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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 March 31, 2003
[ ] 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 May 12,
2003: 33,602,990.
NUTRITION 21, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
ITEM 1 Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 2003
and June 30, 2002 3
Consolidated Statements of Operations for the three
and nine months ended March 31, 2003 and 2002 5
Consolidated Statement of Stockholders' Equity for
the nine months ended March 31, 2003 6
Consolidated Statements of Cash Flows for the nine
months ended March 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 17
ITEM 4 Controls and Procedures 17
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 18
ITEM 5 Other Information 18
ITEM 6 Exhibits and Reports on Form 8-K 18
2
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, JUNE 30,
2003 2002
---- ----
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 4,787 $ 3,974
Short-term investments -- 1,000
Accounts receivable (less allowance for doubtful accounts of $19 at March 31,
2003 and June 30, 2002, respectively) 1,460 2,219
Other receivables 303 1,097
Inventories 940 1,075
Prepaid expense and other current assets 307 788
------- -------
Total current assets 7,797 10,153
Property and equipment, net 583 654
Patents and trademarks (net of accumulated amortization of $14,458 at March 31,
2003 and $12,721 at June 30, 2002) 15,526 17,073
Other assets 221 220
------- -------
TOTAL ASSETS $24,127 $28,100
======= =======
See accompanying notes to consolidated financial statements.
3
NUTRITION 21, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
MARCH 31, JUNE 30,
2003 2002
---- ----
(unaudited) (Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities;
Accounts payable and accrued expenses $ 1,699 $ 2,102
Contingent payments payable 29 43
Preferred dividends payable 2 6
------- --------
Total current liabilities 1,730 2,151
TOTAL LIABILITIES 1,730 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 March 31, 2003 and June 30, 2002, respectively
(aggregate liquidation value - $193) 188 471
Common stock, $0.005 par value, authorized 65,000,000 shares;
33,602,990 shares issued and outstanding at March 31, 2003 and 33,048,655
shares issued at June 30, 2002 168 165
Additional paid-in capital 64,080 63,936
Accumulated deficit (42,039) (38,501)
Less treasury stock, at cost, 136,000 shares -- (122)
-------- --------
TOTAL STOCKHOLDERS' EQUITY $ 22,397 $ 25,949
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 24,127 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 3,082 $ 3,912 $ 8,605 $ 10,544
Other revenues 50 75 175 304
-------- -------- -------- --------
REVENUES 3,132 3,987 8,780 10,848
Cost of goods sold 1,017 1,274 2,808 3,385
-------- -------- -------- --------
GROSS PROFIT 2,115 2,713 5,972 7,463
Research and development expenses 561 276 1,401 686
Selling, general and administrative
expenses 2,362 2,058 6,383 5,516
Depreciation and amortization 649 641 2,046 1,962
-------- -------- -------- --------
OPERATING (LOSS) (1,457) (262) (3,858) (701)
Interest income 13 11 54 76
Snterest expense 5 46 27 96
Other income, net -- -- -- 1,794
-------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES
(1,449) (297) (3,831) 1,073
Income taxes (benefit) (306) (100) (306) 366
-------- -------- -------- --------
NET (LOSS) INCOME $ (1,143) $ (197) $ (3,525) $ 707
======== ======== ======== ========
Basic (loss) earnings per share $ (0.03) $ (0.01) $ (0.11) $ 0.02
======== ======== ======== ========
Diluted (loss) earnings per share $ (0.03) $ (0.01) $ (0.11) $ 0.02
======== ======== ======== ========
Weighted average number of common shares -
basic 33,603 32,995 33,212 32,523
======== ======== ======== ========
Weighted average number of common shares
and equivalents - diluted
33,603 33,018 33,212 32,550
======== ======== ======== ========
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 -- -- -- -- -- (13) -- (13)
Issuance of warrants -- -- -- -- 24 -- -- 24
Conversion of Series G stock to
common stock (283) (283) 654,335 4 279 -- -- --
Repurchase of common stock for
treasury -- -- (100,000) -- -- -- (38) (38)
Retirement of treasury stock -- -- -- (1) (159) -- 160 --
Net loss for the period -- -- -- -- -- (3,525) -- (3,525)
---- ---- ---------- ---- ------- --------- ---- -------
Balance at March 31, 2003 188 $188 33,602,990 $168 $64,080 $(42,039) $ -- $22,397
==== ==== ========== ==== ======= ========= ==== =======
See accompanying notes to consolidated financial statements.
