (79) (1,512)
Purchases of property and equipment (46) (6)
Payments for patents and trademarks (157) (131)
Proceeds from sale of assets -- 100
Proceeds from investments 800 --
--- --
Net cash provided by (used in) investing activities 518 (1,549)
--- -------
Cash flows from financing activities:
Debt repayments -- (1,125)
Preferred stock dividends paid (12) (43)
Purchase of common stock for treasury (38) (122)
Redemption of redeemable preferred stock -- (345)
-- -----
Net cash used in financing activities (50) (1,635)
---- -------
Net increase (decrease) in cash and cash equivalents 1,166 (352)
Cash and cash equivalents at beginning of period 3,974 5,355
----- -----
Cash and cash equivalents at end of period $5,140 $5,003
====== ======
See accompanying notes to consolidated financial statements.
7
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 1 BASIS OF PRESENTATION
---------------------
The accompanying unaudited consolidated 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. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been
included. Operating results for the three-and six month periods ended
December 31, 2002 are not necessarily indicative of the results that
may be expected for the year ending June 30, 2003.
The balance sheet at June 30, 2002 has been derived from the audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended June 30, 2002.
Note 2 SIGNIFICANT ACCOUNTING PRONOUNCEMENTS
-------------------------------------
In October 2002, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The FASB's new rules on
asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and is effective for the Company's fiscal year beginning
July 1, 2002. For the three and six month periods ended December 31,
2002, there was no material impact as a result of the adoption of this
standard.
Note 3 INVENTORIES
-----------
The components of inventories at December 31, 2002 and June 30, 2002
were:
December 31, June 30,
2002 2002
---- ----
Raw materials $401 $444
Finished goods 391 631
--- ---
Total inventories $792 $1,075
==== ======
Note 4 REDEEMABLE PREFERRED STOCK
--------------------------
During the six month period ended December 31, 2002, 283 shares of the
Company's Series G Preferred Stock were converted into 654,335 shares
of the Company's common stock.
8
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 5 EARNINGS PER SHARE
------------------
The following table sets forth the computation of basic and diluted
earnings (loss) per share for the periods indicated.
Basic and diluted earnings (loss) per Three months ended Six months ended
share: December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Net (loss) income $(2,270) $(375) $(2,382) $904
Less: Dividends on preferred shares (5) (17) (11) (40)
Premium on redemption of
preferred stock -- (85) -- (115)
-- ---- -- -----
Net (loss) income available to common
stockholders $(2,275) $(477) $(2,393) $749
======== ====== ======== ====
Weighted average shares: 33,041,115 32,242,337 33,020,538 32,291,648
========== ========== ========== ==========
Basic (loss) earnings per share $(0.07) $(0.02) $(0.07) $0.02
======= ======= ======= =====
Diluted (loss) earnings per share
computation:
Net (loss) income available to common
stockholders $(2,275) $(477) $(2,393) $749
Add: Dividends on preferred stock -- -- -- --
-- -- -- --
Net (loss) income available to common
stockholders $(2,393) $(477) $(2,393) $749
======== ====== ======== ====
Weighted average shares: 33,041,115 32,242,337 33,020,538 32,291,648
Plus incremental shares from assumed
conversions:
Preferred stock -- -- -- --
Stock option plans -- -- -- 16,752
-- -- -- ------
Adjusted weighted average shares 33,041,115 32,242,337 33,020,638 32,308,400
========== ========== ========== ==========
Diluted (loss) earnings per share $(0.07) $(0.02) $(0.07) $0.02
======= ======= ======= =====
Diluted (loss) earnings per share for the three month and six month
periods ended December 31, 2002 and 2001, does not reflect the
incremental shares from the assumed conversion of preferred stock
(1,079,692 and 1,247,756 and 178,522 and 614,617 shares, respectively)
as the effect of such inclusion would be antidilutive.
