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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 September 30, 2004
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 November 12,
2004: 37,991,988.
NUTRITION 21, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
- ------ --------------------- ----
ITEM 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at September 30, 2004
and June 30, 2004 3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2004 and 2003 5
Condensed Consolidated Statement of Stockholders' Equity for
the three months ended September 30, 2004 6
Condensed Consolidated Statements of Cash Flows for the three
months ended September 30, 2004 and 2003 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 11
ITEM 4 Controls and Procedures 12
PART II OTHER INFORMATION
ITEM 1 Legal Proceedings 13
ITEM 6 Exhibits and Reports on Form 8-K 13
2
NUTRITION 21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, June 30,
2004 2004
------- -------
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents $ 1,543 $ 2,164
Short-term investments 2,000 2,000
Accounts receivable (less allowance for doubtful accounts
of $10) 1,041 1,342
Other receivables 57 257
Inventories 897 1,163
Prepaid expenses and other current assets 338 221
------- -------
Total current assets 5,876 7,147
Property and equipment, net 271 314
Patents, trademarks and other intangibles (net of accumulated
amortization of $15,936 at September 30, 2004 and $15,444 at
June 30, 2004) 8,293 8,719
Other assets 186 187
------- -------
TOTAL ASSETS $14,626 $16,367
======= =======
See accompanying notes to condensed consolidated financial statements.
3
NUTRITION 21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, June 30,
2004 2004
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited) (Note 1)
Accounts payable and accrued expenses $ 3,138 $ 3,687
Contingent payments payable 45 47
-------- --------
TOTAL LIABILITIES 3,183 3,734
-------- --------
Commitments and contingent liabilities
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized 5,000,000 shares -- --
Common stock, $0.005 par value, authorized 65,000,000 shares;
37,991,988 shares issued and outstanding at September 30,
2004 and at June 30, 2004 190 190
Additional paid-in capital 67,404 67,367
Accumulated deficit (56,151) (54,924)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 11,443 12,633
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 14,626 $ 16,367
======== ========
See accompanying notes to condensed consolidated financial statements.
4
NUTRITION 21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
Three Months Ended
September 30,
2004 2003
------------ ------------
Net sales $ 2,670 $ 2,308
Other revenues 71 50
------------ ------------
TOTAL REVENUES 2,741 2,358
Cost of goods sold 610 563
------------ ------------
GROSS PROFIT 2,131 1,795
Selling, general and administrative expenses 2,159 1,841
Research and development expenses 609 428
Depreciation and amortization 584 539
------------ ------------
OPERATING (LOSS) (1,221) (1,013)
Interest income 4 6
Interest expense 6 6
------------ ------------
LOSS BEFORE INCOME TAXES (1,223) (1,013)
Income taxes 4 --
------------ ------------
NET (LOSS) $ (1,227) $ (1,013)
============ ============
Basic and diluted (loss) per share $ (0.03) $ (0.03)
============ ============
Weighted average number of common shares - basic and diluted 37,991,988 33,699,750
============ ============
See accompanying notes to condensed consolidated financial statements.
5
NUTRITION 21, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Common Stock Additional
----------------------- Paid-In Accumulated
Shares Capital Deficit Total
---------- ---------- ---------- ---------- ----------
Balance at June 30, 2004 37,991,988 $ 190 $ 67,367 $ (54,924) $ 12,633
Charge for stock appreciation rights -- -- 30 -- 30
Issuance of warrants to purchase 20,000
shares of common stock for services -- -- 7 -- 7
Net loss for the period -- -- -- (1,227) (1,227)
---------- ---------- ---------- ---------- ----------
Balance at September 30, 2004 37,991,988 $ 190 $ 67,404 $ (56,151) $ 11,443
========== ========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
6
NUTRITION 21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
September 30,
2004 2003
------- -------
Cash flows from operating activities:
Net (loss) $(1,227) $(1,013)
Adjustments to reconcile net (loss) to net cash
(used in) operating activities:
Depreciation and amortization 584 539
Other non-cash items 37 29
Changes in operating assets and liabilities:
Accounts receivable 301 (27)
Other receivables 200 183
Inventories 267 (273)
Prepaid expenses and other current assets (117) (107)
Other assets -- 4
Accounts payable and accrued expenses (549) (85)
------- -------
Net cash (used in) operating activities (504) (750)
------- -------
Cash flows from investing activities:
Contingent payments for acquisitions (47) (26)
Purchases of property and equipment (2) (2)
Payments for patents and trademarks (68) (82)
------- -------
Net cash (used in) investing activities (117) (110)
------- -------
Cash flows from financing activities:
Preferred stock dividends paid -- (2)
Proceeds from stock option exercises -- 4
------- -------
Net cash provided by financing activities -- 2
------- -------
Net (decrease) in cash and cash equivalents (621) (858)
Cash and cash equivalents at beginning of period 2,164 4,059
------- -------
Cash and cash equivalents at end of period $ 1,543 $ 3,201
======= =======
See accompanying notes to condensed consolidated financial statements.