6
NUTRITION 21, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
NINE MONTHS ENDED
MARCH 31,
2003 2002
---- ----
Cash flows from operating activities:
Net (loss) income $(3,525) $ 707
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 2,046 1,962
Gain on sale of assets -- (55)
Other non-cash items 24 74
Changes in operating assets and liabilities:
Accounts receivable 759 2,001
Other receivables 793 334
Inventories 135 (130)
Prepaid and other current assets 481 (4)
Other assets -- 111
Accounts payable and accrued expenses (403) (1,473)
------- -------
Net cash provided by operating activities 310 3,527
-------- -------
Cash flows from investing activities:
Contingent payments for acquisitions (106) (2,746)
Purchases of property and equipment (88) (82)
Payments for patents and trademarks (248) (325)
Proceeds from sale of assets -- 100
Sale of investments 1,000 --
------- -------
Net cash provided by (used in) investing activities 558 (3,053)
------- -------
Cash flows from financing activities:
Debt repayments -- (1,125)
Preferred stock dividends paid (17) (55)
Purchase of common stock for treasury (38) (122)
Redemption of redeemable preferred stock -- (348)
------- -------
Net cash used in financing activities (55) (1,650)
------- -------
Net increase (decrease) in cash and cash equivalents 813 (1,176)
Cash and cash equivalents at beginning of period 3,974 5,355
------- -------
Cash and cash equivalents at end of period $ 4,787 $ 4,179
======= =======
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 nine month periods ended
March 31, 2003 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 December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure-an amendment of
FASB Statement No. 123." SFAS No 148 amends SFAS No. 123, "Accounting
for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company
adopted the disclosure provisions of SFAS No. 148 effective December
31, 2002.
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 is effective for the Company's fiscal year beginning
July 1, 2002. For the three and nine month periods ended March 31,
2003, there was no material impact as a result of the adoption of this
standard.
NOTE 3 STOCK-BASED COMPENSATION
The Company continues to account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees".
Compensation cost for stock options, if any, is measured as the excess
of the quoted market price of the Company's stock at the date of grant
over the amount an employee must pay to acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," established accounting and
disclosure requirements using a fair-value method of accounting for
stock-based employee compensation plans. The Company has elected to
remain on its current method of accounting as described above, and has
adopted the disclosure requirements of SFAS No. 123.
The Company applies APB Opinion No. 25 in accounting for its Plans
and, accordingly, no compensation cost has been recognized in the
financial statements for its employee stock options, which have an
exercise price equal to the fair value of the stock on the date of the
grant. Had the Company determined compensation cost based on the fair
value at the grant date for its stock options under SFAS No. 123, the
Company's net income (loss) would have been reduced (increased) to the
pro forma amounts indicated below (in thousands):
8
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
---------------------------- ----------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income as reported $ (1,143) $ (197) $ (3,525) $ 707
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects (63) (55) (198) (163)
--------- --------- --------- ---------
Pro forma net income (loss) $ (1,206) $ (252) $ (3,723) $ 545
========= ========= ========= =========
Earnings (loss) per share
Basic - as reported $ (0.03) $ (0.01) $ (0.11) $ 0.02
Basic - pro forma $ (0.04) $ (0.01) $ (0.11) $ 0.02
Diluted - as reported $ (0.03) $ (0.01) $ (0.11) $ 0.01
Diluted - pro forma $ (0.04) $ (0.01) $ (0.11) $ 0.01
NOTE 4 INVENTORIES
The components of inventories at March 31, 2003 and June 30, 2002
were:
MARCH 31, JUNE 30,
2003 2002
---- ----
Raw materials $439 $444
Finished goods 501 631
--- ---
Total inventories $940 $1,075
==== ======
NOTE 5 REDEEMABLE PREFERRED STOCK
During the nine month period ended March 31, 2003, 283 shares of the
Company's Series G Preferred Stock were converted into 654,335 shares
of the Company's common stock.
