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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, 2005
[_] 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 (I.R.S. Employer Identification No.)
of 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 May 10,
2005: 38,136,695.
NUTRITION 21, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
------ --------------------- ----
ITEM 1 Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets at March 31, 2005 and June 30,
2004 3
Condensed Consolidated Statements of Operations for the three months
and nine months ended March 31, 2005 and 2004 5
Condensed Consolidated Statement of Stockholders' Equity for the nine
months ended March 31, 2005 6
Condensed Consolidated Statements of Cash Flows for the nine months
ended March 31, 2005 and 2004 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
ITEM 3 Quantitative and Qualitative Disclosures
About Market Risk 13
ITEM 4 Controls and Procedures 13
PART II OTHER INFORMATION
------- -----------------
ITEM 1 Legal Proceedings 14
ITEM 2 Unregistered Sales of Equity Securities and Use of Proceeds 14
ITEM 6 Exhibits 14
2
NUTRITION 21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, June 30,
2005 2004
----------- -----------
(unaudited) (Note 1)
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 8,886 $ 2,164
Short-term investments ........................... 2,000 2,000
Restricted cash .................................. 1,225 --
Accounts receivable (less allowance for doubtful
accounts of $10) ................................. 1,145 1,342
Subscriptions receivable ......................... 930 --
Other receivables ................................ 191 257
Inventories ...................................... 437 1,163
Prepaid expenses and other current assets ........ 369 221
----------- -----------
Total current assets ........................ 15,183 7,147
Property and equipment, net .......................... 213 314
Patents, trademarks and other intangibles
(net of accumulated amortization of $16,939
at March 31, 2005 and $15,444 at June 30, 2004) .... 7,463 8,719
Other assets ......................................... 824 187
----------- -----------
TOTAL ASSETS ......................................... $ 23,683 $ 16,367
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
NUTRITION 21, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, June 30,
2005 2004
---------- ----------
(unaudited) (Note 1)
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses .................... $ 4,365 $ 3,687
Contingent payments payable .............................. 39 47
---------- ----------
Total current liabilities ....................... 4,404 3,734
6% Series I convertible preferred stock subject
to mandatory redemption
4,262 --
---------- ----------
Total liabilities .............................. 8,666 3,734
---------- ----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, authorized
5,000,000 shares, 9,600 shares issued -- --
Common stock, $0.005 par value, authorized 65,000,000
shares; 38,061,830 shares issued and outstanding at
March 31, 2005 and 37,991,988 issued and outstanding
at June 30, 2004 ....................................... 190 190
Additional paid-in capital ............................... 73,133 67,367
Accumulated deficit ...................................... (58,306) (54,924)
---------- ----------
Total stockholders' equity ..................... 15,017 12,633
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $ 23,683 $ 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 Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
---- ---- ---- ----
Net sales ...................................... $ 2,323 $ 2,577 $ 7,635 $ 7,230
Other revenues ................................. 71 71 1,153 171
------------ ------------ ------------ ------------
TOTAL REVENUES ................................. 2,394 2,648 8,788 7,401
Cost of goods sold ............................. 658 451 1,940 1,596
------------ ------------ ------------ ------------
GROSS PROFIT ................................... 1,736 2,197 6,848 5,805
Selling, general and administrative expenses ... 2,224 2,009 6,611 5,762
Research and development expenses .............. 770 682 1,884 1,723
Depreciation and amortization .................. 596 540 1,727 1,619
------------ ------------ ------------ ------------
OPERATING LOSS ................................. (1,854) (1,034) (3,374) (3,299)
Interest income ................................ 2 19 29 36
Interest expense ............................... 6 5 18 18
------------ ------------ ------------ ------------
LOSS BEFORE INCOME TAXES ....................... (1,858) (1,020) (3,363) (3,281)
Income taxes ................................... 10 -- 19 --
------------ ------------ ------------ ------------
NET LOSS ....................................... $ (1,868) $ (1,020) $ (3,382) $ (3,281)
============ ============ ============ ============
Basic and diluted loss per share ............... $ (0.05) $ (0.03) $ (0.09) $ (0.09)
============ ============ ============ ============
Weighted average number of common shares - basic
and diluted .................................... 38,046,671 37,991,988 38,009,950 36,362,739
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
5
NUTRITION 21, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
(unaudited)
Additional
Paid-In Accumulated
Common Stock Capital Deficit Total
-------------------------- ------------ ------------ ------------
Shares
------
Balance at June 30, 2004 ........................ 37,991,988 $ 190 $ 67,367 $ (54,924) $ 12,633
Charge for stock appreciation rights ............ -- -- 143 -- 143
Issuance of 2,948,662 warrants and beneficial
conversion features related to 6% Series I
convertible preferred stock .................. -- -- 5,338 -- 5,338
Issuance of warrants to purchase 292,461 shares
of common stock for services related to 6%
Series I convertible preferred stock .......... -- -- 248 -- 248
Exercise of stock options ....................... 8,867 -- 5 -- 5