7
NUTRITION 21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 1 BASIS OF PRESENTATION
The accompanying unaudited condensed 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-month period ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the
year ending June 30, 2005. Beginning in fiscal year 2004, the
Company's reporting segments were combined into one - Nutritional
Products.
The consolidated balance sheet at June 30, 2004 has been derived
from the audited financial statements at that date, but does not
include all of the information and footnotes required by
accounting principles generally accepted in the United States 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, 2004.
Note 2 SHORT-TERM INVESTMENTS
Short-term investments consist of securities acquired with
maturities exceeding three months but less than three years. The
Company, in compliance with SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," has classified all
debt securities that have readily determinable fair values as
available-for-sale, as the sale of such securities may be required
prior to maturity. Such securities are reported at fair value. The
cost of securities sold is based on the specific identification
method.
Available-for-sale securities consist of ($ in thousands):
September 30, 2004
------------------------------------
Gross Estimated
Amortized Unrealized Fair
Cost Gain (loss) Value
--------- ----------- ---------
U.S. government and agency securities $2,000 -- $2,000
Note 3 STOCK-BASED COMPENSATION
The Company continues to account for employee stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". Compensation cost for stock options, if any,
is measured as the excess of the quoted market price of the
Company's stock at the date of grant over the amount an employee
must pay to acquire the stock.
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," established accounting
and disclosure requirements using a fair-value method of
accounting for stock-based employee compensation plans. The
Company has elected to remain on its current method of accounting
as described above, and has adopted the disclosure requirements of
SFAS No. 123 and SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure".
The Company applies the intrinsic value method pursuant to APB
Opinion No. 25 in accounting for its employee stock option plans
and, accordingly, no compensation cost has been recognized in the
condensed consolidated financial statements for its employee stock
options, which have an exercise price equal to the fair value of
the stock on the date of the grant. Had the Company determined
compensation cost based on the fair value at the grant date for
its stock options under SFAS No. 123, and amortized such costs
over the vesting period, the Company's net loss would have been
increased to the pro forma amounts indicated below (in thousands,
except per share data):
8
NUTRITION 21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Three months ended
September 30,
2004 2003
------- -------
Net (loss) as reported $(1,227) $(1,013)
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards (28) (57)
------- -------
Pro forma net (loss) $(1,255) $(1,070)
======= =======
(Loss) per share:
Basic and diluted - as reported $(0.03) $(0.03)
Basic and diluted - pro forma $(0.03) $(0.03)
Note 4 INVENTORIES
Inventories at September 30, 2004 and June 30, 2004 consisted of
finished goods.
Note 5 (LOSS) PER SHARE
Diluted (loss) per share for the three month periods ended
September 30, 2004 and 2003, does not reflect the incremental shares
from the assumed conversion of stock options and warrants (717,794 and
1,320,193 shares, respectively) as the effect of such inclusion would
be antidilutive.
Note 6 SUPPLEMENTAL CASH FLOW INFORMATION
Three months ended
September 30,
2004 2003
------- -------
Supplemental disclosure of cash flow information:
Cash paid for interest $ -- $ --
Cash paid for income taxes $ -- $ --
Supplemental schedule of non-cash financing activities:
Obligation for N21 contingent payments $ 45 $ 33
Issuance of common stock for conversion of
Series G preferred $ -- $188
Note 7 LEGAL PROCEEDINGS
On March 19,2003, Andrew Wertheim (a former Executive Officer)
initiated an arbitration with the American Arbitration Association
against the Company in connection with his termination of employment. On
July 24, 2004, an arbitrator awarded Mr. Wertheim (1) damages of
$268,477 for salary and benefits, (2) $708,750 related to stock options,
and (3) interest of $92,151. On November 1, 2004, the United States
District Court for the Southern District of New York denied a motion by
the Company to vacate the part of the award that relates to the stock
options, i.e. $708,750 plus interest. The Company is considering
appealing the decision of the District Court.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and related notes thereto
of the Company included elsewhere herein.
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
This quarterly report and the documents incorporated by reference
contain forward-looking statements which are intended to fall within
the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995. Words such as "anticipates", "expects",
"intends", "plans", "believes", "seeks", and "estimates" and similar
expressions identify forward-looking statements. Statements that are
"forward-looking statements" are based on current expectations and
assumptions that are subject to risks and uncertainties. Actual
performance and results could differ materially because of factors
such as those set forth under "Risk Factors" in Form S-3/A filed with
the Securities and Exchange Commission on January 27, 2004.
GENERAL
The Company's revenues are primarily derived from the sale of
proprietary ingredients and the grant of patent licenses related to
those ingredients to manufacturers of vitamin and mineral
supplements. The fee for the licenses are bundled on an
undifferentiated basis with the price that the Company charges for
its ingredients.
Cost of goods sold includes both direct and indirect manufacturing
costs. Research and development 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 intangible assets, and amortizes them over periods of one
to seventeen years.