Note 6 RESEARCH AND DEVELOPMENT AGREEMENTS
-----------------------------------
The Company's strategy for this quarter and the next four quarters
includes a larger commitment, relative to the prior year, to spending
on research and development targeted at validating earlier findings
focused on disease specific conditions in the areas of diabetes and
depression. The Company entered into an agreement with Comprehensive
NeuroSciences, Inc., a contract research organization in the
neurosciences field, to perform studies related to the Company's
anti-depressant technology to be completed not later than December 31,
2004. The Company entered into an agreement with Diabetex, Inc., a
diabetes disease management company, to perform studies related to the
Company's technology addressing blood glucose support for people with
diabetes to be completed not later than December 31, 2004. The Company
expects to launch these products under the Dietary Supplement Health
and Education Act (DSHEA) regulatory pathway, which customarily
9
requires only nominal research to support safety and label claims and
is less costly and time consuming than that required for drug
development. The larger scale studies are being conducted to secure
medical acceptance and adoption as treatment protocols. The Company's
spending in this area of new technology, however, is discretionary and
is subject to the availability of funds. There can be no assurances
that the Company's disease specific product development efforts will
be successfully completed or that the products will be successfully
manufactured or marketed.
Note 7 OTHER INCOME
------------
In the six month period ended December 31, 2001, the Company recorded
as other income $1.8 million from the settlement of patent
infringement claims related to chromium picolinate and a sale of
assets.
Note 8 INCOME TAXES
------------
The effective tax rates for the six-month periods ended December 31,
2002 and 2001 were 0.0% and 34.0%, respectively. The difference in tax
rates is primarily due to changes in the deferred tax valuation
allowance.
Note 9 SEGMENT REPORTING
-----------------
A summary of business data for the Company's reportable segments is as
follows:
Information by business segment (in thousands):
Three months ended Six months ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues
--------
Nutritional Products $2,284 $2,791 $5,508 $6,675
Pharmaceutical Products 50 121 140 186
-- --- --- ---
$2,334 $2,912 $5,648 $6,861
====== ====== ====== ======
Operating Income (Loss)
-----------------------
Nutritional Products $(2,298) $(2,467) $(396)
$(683)
Pharmaceutical Products 18 58 66 (43)
-- -- -- ----
$(2,280) $(625) $(2,401) $(439)
======== ====== ======== ======
The operations of the Company are principally in the United States.
One nutritional product segment customer accounted for approximately
38% of the segment revenues in the six month period ended December 31,
2002.
Note 10 SUPPLEMENTAL CASH FLOW INFORMATION
----------------------------------
Six months ended
December 31 ,
2002 2001
---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest $12 $50
Cash paid for income taxes $41 $759
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property and equipment $-- $137
Obligation for N21 contingent payments $18 $217
Obligation for Lite Bites contingent payment $-- $915
Issuance of common stock for Series E conversion $-- $194
10
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 11 RELATED PARTY TRANSACTIONS
--------------------------
On January 14, 2003, the Company entered into a financial advisory and
investment banking services agreement with C. E. Unterberg, Towbin.
The agreement has a one-year term and provides for a monthly retainer,
and additional remuneration upon the sale of securities to investors.
The agreement is terminable on thirty days notice and the retainer
payments cease upon termination of the agreement. John H. Gutfreund is
Senior Managing Director and Executive Committee member of C. E.
Unterberg, Towbin and is Chairman of the Company's board of directors.
11
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and related notes thereto of the
Company included elsewhere herein.
General
The Company's revenues have been primarily derived from: (i) the sale
of nutrition products to manufacturers of vitamin and mineral
supplements ("Nutrition Products"), and (ii) the sale of nutrition
bars and other related dietary supplement products marketed under the
trademarks "Lite Bites" and "Brite Bites" (the "Lite Bites Business").
The Company has, in addition, received royalty and license income from
users of its patented technology ("Pharmaceutical Products").
Cost of goods sold includes both direct and indirect manufacturing
costs. Research expenses include internal expenditures as well as
expenses associated with third party providers. Selling, general and
administrative expenses include salaries and overhead, third party
fees and expenses, royalty expenses for licenses and trademarks, and
costs associated with the selling of the Company's products. The
Company capitalizes patent costs and acquisition-related goodwill and
intangible assets, and amortizes them, excluding goodwill effective
July 1, 2001, over periods of one to twenty years.
