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EX-31.1 - NUTRITION 21 INC | v197175_ex31-1.htm |
EX-31.2 - NUTRITION 21 INC | v197175_ex31-2.htm |
EX-32.2 - NUTRITION 21 INC | v197175_ex32-2.htm |
EX-23.1 - NUTRITION 21 INC | v197175_ex23-1.htm |
EX-32.1 - NUTRITION 21 INC | v197175_ex32-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
Fiscal Year ended June 30, 2010
¨ 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
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11-2653613
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(State
or other jurisdiction of incorporation
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(I.R.S.
Employer Identification No.)
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or
organization)
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4
Manhattanville Road, Purchase, New York 10577-2197
(914)
701-4500
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock (par value $.005 per
share)
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OTC Bulletin
Board
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes
¨ No
x
Indicate
by check mark whether the registrant 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 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 90 days. Yes x No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this form 10-K ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer a non-accelerated filer or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ¨
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Accelerated
filer ¨
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Non-accelerated
filer ¨
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
As of
December 31, 2009, the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $4,213,479 based on the closing
sale price as reported on the OTC Pink Markets.
As of
September 16, 2010, there were 123,617,175 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the definitive Proxy Statement to be made available or delivered to
shareholders in connection with the Annual Meeting of Shareholders to be held on
November 4, 2010 are incorporated by reference into Part III.
FORM
10-K REPORT INDEX
10-K
Part
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and
Item No.
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Page
No.
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PART
I
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Item
1
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Business
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3
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Item
1A
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Risk
Factors
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10
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Item
1B
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Unresolved
Staff Comments
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10
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Item
2
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Properties
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10
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Item
3
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Legal
Proceedings
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10
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Item
4
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(Removed
and Reserved)
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10
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PART
II
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Item
5
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Market
For Registrant's Common Equity, Related Stockholder
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Matters
and Issuer Purchases of Equity Securities
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11
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Item
6
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Selected
Financial Data
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12
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Item
7
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Management's
Discussion and Analysis of Financial
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Condition
and Results of Operations
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12
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Item
7A
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Quantitative
and Qualitative Disclosures About Market Risk
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16
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Item
8
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Financial
Statements and Supplementary Data
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16
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Item
9
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Changes
In and Disagreements with Accountants on
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Accounting
and Financial Disclosure
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16
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Item
9A
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Controls
and Procedures
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16
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PART
III
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Item
10
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Directors,
Executive Officers and Corporate Governance
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17
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Item
11
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Executive
Compensation
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17
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Item
12
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Security
Ownership of Certain Beneficial Owners
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and
Management and Related Stockholder Matters
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17
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Item
13
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Certain
Relationships and Related Transactions, and Director
Independence
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18
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Item
14
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Principal
Accounting Fees and Services
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18
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PART
IV
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Item
15
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Exhibits,
Financial Statement Schedules
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18
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2
Disclosures
in this Form 10-K contain certain forward-looking statements, including without
limitation, statements concerning the Company's operations, economic performance
and financial condition. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The words "believe," "expect," "anticipate" and other
similar expressions generally identify forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of their
dates. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties, including without limitation, changes in external market factors,
changes in the Company's business or growth strategy or an inability to execute
its strategy due to changes in its industry or the economy generally, the
emergence of new or growing competitors, various other competitive factors and
other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission. Actual results
could differ materially from the results referred to in the forward-looking
statements. In light of these risks and uncertainties, there can be
no assurance that the results referred to in the forward-looking statements
contained in this Form 10-K will in fact occur. The Company makes no
commitment to revise or update any forward looking statements in order to
reflect events or circumstances after the date any such statement is
made.
PART
I
Item
1. BUSINESS
We are a
nutritional bioscience company that primarily develops and markets raw
materials, formulations, compounds, blends and bulk and other materials to
third-party non-end users to be further fabricated, blended or packaged for
ultimate sales to end-users as nutritional supplements or
otherwise. We hold more than 30 patents for nutrition products and
their uses.
We
conduct our business through one operating segment.