9
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
NOTE 6 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 Nine months ended
share computation: March 31, March 31,
2003 2002 2003 2002
---- ---- ---- ----
Net (loss) income $ (1,143) $ (197) $ (3,525) $ 707
Less: Dividends on preferred shares (2) (6) (13) (39)
Premium on redemption of
preferred stock -- -- -- (121)
------------ ------------ ------------ ------------
Net (loss) income available to common
stockholders $ (1,145) $ (203) $ (3,538) $ 547
============ ============ ============ ============
Weighted average shares: 33,602,990 32,995,281 33,211,855 32,522,768
============ ============ ============ ============
Basic (loss) earnings per share $ (0.03) $ (0.01) $ (0.11) $ 0.02
============ ============ ============ ============
Diluted (loss) earnings per share
computation:
Net (loss) income available to common
stockholders $ (1,145) $ (203) $ (3,538) $ 547
Add: Dividends on preferred stock -- -- -- --
------------ ------------ ------------ ------------
Net (loss) income available to common
stockholders $ (1,145) $ (203) $ (3,538) $ 547
============ ============ ============ ============
Weighted average shares: 33,602,990 32,995,281 33,211,855 32,522,768
Plus incremental shares from assumed conversions:
Preferred stock -- -- -- --
Stock option plans -- -- -- --
------------ ------------ ------------ ------------
Adjusted weighted average shares 33,602,990 32,995,281 33,211,855 32,522,768
============ ============ ============ ============
Diluted (loss) earnings per share $ (0.03) $ (0.01) $ (0.11) $ 0.02
============ ============ ============ ============
Diluted (loss) earnings per share for each of the three and nine month
periods ended March 31, 2003 and 2002, does not reflect the incremental
shares from the assumed conversion of preferred stock and stock option
plans (303,471 and 144,494 and 782,253 and 506,199 shares,
respectively) as the effect of such inclusion would be antidilutive.
NOTE 7 RESEARCH AND DEVELOPMENT AGREEMENTS
The Company's strategy for the quarter ended March 31, 2003 and the
next three quarters includes a larger commitment, relative to the
prior year comparable periods, 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 that are
expected to be completed by 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 that are
expected to be completed by December 31, 2004. The Company expects
10
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.
These large scale studies are being conducted to secure medical
acceptance and adoption as treatment protocols. The Company's spending
in these areas of new technology, however, is discretionary and is
subject to the availability of funds, since the agreements permit the
Company to discontinue the studies. 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 8 OTHER INCOME
In the nine month period ended March 31, 2002, the Company recorded as
other income $1.8 million from the settlement of patent infringement
claims related to chromium picolinate as well as a sale of assets.
NOTE 9 INCOME TAXES
The effective tax rates for the nine-month periods ended March 31, 2003
and 2002 were a benefit of 8.0% and a 34.0% provision, respectively.
The benefit was recorded only to the extent of the Company's net
operating loss carryback. At March 31, 2003, 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.
NOTE 10 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Nutritional Products $ 3,067 $ 3,912 $ 8,575 $ 10,483
Pharmaceutical Products 65 75 205 365
-------- -------- -------- --------
$ 3,132 $ 3,987 $ 8,780 $ 10,848
======== ======== ======== ========
Operating Income (Loss)
Nutritional Products $ (1,493) $ (3,960) $ (929) $ (305)
Pharmaceutical Products 36 43 102 228
-------- -------- -------- --------
$ (1,457) $ (262) $ (3,858) $ (701)
======== ======== ======== ========
The operations of the Company are principally in the United States.
One nutritional product segment customer accounted for approximately
16% of the segment revenues in the nine month period ended March 31,
2003.
Note 11 SUPPLEMENTAL CASH FLOW INFORMATION
NINE MONTHS ENDED
MARCH 31 ,
2003 2002
---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest $17 $57
Cash paid for income taxes $41 $979
Supplemental schedule of non-cash financing activities:
Obligation for purchase of property and equipment $-- $137
Obligation for N21 contingent payments $29 $41
Issuance of common stock for Series E conversion $-- $194
Issuance of common stock for Series G conversion $283 $470
11
NUTRITION 21, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
NOTE 12 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.