Issuance of stock for compensation .............. 60,975 -- 25 -- 25
Issuance of warrants to purchase 20,000 shares of
common stock for services ..................... -- -- 7 -- 7
Net loss for the period ......................... -- -- -- (3,382) (3,382)
------------ ------------ ------------ ------------ ------------
Balance at March 31, 2005 ....................... 38,061,830 $ 190 $ 73,133 $ (58,306) $ 15,017
============ ============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
6
NUTRITION 21, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended
March 31,
2005 2004
------- -------
Cash flows from operating activities:
Net loss ............................................... $(3,382) $(3,281)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ...................... 1,727 1,619
Issuance of warrants for services .................. 7 16
Charge for stock appreciation rights ............... 143 29
Changes in operating assets and liabilities:
Accounts receivable ............................. 197 (220)
Other receivables ............................... 66 116
Inventories ..................................... 726 125
Prepaid expenses and other current assets ....... (148) (84)
Other assets .................................... -- 11
Accounts payable and accrued expenses ........... 367 (672)
------- -------
Net cash used in operating activities ....... (297) (2,341)
------- -------
Cash flows from investing activities:
Contingent payments for acquisitions ................... (137) (99)
Purchases of property and equipment .................... (35) (10)
Payments for patents and trademarks .................... (206) (192)
Redemption of investments available for sale ........... -- 1,350
Purchase of investments available for sale ............. -- (2,350)
Increase in restricted cash ............................ (1,225) --
------- -------
Net cash used in investing activities .... (1,603) (1,301)
------- -------
Cash flows from financing activities:
Preferred stock dividends paid ......................... -- (2)
Proceeds from stock option exercises ................... 5 6
Net proceeds from private placement .................... -- 3,005
Net proceeds from Series I Convertible Preferred Stock,
net of debt issuance costs .......................... 8,617 --
------- -------
Net cash provided by financing activities 8,622 3,009
------- -------
Net increase (decrease) in cash and cash equivalents ....... 6,722 (633)
Cash and cash equivalents at beginning of period ........... 2,164 4,059
------- -------
Cash and cash equivalents at end of period ................. $ 8,886 $ 3,426
======= =======
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 and nine month periods ended March 31, 2005 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 condensed consolidated balance sheet at June 30, 2004 has been
derived from the audited consolidated 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 debt 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 cost, which
approximates market. The cost of securities sold is based on the
specific identification method.
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".
8
NUTRITION 21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 3 STOCK-BASED COMPENSATION (cont'd)
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:
Three months ended Nine months ended
March 31, March 31,
2005 2004 2005 2004
------- ------- ------- -------
Net loss as reported ..................... $(1,868) $(1,020) $(3,382) $(3,281)
Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards ........ (62) (25) (186) (95)
------- ------- ------- -------
Pro forma net loss ...................... $(1,930) $(1,045) $(3,568) $(3,376)
======= ======= ======= =======
Loss per share:
Basic and diluted - as reported ...... $ (0.05) $ (0.03) $ (0.09) $ (0.09)
Basic and diluted - pro forma ......... $ (0.05) $ (0.03) $ (0.09) $ (0.09)
As a result of amendments to SFAS No. 123, the Company will be
required to expense the fair value of employee stock options over
the vesting period beginning with its fiscal quarter ending
September 30, 2005.
Note 4 INVENTORIES
Inventories at March 31, 2005 and June 30, 2004 consist primarily of
finished goods.
Note 5 SERIES I CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
On March 31, 2005, the Company entered into a Securities Purchase
Agreement under which the Company sold to private investors 9,600
shares of Series I Convertible Preferred Stock and warrants to
purchase 2,948,662 shares of Common Stock for gross proceeds of $9.6
million ($8.7 million in cash and $0.9 million in subscriptions).
Each share of Preferred Stock has a stated value of $1,000 per
share. The preferred Stock is convertible into common stock at the
option of the holders at $1.2535 per share, subject to anti-dilution
provisions. Subject to certain conditions, the Company can force
conversion of the Preferred Stock if the volume weighted average
price of the common stock is at least $3.76 for 20 consecutive
trading days. The Preferred Stock pays cumulative dividends at the
annual rate of 6%. Dividends are payable in cash, provided that in
certain circumstances dividends may be paid in shares of common
stock valued at 90% of the then volume weighted average price. The
Company must redeem the Preferred Stock at the original issue price
plus accrued dividends on March 31, 2009.The Agreement also provides
for early redemption of the Preferred Stock on the occurrence of
certain default events. The Warrants are exercisable commencing
October 1, 2005 and ending on March 31, 2010 at $1.3104 per share
subject to anti-dilution provisions and other limitations. The
Warrants may be exercised on a cashless basis ( i.e., by deducting
from the number of shares otherwise issuable on exercise a number of
shares that have a then market value equal to the exercise price)
after March 31, 2006 so long as no registration statement is in
effect with respect to the sale of shares issuable upon exercise.