Our
Internet address is www.nutrition21.com. There we make available, free of
charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and any amendments to those reports, as soon as reasonably
practicable after we electronically file such material with or furnish it to the
Securities and Exchange Commission (“SEC”). Our SEC reports can be accessed
through the investor relations section of our website.
History
of the Company
The
Company is a New York corporation that was incorporated on June 29, 1983 as
Applied Microbiology, Inc. Prior to 1995 the Company focused on the
development and commercialization of antibacterial technologies for new drugs.
The Company subsequently licensed these technologies to third parties. Beginning
in 1995, the Company shifted its focus to developing and marketing nutrition
products and ingredients. In 1997, the Company acquired a
comprehensive chromium-based patent portfolio based on a picolinate form of
chromium that was invented and researched by the United States Department of
Agriculture. In August 2006, the Company acquired Iceland Health,
Inc, and its exclusive rights, until 2015, to market and sell certain omega-3
fatty acids in the US. In the same year, we embarked on a program of retail and
direct response sales of branded products through our Branded Products Group.
Based on our decision to move our primary focus back to the Ingredients segment,
the Company sold its direct response and retail businesses on December 29, 2009,
and discontinued the Branded Products Group.
3
The
Company’s Products
Chromium Picolinate and
Related Products
Chromax
chromium picolinate is the Company’s primary Ingredients product which in
various combinations is covered by both domestic and international composition
of matter and use patents.
The
Company also markets and sells other mineral compounds such as Selenomax and
SelenoPure selenium and Zinmax zinc picolinate. In fiscal year 2010, the Company
launched Probiomega, a unique combination of a patented probiotic and omega 3
fatty acids.
Under
license from us, certain of the Company’s customers manufacture and distribute
the Company’s chromium picolinate as a stand-alone chromium supplement that is
marketed either under their own private labels or in conjunction with their
vitamin, mineral and supplement lines.
The
Company derives additional revenues from the sale and licensing of the Company’s
chromium picolinate and other products to customers who incorporate these
products into other finished multi-ingredient nutritional supplement
products. These include vitamin/mineral formulas, weight loss and
sports nutrition supplements, bars, drink mixes and beverages. These
products are sold by our customers under a variety of brands through
natural/health food stores, supermarkets, drug stores, and mass merchandisers,
as well as through direct and catalogue sales.
The
Company actively promotes its research findings, as well as pronouncements
regarding the safety of chromium picolinate, to functional food manufacturers
including health and consumer product distributors.
The
Company’s chromium picolinate is also sold into the animal feed market for
managing the health of breeding sows and their offspring, where it has been
shown to improve glucose control in gestating swine. Research outcomes also
include improved fertility, productivity and recovery for the sows, and stronger
and more resilient offspring.
The
Company sells its products on terms that grant its customers a license, under
the Company’s patents, to sell the Company’s chromium picolinate for the uses
and nutrient combinations covered by its patents. The fee for this license is
bundled on an unallocated basis with the price that the Company charges for its
products. See “Supply and Manufacturing” for information on manufacturing
agreements between the Company and the manufacturers of its principal
products.
During
the fiscal years ended June 30, 2010, 2009 and 2008 ingredient sales of Chromax
chromium picolinate accounted for approximately 71%, 74%, and 72%, respectively,
of the Company's total revenues.
In fiscal
year 2010, three customers accounted for approximately 39% of the Company’s
total revenues, while in fiscal year 2009, one customer accounted for 24% of the
Company’s total revenues. In fiscal year 2008, three customers accounted for 20%
of the Company’s total revenues.
Function and Safety of
Chromium Picolinate
The
function of insulin, the body’s master metabolic hormone, is in part dependent
on chromium that must be supplied through diet or
supplementation. Recognizing that a number of the signs and symptoms
of diabetes are shared in common with chromium deficiency, a 1999 Congressional
mandate urged the National Institutes of Health’s Office of Dietary Supplements
(ODS) and the United States Department of Agriculture (“USDA”) to further
evaluate the role of chromium in diabetes. An ODS November 1999 Chromium and
Diabetes Workshop Summary prioritized the research questions that had to be
resolved in order to evaluate chromium’s potential role in preventing and/or
mitigating diabetes management. In December 2004, Congress passed an
Appropriations bill that included Report Language that “chromium picolinate can
restore normal glucose metabolism by enhancing insulin sensitivity,” and that
encouraged the National Center for Complementary and Alternative Medicine
(NCCAM) to expand its chromium research.