On April 30, 2003, the Company gave C. E. Unterberg, Towbin a thirty
day termination notice.
12
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 are 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 nine month periods ended March 31, 2003 of $3.1
million and $8.6 million, respectively, decreased $0.8 million and $1.9 million,
respectively, when compared to $3.9 million and $10.5 million for the same
periods a year ago. The decrease is due primarily to a softness in sales of Lite
Bites products sold through QVC. There were no airings on QVC from October, 2002
to February, 2003. Since air-time was re-initiated in late February, sales to
QVC for the quarter were lower than expected. For the nine months ended March
31, 2003, Lite Bites sales were negatively impacted by a temporary hiatus in
airings while restaging the QVC product lineup, as well as limited airings in
the period. For the three months ended March 31, 2003, there was nominal
additional revenue associated with a planned expansion of the Lite Bites
products into retail outlets. The Company continues to focus its efforts on
selecting an appropriate partner to expand distribution of these products.
Nutrition Products' net sales, for the three and nine month periods ended March
31, 2003, remained stable when compared to the comparable periods a year ago.
Net sales, for the three and nine month periods ended March 21, 2003, remain
stable when compared to comparable periods a year ago. Other revenues of $50
thousand and $175 thousand for the three and nine month periods ended March 31,
2003, respectively, declined when compared to the same periods a year ago.
License fee income earned was lower in the three and nine month period ended
March 31, 2003 when compared to the same periods a year ago.
COST OF GOODS SOLD
Cost of goods sold for the three and nine month periods ended March 31, 2003
were $1.0 million and $2.8 million, compared to $1.3 million and $3.4 million,
respectively, for the same periods a year ago. Cost of goods primarily reflects
the impact of lower sales of Lite Bites products for the three and nine month
periods ended March 31, 2003. Gross margin on product sales of 67.0% and 67.4%
for the three and nine month periods ended March 31, 2003, respectively,
declined 0.4 and 0.4 percentage points, respectively, when compared to the same
periods a year earlier.
RESEARCH AND DEVELOPMENT EXPENSES
Research costs were $0.6 million and $1.4 million for the three and nine month
periods ended March 31, 2003, respectively, compared to $0.3 million and $0.7
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 the quarter ended March 31, 2003 and the next three
quarters includes a larger commitment, relative to the prior year comparable
periods, 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
13
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
the neurosciences field, to perform studies related to the Company's
anti-depressant technology that are expected to be completed by 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 that are
expected to be completed by 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. These large scale studies are being conducted to secure
medical acceptance and adoption as treatment protocols. The Company's spending
in these areas of new technology, however, is discretionary and is subject to
the availability of funds, since the agreements permit the Company to
discontinue the studies. 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.
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 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 nine month periods ended March 31, 2003 of $2.4
million and $6.4 million, respectively, increased $0.3 million and $0.9 million,
respectively, when compared to $2.1 million and $5.5 million in the same periods
a year ago. Charges for marketing, as well as personnel and personnel related
costs associated with the organizational expansion to support the Company's
planned launch of new chromium based nutrition products were the primary reasons
for the increases.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization for the three and nine month periods ended March
31, 2003 were $0.6 million and $2.0 million, respectively, compared to $0.6
million and $2.0 million, respectively, for the same periods a year ago.
OPERATING LOSS
Operating loss for the three and nine month periods ended March 31, 2003 was
$1.5 million and $3.9 million, respectively, compared to an operating loss of
$0.3 million and $0.7 million, respectively, for the same periods a year ago.
Lower revenues combined with increases in expenses for our new chromium based
nutrition products were the primary reasons for the decrease.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME, NET
Interest income, net of interest expense for the three and nine month periods
ended March 31, 2003 was $8 thousand and $27 thousand, respectively, compared to
interest expense, net of interest income of $35 thousand and $20 thousand for
the same periods a year ago. Levels of cash available for investment in fiscal
2003 were higher than the comparable periods a year ago.