Results of Operations
Revenues
--------
Net sales for the three and six month periods ended December 31, 2002
of $2.3 million and $5.5 million, respectively, decreased $0.5 million
and $1.1 million, respectively, when compared to $2.8 million and $6.6
million for the same periods a year ago. The decrease is due primarily
to a temporary hiatus of the sale of Lite Bites products through QVC
as a result of a restaging of the QVC product lineup, and planning for
expansion to retail outlets. Nutrition Products revenue nominally
increased for the period, despite an erosion of our customers'
business in the "weight-loss" category due to the discontinuation of
their products formulated with Ephedra.
Other revenues of $50 thousand and $125 thousand for the three and six
month periods ended December 31, 2002, respectively, declined slightly
when compared to the same periods a year ago. License fee income
earned was lower in the three and six month period ended December 21,
2002 when compared to the same periods a year ago.
Cost of goods sold
------------------
Cost of goods sold for the three and six month periods ended December
2002 were $1.0 million and $1.8 million, compared to $0.9 million and
$2.1 million, respectively, for the same periods a year ago. Cost of
goods primarily reflects the impact of lower sales for the six months
ended December 31, 2002. Gross margin on product sales of 57.0% and
67.6% for the three and six month periods ended December 31, 2002,
respectively, declined 12.3 and 0.6 percentage points, respectively,
when compared to the same periods a year earlier. The change is due
partly to development costs associated with the restaging of the new
QVC product lineup and the Lite Bites expansion into retail, as well
as an increase in provision for returned goods. An additional change
is due partly to product mix, with lower margin products accounting
for a greater proportion of the Company's revenues.
Research and development expenses
---------------------------------
Research costs of $0.6 million and $0.8 million for the three and
six-month periods ended December 31, 2002, respectively, increased
$0.4 million and $0.4 million, respectively, when compared to $0.2
million and $0.4 million, respectively, for the same periods a year
ago. The increase is due primarily to spending to validate two new
chromium Nutrition Products applications in diabetes and depression.
The Company's strategy for this quarter and the next four quarters
includes a larger commitment, relative to the prior year, to spending
on research and development targeted at validating earlier findings
focused on disease specific conditions in the areas of diabetes and
depression. The Company entered into an agreement with Comprehensive
NeuroSciences, Inc., a contract research organization in the
neurosciences field, to perform studies related to the Company's
anti-depressant technology to be completed not later than December 31,
12
2004. The Company entered into an agreement with Diabetex, Inc., a
diabetes disease management company, to perform
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
studies related to the Company's technology addressing blood glucose
support for people with diabetes to be completed not later than
December 31, 2004. The Company expects to launch these products under
the Dietary Supplement Health and Education Act (DSHEA) regulatory
pathway, which customarily requires only nominal research to support
safety and label claims and is less costly and time consuming than
that required for drug development. The larger scale studies are being
conducted to secure medical acceptance and adoption as treatment
protocols. The Company's spending in this area of new technology,
however, is discretionary and is subject to the availability of funds.
There can be no assurances that the Company's disease specific product
development efforts will be successfully completed or that the
products will be successfully manufactured or marketed.
Selling general and administrative expenses (SG&A)
--------------------------------------------------
SG&A expenses for the three and six month periods ended December 31,
2002 of $2.3 million and $4.0 million, respectively, increased $0.5
million and $0.5 million, respectively, when compared to $1.8 million
and $3.5 million in the same periods a year ago. Charges for personnel
and personnel related costs as well as activities associated with the
Company's transition to retail expansion for the Lite Bites Business
and organizational expansion to support the Company's planned launch
of new chromium based nutrition products were the primary reasons for
the increase.
Depreciation and amortization
-----------------------------
Depreciation and amortization for the three and six month periods
ended December 31, 2002 were $0.8 million and $1.4 million,
respectively, compared to $0.7 million and $1.4 million, respectively,
for the same periods a year ago.