9
NUTRITION 21, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
($ in thousands, except share data)
(unaudited)
Note 5 SERIES I CONVERTIBLE PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
(cont'd)
At March 31, 2005, the Company recorded a long-term liability, net
of debt discount, of $4.3 million for the preferred stock with a
resultant increase to additional paid-in capital of $5.3 million,
relating to a beneficial conversion feature and the issuance of
warrants. Dividends will be classified as interest expense. Related
issuance costs will be classified as other assets on the condensed
consolidated balance sheet and amortized to interest expense over
the term of the convertible preferred stock. In addition, debt
discount will accrete and will be charged to interest expense over
the term of the convertible preferred stock.
Note 6 LOSS PER SHARE
Diluted loss per share for the three and nine month periods ended
March 31, 2005 and 2004 does not reflect the incremental shares from
the assumed conversion of stock options and warrants (2,237,975,
1,868,166, 1,698,860 and 303,471 shares, respectively) as the effect
of such inclusion would be anti-dilutive.
Note 7 SUPPLEMENTAL CASH FLOW INFORMATION
Nine months ended
March 31 ,
2005 2004
---- ----
Supplemental disclosure of cash flow information:
Cash paid for interest ...................................... $ -- $--
Cash paid for income taxes ............................. $ 5 $--
Supplemental schedule of non-cash financing activities:
Obligation for N21 contingent payments ...................... $ 129 $ 44
Issuance of common stock for conversion of Series G preferred $ -- $ 188
Issuance of stock for deferred compensation ................. $ 25 $ --
Debt issuance costs in connection with convertible
preferred stock ........................................... $ 584 $--
Subscriptions receivable relating to sale of preferred stock
(paid in April 2005) ....................................... $ 930 $ --
Note 8 LEGAL PROCEEDINGS
On September 3, 2004, QVC filed a suit against the Company alleging
that QVC has the right to return product to the Company and receive
a payment of $551,715, and for $5,706 for certain services QVC
allegedly rendered to the Company. The Company and QVC have agreed
to settle this suit for a payment by the Company of $390,000. This
amount has been included in accounts payable and accrued expenses at
March 31, 2005.
10
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 April 4, 2005.
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 fees 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 product sales for the three month period ended March 31, 2005 of
$2.3 million declined $0.3 million, when compared to $2.6 million,
for the same period a year ago. The decline is due primarily to
lower sales of the Company's Chromax(R) chromium picolinate
products. For the nine month period ended March 31, 2005, net
product sales of $7.6 million increased $0.4 million when compared
to $7.2 million in the comparable period a year ago. Product sales
of Chromax chromium related products for the nine months ended March
31, 2005 continue to exceed the comparable period a year ago.
Other revenues were $71 thousand and $1.2 million, respectively, for
the three and nine-month periods ended March 31, 2005, compared to
$71 thousand and $0.2 million for the same periods a year ago. In
the nine month period ended March 31, 2005, the Company received a
non-refundable $1.0 million payment from ImmuCell Corporation for
waiving its right to receive potential milestone and royalty
payments for a majority of the animal health applications covered by
the Company's patented nisin technology.
Cost of goods sold
------------------
Cost of goods sold for the three and nine-month periods ended March
31, 2005 was $0.7 million and $1.9 million, respectively, compared
to $0.5 million and $1.6 million for the comparable periods a year
ago. Gross margin on product sales for the three and nine month
periods ended March 31, 2005 was 71.7% and 74.6%, respectively,
compared to 82.5% and 77.9%, respectively, for the same periods a
year ago. A mix of products sold as well as royalty payments made in
connection with the sale of Chromax chromium picolinate products for
animal uses were the primary reasons for the change.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Selling, general and administrative expenses (SG&A)
---------------------------------------------------
SG&A expenses for the three and nine month periods ended March 31,
2005 was $2.2 million and $6.6 million, respectively, compared to
$2.0 million and $5.8 million, respectively, for the same periods a
year ago. Marketing expenditures, increased legal fees associated
with outstanding lawsuits and personnel related expenditures were
the primary reasons for the increase.
Research and development expenses
---------------------------------
Research and development expenses were $0.8 million and $1.9
million, respectively, for the three and nine month periods ended
March 31, 2005, compared to $0.7 million and $1.7 million,
respectively, for the same periods a year ago. The increases are due
primarily to continued spending to validate new chromium
applications
Depreciation and amortization
-----------------------------
Depreciation and amortization for the three and nine month periods
ended March 31, 2005 was $0.6 million and $1.7 million,
respectively, compared to $0.5 million and $1.6 million,
respectively for the same periods a year ago.