Other income for the nine months ended March 31, 2002, includes $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)
Income tax benefit for the three and nine month periods ended March 31, 2003 was
$0.3 million and $0.3 million respectively, compared to an income tax benefit of
$0.1 million for the three months ended March 31, 2002 and an income tax
provision of $0.4 million for the nine months ended March 31, 2002. The
effective tax rate was a 8% benefit for the nine months ended March 31, 2003.
The benefit was recorded up to the extent of the Company's net operating loss
carryback.
14
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
At March 31, 2003, 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 nine month periods ended
March 31, 2003, were $3.1 million and $8.6 million, respectively, a
decrease of $0.8 million and $1.9 million, respectively, when compared to
$3.9 million and $10.5 million, respectively, for the same periods a year
ago. The decrease is due primarily to a softness in sales of Lite Bites
products sold through QVC. There were no airings on QVC from October, 2002
to February, 2003. Since air-time was re-initiated in late February, sales
to QVC for the quarter were lower than expected. For the nine months ended
March 31, 2003, Lite Bites sales were negatively impacted by a temporary
hiatus in airings while restaging the QVC product lineup, as well as
limited airings in the period. For the three months ended March 31, 2003,
there was nominal additional revenue associated with a Company expansion
into retail outlets. The Company continues to focus its efforts on
selecting an appropriate partner to expand distribution of these products.
Net sales for the three and nine month periods ended March 31, 2003
remained stable when compared to the comparable periods a year ago.
Nutritional products operating loss was $1.5 million and $4.0 million,
respectively, for the three and nine month periods ended March 31, 2003
compared to an operating loss of $0.3 million and $0.9 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 and the planned launch of new chromium based nutrition products
were the primary reasons for the shortfall.
PHARMACEUTICAL PRODUCTS
Pharmaceutical product revenues were $65 thousand and $205 thousand for the
three and nine month periods ended March 31, 2003, compared to $75 thousand
and $365 thousand in the comparable periods a year ago.
Pharmaceutical products operating income was $36 thousand and $102 thousand
for the three and nine month periods ended March 31, 2003, respectively, as
compared to operating income of $43 thousand and $228 thousand in the three
and nine month periods ended March 31, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents and short-term investments at March 31, 2003 were
$4.8 million compared to $5.0 million at June 30, 2002. As of March 31,
2003, the Company had working capital of $6.1 million compared to $8.0
million as of June 30, 2002.
During the nine months ended March 31, 2003, net cash of $0.6 million was
provided by investing activities compared to net cash of $3.1 million used
in investing activities for the comparable period a year ago. Contingent
payments for previous acquisitions, which are based on current sales,
declined $2.6 million due to a change in royalty rates, as well as proceeds
from the sale of short-term investments of $1.0 million.
Cash used in financing activities for the nine months ended March 31, 2003
was $55 thousand compared to $1.7 million for the same period a year ago.
During the nine months ended March 31, 2002, 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.
15
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
The Company's primary sources of financing are from cash generated from
continuing operations, as well as the ability, subject to bank approval, to
enter into short-term loans from time to time, not to exceed $4.0 million,
with Fleet National Bank. At March 31, 2003, the Company had no borrowings.
The Company believes that cash on hand and cash generated from operations
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 December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of FASB Statement No.
123." SFAS No 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company adopted the disclosure provisions of SFAS No.
148 effective December 31, 2002.
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.
16
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.
17
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 one action pending and is evaluating
bringing additional actions.
On April 24, 2003, the Company filed an action against a competitor
for false and misleading advertising.
A former executive of the Company has submitted an employment dispute
for arbitration.
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.
On April 23, 2003, the Company gave C. E. Unterberg, Towbin a thirty
day termination notice.
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
18
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: May 14, 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)
19
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: May 14, 2003 /s/ Gail Montgomery
-------------------
President and Chief Executive officer
20
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: May 14, 2003 /s/ Paul Intlekofer
-------------------
Chief Financial Officer
and Senior Vice President,
Corporate Development
(Principal Financial Officer)
21