4
According
to the American Diabetes Association, 24 million people suffer from diabetes; it
is the sixth leading cause of death in the U.S. and one of the most costly
health problems. Insulin resistance is thought to be a precursor to
diabetes and is estimated to affect one in five Americans according to the Journal of American Dietetic
Association, February 2004.
Nutrition
21’s core research and development program has followed the ODS research
guidelines with the goal of further commercializing its chromium patent estate
by expanding chromium use for therapeutic applications in diabetes and other
health conditions linked to insulin resistance. On August 25, 2005, the U.S.
Food & Drug Administration (FDA), through its Qualified Health Claim (QHC)
process, acknowledged there is limited but credible evidence to suggest that
chromium picolinate may reduce the risk of insulin resistance, and therefore may
possibly reduce the risk of type 2 diabetes. The FDA ruling is the
first QHC related to diabetes, and it relates only to chromium picolinate and
not other forms of chromium. See “Governmental
Regulation”.
In
collaboration with both independent and sponsored academic researchers at
leading U.S. and international institutions and government agencies, the
Company’s research objectives have been to strengthen the substantiation for
chromium picolinate and expand its patent estate by continuing to:
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·
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Firmly
establish the safety of Chromax chromium picolinate. Chromax
chromium picolinate has been affirmed as Generally Recognized as Safe
(GRAS) for use in nutritional bars and
beverages
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Firmly
establish the mechanism of action of chromium picolinate as an insulin
sensitizer in insulin mediated glucose
metabolism
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Confirm
a relationship between low chromium status and an increased risk of
diabetes and other conditions linked to insulin
resistance
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·
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Use
double-blind placebo-controlled trials to continue to demonstrate the
potential of its chromium product(s) to safely prevent, mitigate or treat
diabetes and other related
conditions
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·
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Explore
chromium’s potential role in mitigating or treating symptoms related to
mental health issues, such as depression, Alzheimer’s disease, and
cognitive impairment
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·
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Identify
other opportunities to expand the therapeutic use of its chromium
technology
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·
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Communicate
the cost and health benefits of chromium-based supplements to secure
approval of its product(s) for use as a first line therapy in diabetes
management
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The
Company will continue to publicize the outcomes of these and forthcoming studies
in order to increase the demand for sales of stand-alone chromium picolinate and
chromium combination products, as well as its use in foods and vitamins
supplement formulas.
The
Company must also continue to demonstrate the safety of this
product. The following studies, in the Company’s opinion, demonstrate
that chromium picolinate is safe.
In 2009,
the European Food Safety Authority (EFSA) released its safety assessment
supporting the safe use of chromium picolinate in food supplements in the
European Union (EU).
The
United States Government, acting through the National Institutes of
Health-National Toxicology Program (“NTP”), has independently evaluated the
safety of chromium picolinate with government approved tests. In 2002
and 2008, the NTP did not find any significant safety concerns related to
chromium picolinate, even at high doses.
In 2002 a
group of experts consisting of Richard Anderson, Ph.D. (senior scientist, USDA
chromium expert), Walter Glinsman, MD (former director from the FDA), and Joseph
Borzelleca, Ph.D. (professor emeritus of pharmacology and toxicology from
Virginia Commonwealth University) reviewed all existing studies of chromium
picolinate and found no safety concerns.
5
In 1997
United States Department of Agriculture (“USDA”) researchers published results
of a high dose chromium picolinate study, concluding that chromium picolinate is
safe.
The
United States Food & Drug Administration (FDA), the European Food Safety
Authority (EFSA) and the United Kingdom’s Food Standards Agency (FSA) have
announced that chromium picolinate is safe.