Operating Loss
--------------
Operating loss for the three and nine month periods ended March 31,
2005 was $1.9 million and $3.4 million, respectively, when compared
to an operating loss of $1.0 million and $3.3 million, respectively,
for the same periods a year ago. The increase in operating loss for
the three month period ended March 31, 2005, when compared to the
same period a year ago, is due primarily to lower net product sales
as well as increased cost of goods sold due to royalty payments for
sales of Chromax chromium picolinate products for animal uses. In
the nine month period ended March 31, 2005, $1.0 million the Company
received for waiving its rights to receive potential milestone and
royalty payments for a majority of animal health applications
covered by patented nisin technology, partially offset the increases
in SG&A and research and development expenses, discussed above.
Interest expense and interest income
------------------------------------
Interest expense, net of interest income for the three month period
ended March 31, 2005 was $4 thousand, compared to interest income,
net of expense of $14 thousand for the same period a year ago.
Levels of cash available for investment in the third quarter of
fiscal year 2005 were lower than the comparable period in fiscal
year 2004. For the nine month period ended March 31, 2005, interest
income, net was $11 thousand compared to $18 thousand for the
comparable period a year ago.
Liquidity and Capital Resources
-------------------------------
Unrestricted cash, cash equivalents and short-term investments at
March 31, 2005 were $10.9 million compared to $4.2 million at June
30, 2004. As of March 31, 2005, the Company had working capital of
$10.8 million compared to $3.4 million as of June 30, 2004. On March
31, 2005, the Company entered into a Securities Purchase Agreement
under which the Company sold to private investors 9,600 shares of
Series I Convertible Preferred Stock and warrants to purchase
2,948,662 shares of Common Stock for gross proceeds of $9.6 million
($8.7 million in cash and $0.9 million in subscriptions). See Note 5
for further discussion.
During the nine month period ended March 31, 2005, net cash of $0.3
million was used in operating activities compared to net cash used
of $2.3 million for the comparable period a year ago. Increases in
accounts payable and accrued expenses of $1.0 million as well as a
positive change in inventories of $0.7 million were the primary
reasons for the change.
During the nine-month periods ended March 31, 2005 and 2004, net
cash used for investing activities was $1.6 million and $1.3
million, respectively. While no short-term investments were made in
the nine month period ended March 31, 2005, the Company used cash of
$1.2 million as security pending resolution of an appeal. See Note 8
for further discussion.
12
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
During the nine month period ended March 31, 2005, $8.6 million of
cash was provided by financing activities, compared $3.0 million of
net cash provided in the comparable period a year ago. On March 31,
2005, the Company entered into a Securities Purchase Agreement under
which the Company sold to private investors 9,600 shares of 6%
Series I Convertible Preferred Stock and Warrants to purchase
2,948,662 shares of Common Stock for gross proceeds of $9.6 million,
($8.7 million in cash and $0.9 million in subscriptions). See Note 5
for further discussion.
The Company believes that cash on hand and cash generated from
operations will provide sufficient liquidity.
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
-------------------------------------
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based
Payment", which establishes standards for transactions in which an
entity exchanges its equity instruments for goods or services. This
standard focuses primarily on accounting for transactions in which
an entity obtains employee services in share-based payment
transactions including issuances of stock options to employees. SFAS
No. 123(R) will be effective for interim or annual reporting periods
beginning on or after June 15, 2005. We believe SFAS No. 123(R) may
reduce profitability or increase losses in future periods .
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
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 March 31, 2005. 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 March 31, 2005, 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.
13
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 September 3, 2004, QVC filed a suit against the Company alleging
that QVC has the right to return product to the Company and receive
a payment of $551,715, and for $5,706 for certain services QVC
allegedly rendered to the Company. The Company and QVC have agreed
to settle this suit for a payment by the Company of $390,000.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On March 31, 2005, the Company sold 9,600 shares of 6% Series I
Convertible Preferred Stock and Warrants to purchase 2,948,662
shares of Common Stock for gross proceeds of $9.6 million ($8.7
million in cash and $0.9 million in subscriptions). See 8-K filed
April 4, 2005. The sale of the Preferred Stock and Warrants was made
to the following individuals and entities: Nordea Bank Danmark A/S;
Cross Atlantic Partners IV, K/S; Cross Atlantic Partners V, K/S;
Morton Partners; Stuart L. Rudick; Enable Growth Partners; Andrew
Ferguson; Lythcott & Company; Kevin H. Livingston; and Midsummer
Investment Ltd.
ITEMS 3, 4 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED.
ITEM 6 - EXHIBITS
(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.
14
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 12, 2005 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)
15