Operating Loss
--------------
Operating loss for the three and six month periods ended December 31,
2002 was $2.3 million and $2.4 million, respectively, compared to an
operating loss of $0.6 million and $0.4 million, respectively, for the
same periods a year ago. Lower revenues and product mix combined with
increases in operating expenses for our new chromium based nutrition
products were the primary reasons for the shortfall.
Interest income, Interest expense and Other income, net
-------------------------------------------------------
Interest income, net of interest expense for the three and six month
periods ended December 21, 2002 was $20 thousand and $19 thousand,
respectively, compared to interest expense, net of interest income of
$2 thousand and interest income, net of interest expense of $15
thousand for the same periods a year ago. Levels of cash on hand in
fiscal 2003 were higher than the comparable periods a year ago.
Other income for the six months ended December 31, 2001, was $1.8
million primarily from amounts earned on the settlement of patent
infringement lawsuits, as well as gains resulting from licensing
certain rights to sell lysostaphin for research purposes to an Officer
of the Company.
Income tax (benefit)
--------------------
There were no income taxes for the three and six month periods ended
December 31, 2002 compared to an income tax benefit of $0.3 million
for the three months ended December 31, 2001 and an income tax
provision of $0.5 million for the six months ended December 31, 2001.
The effective tax rate was 0% for the three and six months ended
December 31, 2002. At December 31, 2002, the difference between the
federal statutory rate of 34% and the actual rate is primarily due to
changes in the deferred tax asset valuation allowance.
Business Segment
----------------
The Company operates in two business segments, Nutritional Products
and Pharmaceutical Products.
Nutritional Products
--------------------
Nutritional product revenues for the three and six month periods ended
December 31, 2002, were $2.3 million and $5.5 million, respectively, a
decrease of $0.5 million and $1.2 million, respectively, when compared
13
to $2.8 million and $6.7 million, respectively, for the same periods a
year ago. The decrease in revenues is primarily due to lower
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
sales of nutrition bars and related supplement products through QVC,
as a result of a temporary hiatus of QVC airings due to a restaging of
the QVC lineup.
Nutritional products operating loss was $2.3 million and $2.5 million,
respectively, for the three and six month periods ended December 31,
2002 as compared to an operating loss of $0.7 million and $0.4
million, respectively, for the same periods a year ago. The decline in
product sales and increases in operating costs associated with our
retail expansion of Lite Bites a the planned launch of two new
chromium based nutrition products were the primary reasons for the
shortfall.
Pharmaceutical Products
-----------------------
Pharmaceutical product revenues were $50 thousand and $140 thousand
for the three and six month periods ended December 31, 2002, compared
to $121 thousand and $186 thousand in the comparable periods a year
ago.
Pharmaceutical products operating income was $18 thousand and $66
thousand for the three month and six month periods ended December 31,
2002 as compared to operating income of $58 thousand in the three
months ended December 31, 2001 and an operating loss of $43 thousand
for the six months ended December 31, 2001.
Liquidity and Capital Resources
-------------------------------
Cash and cash equivalents at December 31, 2002 were $5.3 million
compared to $5.0 million at June 30, 2002. As of December 31, 2002,
the Company had working capital of $6.7 million compared to a $8.0
million as of June 30, 2002. The change in working capital was the
result of the collection of funds due from the successful settlement
of patent infringement litigation as well as a reduction in trade
collections.
During the six months ended December 31, 2002, net cash of $0.5
million was provided by investing activities compared to net cash of
$1.5 million used in investing activities for the comparable period a
year ago. Contingent payments for previous acquisitions that are based
on current sales declined $1.4 million due to decreases in net sales.
Cash used in financing activities for the six months ended December
31, 2002 was $50 thousand compared to $1.6 million for the same period
a year ago. During the six months ended December 31, 2001, a cash
payment of $1.1 million was made to repay the Company's outstanding
term loan with Citizens Bank. This repayment was made in connection
with the Company obtaining a new line of credit with Fleet National
Bank. In addition, cash was used for the redemption of Series F
preferred stock and the repurchase of common stock.