Several
researchers have questioned the safety of chromium picolinate. In
1995 and 2002, a research group headed by Dianne Stearns, Ph.D. (Dartmouth
College and Northern Arizona University) administered chromium picolinate in a
laboratory to Chinese hamster ovary cell lines, and in 2003 another research
group headed by John Vincent, Ph.D. (University of Alabama) administered
chromium picolinate to fruit flies. Both reported safety
concerns. The Company engaged an independent contract research
organization, BioReliance Corporation, and replicated the studies conducted by
Stearns using Chromax chromium picolinate following internationally accepted
procedures. BioReliance Corporation found Chromax chromium picolinate
to be safe. This study was published in Mutation Research,
2005.
Experts
have advised that fruit fly studies do not predict results in
humans. The United States Government, acting through the National
Institutes of Health-National Toxicology Program (“NTP”), has independently
evaluated the safety of chromium picolinate with government approved
tests. In 2002 and 2008, the NTP did not find any significant safety
concerns related to chromium picolinate, even at high doses.
Pharmaceutical Products
Licensed to Third Parties
In August
2000, the Company exclusively licensed to Biosynexus Incorporated certain rights
to nisin and lysostaphin antibacterial technologies for development and
marketing of new drugs for human uses. The licenses provide for
milestone payments and royalties to the Company. To date, the Company
has received only minimum royalties of $200,000 annually under these
licenses.
Based on a license agreement with
ImmuCell Corporation, the Company as licensor may become entitled to royalty
payments upon commercial sale by ImmuCell of certain skin and environment
sanitizers and teat dips for the prevention of animal mastitis.
Research and
Development
During
the fiscal years ended June 30, 2010, 2009 and 2008, the Company spent
approximately $0.4 million, $0.4 million and $0.9 million, respectively, on
research and development. The Company’s research and development program is
based on chromium and seeks to discover and substantiate the efficacy and safety
of ingredients and products that have a significant nutritional therapeutic
value to consumers. The primary research focus over the past few
years has been in the area of diabetes, mental health, and gastrointestinal
health.
This
research effort enabled the Company to identify patentable new combinations of
chromium and new uses for chromium, and new food systems that can be enhanced by
the inclusion of its ingredient systems.
Clinical Studies,
Presentations and Publications
The
Company from time to time provides funding for clinical studies of its products
to evaluate safety, efficacy and mechanism of action, and in other instances
supplies chromium picolinate and other products for use in studies for which it
provides no funding. The Company believes that positive results in
these studies, whether or not funded by it, provide benefits to the Company by
furthering acceptance of its products. The Company also makes
presentations at various meetings to share research findings and to gain
acceptance of its products. The following information summarizes some
of the recent studies that tested product supplied by the
Company. The information also summarizes selected recent
presentations and publications that relate to the Company’s
products.
6
Studies
in progress:
The
Company has supplied its Chromax chromium picolinate to the State University of
New York at Stony Brook for a clinical study funded by the National Institutes
of Health to evaluate “A Novel
Therapy for Glucose Intolerance in HIV Disease.” The purpose of this
study is to evaluate the safety and efficacy of chromium picolinate in the
treatment of insulin resistance in HIV disease.
The
Company has supplied its Chromax chromium picolinate to the State University of
New York at Stony Brook for a clinical study funded by the National Institutes
of Health to evaluate “Chromium Treatment of
Obesity-Related Insulin Resistance.” The purpose of this study is to
evaluate the safety and efficacy of chromium picolinate in the treatment of
obesity-related insulin resistance and may provide data to generate dietary
chromium recommendations for reducing the risk of diabetes and associated
diseases.
The
Company has supplied its Chromax chromium picolinate to the University of
California, San Francisco for a clinical study funded by the National Institutes
of Health to evaluate “Chromium and Insulin
Resistance.” The purpose of this study is to evaluate the safety and
efficacy of chromium picolinate in the treatment of insulin resistance in
non-obese, non-diabetic subjects.
Publications
and Presentations in 2010:
A paper
entitled “Improved
cognitive-cerebral function in older adults with chromium
supplementation” was published in the journal Nutritional
Neuroscience by researchers at the University of
Cincinnati. The study was conducted to evaluate the effects of
chromium picolinate in elderly people with impaired cognitive
function. The results suggested that supplementation with chromium
picolinate can enhance memory and cognitive function in older adults at risk for
neurodegeneration.