RESULTS OF OPERATIONS
Revenues
Net sales for the three-month period ended September 30, 2004 of $2.7
million increased $0.4 million when compared to $2.3 million for the
same period a year ago. The increase is due primarily to increased
sales of the Company's Chromax(R) chromium picolinate in the current
quarter compared to the same period last year.
Other revenues were $71 thousand for the three-month period ended
September 30, 2004 compared to $50 thousand for the same period a
year ago.
Cost of goods sold
Cost of goods sold for the three-month period ended September 30,
2004 and September 30, 2003 was $0.6 million, respectively. Gross
margin on product sales of 77.2% for the three-month period ended
September 30, 2004 increased 1.6 percentage points when compared to
the same period a year earlier due to the mix of products sold in the
current period as compared to the same period a year ago.
Research and development expenses
Research and development expenses were $0.6 million for the
three-month period ended September 30, 2004, compared to $0.4 million
for the same period a year ago. The increase is due primarily to
continued spending to validate new chromium applications.
Selling, general and administrative expenses (SG&A)
SG&A expenses for the three-month period ended September 30, 2004 of
$2.2 million increased $0.3 million when compared to the same period
a year ago. Marketing expenditures, increased legal fees associated
with outstanding lawsuits and personnel related expenditures were the
primary reason for the increase.
10
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Depreciation and amortization
Depreciation and amortization for the three-month period ended
September 30, 2004 was $0.6 million compared to $0.5 million for the
same period a year ago.
Operating Loss
Operating loss for the three-month period ended September 30, 2004
was $1.2 million compared to an operating loss of $1.0 million for
the same period a year ago. Increases in expenses, as noted above,
were the primary reasons for the increased operating loss.
Interest expense and Interest income
Interest expense, net of interest income for the three-month period
ended September 30, 2004 was $2 thousand compared to $0 for the same
period a year ago. Levels of cash available for investment in fiscal
year 2005 were lower than the comparable period in fiscal year 2004.
Liquidity and Capital Resources
Cash and cash equivalents and short-term investments at September 30,
2004 were $3.5 million compared to $4.2 million at June 30, 2004. As
of September 30, 2004, the Company had working capital of $2.7
million compared to $3.4 million as of June 30, 2004. Improved
collection of trade receivables ($0.3 million), lower inventory
levels ($0.3 million) and a reduction in accounts payables and
accrued expenses, net ($0.5 million) were the primary reasons for the
change.
During the three months ended September 30, 2004, net cash of $0.5
million was used in operating activities compared to net cash used of
$0.8 million for the comparable period a year ago. Improvements in
operating assets, net of operating liabilities ($0.5 million),
partially offset by a $0.2 million increase in the Company's net loss
when compared to the comparable period a year earlier, were the
primary reasons for the change.
During the three-month periods ended September 30, 2004 and September
30, 2003 net cash used for investing activities was $0.1 million
respectively.
During the three-month period ended September 30, 2004, net cash
provided by financing activities was $0, compared to net cash
provided of $2 thousand in the comparable period a year ago.
The Company's primary source of financing is cash generated from
operations. The Company believes that cash on hand and cash generated
from operations will provide sufficient liquidity in the short term.
Long-term liquidity is dependent upon achieving future profitability
or raising additional financing.
Future increases in marketing and research and development expenses
over the present levels may require additional funds. The Company
intends to 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.
Significant Accounting Pronouncements
The Company has considered all recent accounting pronouncements and
has determined that the pronouncements have no material effect on the
Company's consolidated financial statements.
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.
11
ITEM 4 - CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's
Chief Executive and Chief Financial Officer, has evaluated the
effectiveness of the Company's disclosure controls and procedures as
of September 30, 2004. Based on this evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information the Company is
required to disclose in the reports it files under the Securities
Exchange Act of 1934, within the time periods specified in the Sec's
rules and forms.
During the quarter ended September 30, 2004, there have been no
significant changes in our internal controls over financial reporting
or in other factors, which have significantly affected, or are
reasonably likely to significantly affect, our internal controls over
financial reporting subsequent to such evaluation.
12
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, no action is pending. The Company is evaluating bringing
other patent infringement actions.
On March 19,2003, Andrew Wertheim (a former Executive Officer)
initiated an arbitration with the American Arbitration Association
against the Company in connection with his termination of employment.
On July 24, 2004, an arbitrator awarded Mr. Wertheim (1) damages of
$268,477 for salary and benefits, (2) $708,750 related to stock
options, and (3) interest of $92,151. On November 1, 2004, the United
States District Court for the Southern District of New York denied a
motion by the Company to vacate the part of the award that relates to
the stock options, i.e. $708,750 plus interest. The Company is
considering appealing the decision of the District Court.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certifications of President and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certifications of the President and Chief Executive
Officer and the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS
The Company filed one Report on Form 8-K during the fiscal
quarter ended September 30, 2004.
1. Report dated September 22, 2004 furnishing a copy of
a press release of financial results for the fiscal
quarter and year ended June 30, 2004.
13
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: November 12, 2004 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)
14