The Company's primary sources of financing are from cash generated
from continuing operations and the ability to enter into short-term
loans from time to time, not to exceed $4.0 million, with Fleet
National Bank. At December 31, 2002, the Company had no borrowings.
The Company believes that cash on hand, cash generated from operations
and cash available from Fleet National Bank will provide sufficient
liquidity to fund operations for the next twelve months.
Future acquisition activities and any increases in marketing and
research and development expenses over the present levels may require
additional funds. The Company will seek any necessary additional
funding through arrangements with corporate collaborators, through
public or private sales of its securities, including equity
securities, or through bank financing arrangements. The Company does
not currently have any specific arrangements for additional financing
and there can be no assurance that additional funding will be
available at all or on terms acceptable to the Company.
Significant Accounting Pronouncements
-------------------------------------
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The FASB's new rules on
asset impairment supersede SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," and will be effective for the Company's fiscal year
beginning July 1, 2002. Management does not anticipate that the
adoption of SFAS No. 144 will have a material impact on Nutrition 21's
financial position or results of operations.
14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of a financial
instrument, derivative or non-derivative, caused by fluctuations in
interest rates, foreign exchange rates and equity prices. The Company
has no financial instruments that give it exposure to foreign exchange
rates or equity prices.
Item 4 - Controls and Procedures
Nutrition 21, Inc. under the direction of the Chief Executive Officer
and Chief Financial Officer, has reviewed and evaluated its disclosure
controls and procedures and believes as of the date of management's
evaluation, that Nutrition 21, Inc.'s disclosure controls and
procedures are reasonably designed to be effective for the purposes
for which they are intended. The review and evaluation was performed
within 90 days prior to the filing of this report.
There have not been any significant changes in Nutrition 21, Inc.'s
internal controls or any other factors that could significantly affect
these controls subsequent to the date of management's evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Company in the ordinary course of its business has brought patent
infringement actions against companies that it believes have sold
chromium picolinate in violation of the Company's patent rights. As of
this date, the Company has two actions pending and is evaluating
bringing additional actions.
Item 2 - Changes in Securities and Use of Proceeds
(i) On September 17, 2002, the Company issued a three year Warrant at
an exercise price of $0.40 to purchase 5,000 shares of the Company's
Common Stock to Stan Slap for marketing and organizational development
services.
(ii) On December 10, 2002, the Company issued a three year Warrant at
an exercise price of $0.48 to purchase 35,000 shares of the Company's
Common Stock to Michael Brod for financial consulting services.
Item 5 - Other Information
On January 14, 2003, the Company entered into a financial advisory and
investment banking services agreement with C. E. Unterberg, Towbin.
The agreement has a one-year term and provides for a monthly retainer,
and additional remuneration upon the sale of securities to investors.
The agreement is terminable on thirty days notice and the retainer
payments cease upon termination of the agreement. John H. Gutfreund is
Senior Managing Director and Executive Committee member of C. E.
Unterberg, Towbin and is Chairman of the Company's board of directors.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
99.1 Certification of President and Chief Executive Officer
pursuant to the Sarbanes-Oxley Act of 2002
99.2 Certification of Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002
(b) Reports
None
16
NUTRITION 21, INC
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION 21, INC.
------------------
Registrant
Date: February 13, 2003 By: /s/ Gail Montgomery
-------------------
Gail Montgomery
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Paul Intlekofer
-------------------
Paul Intlekofer
Chief Financial Officer and
Senior Vice President, Corporate Development
(Principal Financial Officer)
17
CERTIFICATIONS
I, Gail Montgomery, President and Chief Executive Officer of Nutrition 21, Inc.,
certify that:
1. I have reviewed this quarterly r report on Form 10-Q of Nutrition 21, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Gail Montgomery
-------------------
President and Chief Executive officer
18
I, Paul Intlekofer, Senior Vice President, Corporate Development and Chief
Financial Officer (Principal Financial Officer) of Nutrition 21, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Nutrition 21, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: February 13, 2003 /s/ Paul Intlekofer
-------------------
Chief Financial Officer and Senior Vice President,
Corporate Development (Principal Financial Officer)
19