A paper
entitled “Characterization of
the metabolic and physiologic response to chromium supplementation in subjects
with type 2 diabetes mellitus” was published in the journal Metabolism by
researchers at Pennington Biomedical Research Center. The study was
conducted to evaluate risk factors that predict individuals who are more likely
to benefit from taking chromium picolinate. The results of this study
showed that a clinical response to chromium picolinate is more likely to occur
in people with insulin resistance and in those who have more elevated fasting
blood glucose levels.
A paper
entitled “Effects of dietary
chromium (III) picolinate on growth performance, respiratory rate, plasma
variables, and carcass traits of pigs fed high-fat diets” was published
in the journal Biological Trace Mineral
Research by researchers at the University of Kentucky. This
study was conducted to evaluate the effects of chromium picolinate in pigs fed a
high-fat diet. The results of this study indicated that
supplementation with chromium picolinate reduced some of the negative effects,
such as elevated body fat, caused by the feeding of a high-fat
diet.
Governmental
Regulation
The U.S.
Food and Drug Administration (“FDA”) regulates the labeling and marketing of the
Company’s dietary supplements under the Dietary Supplement and Health Education
Act (“DSHEA”). Under DSHEA, dietary supplements that were first marketed as
dietary supplements after October 1994 require safety approval by the
FDA. See “Function and Safety of Chromium Picolinate” for further
information on the safety of the Company’s products. Under DSHEA, the
Company is required to submit for FDA approval claims regarding the effect of
its dietary supplements on the structure or function of the
body. DSHEA also requires an FDA approval for claims that relate
dietary supplements to disease prevention (so-called “health
claims").
7
The
Company has received FDA approval for a qualified health claim. On
August 25, 2005, the FDA recognized chromium picolinate as a safe nutritional
supplement that may reduce the risk of insulin resistance and possibly type 2
diabetes. The FDA concluded:
“One small study suggests that
chromium picolinate may reduce the risk of insulin resistance, and therefore
possibly may reduce the risk of type 2 diabetes. FDA concludes,
however, that the existence of such a relationship between chromium picolinate
and either insulin resistance or type 2 diabetes is highly
uncertain.”
The FDA
also concluded that chromium picolinate is safe, stating the
following:
“FDA concludes at this time, under
the preliminary requirements of 21 CRF 101.14(b)(3)(ii), that the use of
chromium picolinate in dietary supplements as described in the [approved]
qualified health claims discussed in section IV is safe and lawful under the
applicable provisions of the Act.”
The
Federal Trade Commission (“FTC”) regulates product-advertising claims and
requires that claims be supported by competent and reliable scientific evidence.
Prior to our acquisition of a California limited partnership called Nutrition 21
("Nutrition 21 LP"), the FTC opened an inquiry into certain of the claims that
Nutrition 21 LP was making for chromium picolinate. The inquiry was terminated
by the FTC with Nutrition 21 LP entering into a consent agreement that requires
Nutrition 21 LP to support its claims by competent and reliable scientific
evidence. After we acquired Nutrition 21 LP in 1997, we undertook new clinical
studies to support the claims we intended to make for our products. The FTC has
subsequently audited our chromium picolinate advertising and has not found
either a lack of competent and reliable scientific evidence or a failure to
comply with the consent agreement. The FTC continues to monitor our advertising
and could limit our advertising in ways that could make marketing our products
more difficult or result in lost sales.
Proprietary
Rights
Trademarks
Chromax,
Diachrome, Selenomax, SelenoPure, Zinmax, Zenergen, and Magnemax are among the
more well known trademarks owned by Nutrition 21: Chromax for chromium
picolinate; Diachrome for chromium picolinate and biotin; Selenomax for high
selenium yeast; SelenoPure for yeast-free selenium; Zinmax for zinc picolinate;
Zenergen for chromium picolinate and conjugated linoleic acid; and Magnemax for
manganese picolinate.
Patents
Nutritional
Patents
Our
significant patents consist of:
• one
method of use patent that expires in 2015 and covers the use of high doses of
chromium picolinate for glucose stabilization,
• four
patents that expire in 2017 and cover the use of chromium for relieving the
symptoms of depression and pre-menstrual syndrome,
• two
composition of matter patents that expire in 2017 and cover chromium picolinate
and biotin compositions and their use for stabilizing serum
glucose,
8
• one
composition of matter patent that expires in 2017 and covers a composition of
chromium picolinate and other ingredients and its use for improving body
composition,
• twelve
other chromium-based patents that expire in 2017, 2018 and 2021 that cover a
range of compositions and uses for which we do not offer products,
and
• one
composition of matter patent that expires in 2019 that covers a composition of
chromium histidinate.
We have
also applied for 7 other United States patents relating to improving insulin
sensitivity, improving cognitive function, improving immune function, reducing
hyperglycemia, and treatment of diabetes, dyslipidemia, hypercholesterolemia and
other diseases.
Composition
of matter patents protect the manufacture, sale or use of a product. Method of
use patents cover the use of a product. Method of use patents are more difficult
to enforce since the actual infringer is the person that takes the product for
the patented use. In order to enforce a method of use patent against
manufacturers or sellers, the patent owner must prove contributory or induced
infringement, which is more difficult than enforcing a composition of matter
patent.
The
Company maintains non-disclosure safeguards, including confidentiality
agreements, with employees and certain consultants. There can be no
assurance, however, that others may not independently develop similar technology
or that secrecy will not be breached despite any agreements that
exist.
Although
the Company holds six United States patents for chromium picolinate complexes
and for nutritional uses for chromium picolinate complexes, the Company is often
faced with competition from companies, including importers that disregard its
patent rights. These companies take calculated risks that the Company
will not sue to enforce its patent rights against them. The Company determines
whether to file suit against an infringer by taking into consideration an
estimate of infringing sales and the cost of patent
enforcement. While there is no guarantee that the Company will be
able to successfully enforce its patent rights against these competitors, the
Company continues to monitor industry practices.
Pharmaceutical
Patents
The
Company owns more than 100 patents relating to, among other things, the
expression and production of proteins by recombinant Bacillus strains; plasmid
vectors and methods of construction; recombinant lysostaphin complexes; novel
bacteriocin compositions and their use as broad spectrum bactericides; the use
of bacteriocin compositions to treat bovine mastitis; the use of bacteriocin
compositions in oral healthcare; the use of bacteriocin compositions on skin for
healthcare and hygiene; and the use of bacteriocin compositions in
gastrointestinal healthcare. These patents are licensed to Biosynexus
Incorporated and ImmuCell Corporation as set forth under ”Pharmaceutical
Products Licensed to Third Parties.”
The
Company maintains trade secret protection for bacterial strains, technical
know-how, and other information it considers proprietary and beneficial for the
manufacture, use, regulatory approval, and marketing of the Company's
products.
Competition
Numerous
manufacturers and retailers compete actively for consumers of nutritional
supplements. In addition, nutritional supplements can be purchased in a wide
variety of channels of distribution. These channels include mass market retail
stores and the Internet. These markets generally have low barriers to entry.
Private label products of our customers also provide competition to our
products. Additional national or international companies may seek in the future
to enter or to increase their presence in the health foods channel or the
vitamin, mineral supplement market.
9
We
believe that we have a relatively strong position for existing stand-alone
chromium sales, and we have a relatively small market share for sales of
chromium into multi-ingredient products. Our major competitor in this business
is InterHealth Nutraceuticals Inc. which is a privately held company that
markets chromium polynicotinate.
Supply
and Manufacturing
We
purchase our chromium and related compounds on a purchase order basis from
several suppliers, but our business may nevertheless be disrupted if we are
required to change a significant supplier.
All of
the Company’s suppliers comply with GMPs (Good Manufacturing Practices) for
nutritional supplements. GMP is a system of procedures and documentation
written or analytical, to assure our products contain the appropriate strength,
quality, composition and purity which they purport to have.
Employees
As of
June 30, 2010, the Company had 11 full-time employees, of whom 2 were executive
employees, 5 were administrative, 2 were engaged in marketing and sales, and 2
were involved in research, process and product development. The
Company does not have a collective bargaining agreement with any of its
personnel and considers its relationship with its employees to be
satisfactory.
Item
1A. RISK
FACTORS
Not
Applicable
Item
1B. UNRESOLVED
STAFF COMMENTS
None.
Item
2. PROPERTIES
The
Company maintains its corporate headquarters at 4 Manhattanville Road, Purchase,
New York 10577-2197 (Tel: 914-701-4500). The lease for this space
covers approximately 5,383 square feet at an annual lease rental of $134,575,
and expires on May 31, 2012.
Item
3. LEGAL
PROCEEDINGS
U.S.
Customs and Border Protection concluded its review of duties paid by Iceland
Health, LLC on importation of fish oil from Iceland, and in a letter dated March
23, 2010 advised Iceland Health, LLC that it owes $180,949.29.
San
Francisco Technology Inc. filed suit in the United States District Court for the
Northern District of California against Nutrition 21, Inc. (“Nutrition 21”) and
twenty-four other companies with a Complaint for unspecified total
damages. The Complaint against Nutrition 21, Inc. was served on July
22, 2010 and alleges, among other things, that Nutrition 21 falsely marked
Iceland Health Advanced Memory Formula with an expired patent number to deceive
the public. Nutrition 21 believes the suit is without merit and is
unable to predict the outcome of this matter.
Item
4. (Removed
and Reserved)
10
PART
II
Item
5.
|
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
Matters Relating to Common
Stock
On
October 20, 2009, the Company's Common Stock was suspended from trading on the
Nasdaq Capital Markets and commenced trading on the OTC Bulletin Board under the
symbol "NXXI.OB”. Since October 26, 2009, the Company’s Common Stock
has during certain periods traded on the OTC Bulletin Board under the symbol
“NXXI.OB” and during other periods on the Pink Sheets under the symbol
"NXXI.PK”. The Company’s Common Stock currently trades on the OTC Bulletin Board
under the symbol “NXXI.OB”.
The
Company has not paid a cash dividend to its public shareholders on its Common
Stock. The Company intends to retain all earnings, if any, for the foreseeable
future for use in the operation and expansion of its business and, accordingly,
the Company does not contemplate paying any cash dividends on its Common Stock
in the foreseeable future. In addition, if dividends on the Company’s
Series J Preferred Stock are unpaid, the Company is precluded from paying
dividends on its Common Stock and any other equity securities.
The
following table sets forth the average high and low sales prices for the Common
Stock as reported by the OTC Bulletin Board for periods in which the Common
Stock traded on the OTC Bulletin Board and as reported by the Pink Sheets for
periods in which the Common Stock traded on the Pink Sheets.
Common
Stock
Fiscal
Quarter Ended
|
High
|
Low
|
||||||
September
30, 2008
|
$ | 0.58 | $ | 0.07 | ||||
December
31, 2008
|
$ | 0.45 | $ | 0.14 | ||||
March
31, 2009
|
$ | 0.24 | $ | 0.07 | ||||
June
30, 2009
|
$ | 0.37 | $ | 0.15 | ||||
September
30, 2009
|
$ | 0.20 | $ | 0.17 | ||||
December
31, 2009
|
$ | 0.08 | $ | 0.07 | ||||
March
31, 2010
|
$ | 0.04 | $ | 0.03 | ||||
June
30, 2010
|
$ | 0.02 | $ | 0.02 |
As of
September 22, 2010, there were approximately 464 holders of record of the Common
Stock. The Company believes that the number of beneficial owners is
substantially greater than the number of record holders, because a large portion
of its Common Stock is held of record in broker "street names."
Shareholder
Rights Plan
Under a
Shareholder Rights Plan, the Company has distributed, as a dividend, one
preferred share purchase right for each share of Common Stock of the Company
held by stockholders of record as of the close of business on September 25,
2002. The Rights Plan is designed to deter coercive takeover tactics,
including the accumulation of shares in the open market or through private
transactions, and to prevent an acquirer from gaining control of the Company
without offering a fair price to all of the Company's
stockholders. The Rights will expire on September 11,
2012.
Each
Right entitles stockholders to buy one one-thousandth of a share of newly
created Series H Participating Preferred Stock of the Company for $3.00 per
share. Each one one-thousandth of a share of the Series H Preferred
Stock is designed to be the functional equivalent of one share of Common
Stock. The Rights will be exercisable only if a person or group
acquires beneficial ownership of 30% or more of the Company's Common Stock or
commences a tender or exchange offer upon consummation of which such person or
group would beneficially own 30% or more of the Company's Common
Stock.
11
If any
person or group (an "Acquiring Person") becomes the beneficial owner of 30% or
more of the Company's Common Stock, then (1) the Rights become exercisable for
Common Stock instead of Series H Preferred Stock, (2) the Rights held by the
Acquiring Person and certain affiliated parties become void, and (3) the Rights
held by others are converted into the right to acquire, at the purchase price
specified in the Right, shares of Common Stock of the Company having a value
equal to twice such purchase price. The Company will generally be
entitled to redeem the Rights, at $.001 per Right, until 10 days (subject to
extension) following a public announcement that an Acquiring Person has acquired
a 30% position.
Item
6.
|
SELECTED
FINANCIAL DATA
|
Not
Applicable
Item
7.
|
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.
Overview
The
Company’s revenues are primarily derived from the sale of proprietary and
clinically-substantiated nutritional supplements and the grant of patent
licenses related to those ingredients to manufacturers and marketers of vitamin
and mineral supplements. The fee for the licenses is 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 asset
costs, and amortizes them over periods of one to seventeen years.
On
December 29, 2009, the Company discontinued the operations of its Branded
Products Group. As a result the Management Discussion and Analysis of Financial
Condition and Results of Operations analyzes only the changes in the continuing
operations of the Ingredients business.
The
following table sets forth items in the Consolidated Statements of Operations as
a percent of revenues:
Fiscal Year
Percent of Revenues
|
||||||||||||
|
2010
|
2009
|
2008
|
|||||||||
Total
Revenues
|
100 | % | 100 | % | 100 | % | ||||||
Cost
of revenues*
|
24.7 | 23.5 | 24.3 | |||||||||
Advertising
and promotion expenses
|
8.8 | 8.1 | 10.2 | |||||||||
General
and administrative expenses
|
36.7 | 50.5 | 73.3 | |||||||||
Research
and development expenses
|
4.4 | 4.7 | 11.3 | |||||||||
Operating
income (loss)
|
22.2 | (— | ) | (43.8 | ) | |||||||
Net
loss
|
(41.7 | ) | (270.8 | ) | (200.3 | ) |
*As a
percent of net sales
12
Results of
Operations
1.
Year ended June 30, 2010 vs. year ended June 30, 2009
Revenues
Net sales
for Ingredients were $8.4 million in fiscal year 2010 compared to $7.3 million
in fiscal year 2009. Continued strong sales of chromium picolinate for human
consumption and the introduction and first shipment of Probiomega were the
primary reasons for the increase. Partially offsetting the improvement were
reduced sales of chromium picolinate for animal uses.
Cost of
Revenues
Cost of
revenues for Ingredients was $2.1 million in fiscal year 2010 compared to $1.7
million in fiscal year 2009. The increase is due to the increased product sales
as well as the higher cost associated with the introduction of new
products.
General and Administrative
Expenses (“G&A”)
G&A
were $3.2 million in fiscal year 2010 compared to $3.9 million in the comparable
period a year ago. Reductions in professional service fees ($0.4 million),
investor relations expenses ($0.1 million) and share-based compensation expense
($0.2 million) accounted for the decrease.
Advertising and Promotion
Expenses (“Advertising”)
Advertising
for Ingredients was $0.7 million and $0.6 million for fiscal years 2010 and 2009
respectively.
Interest
Expense
Interest
expense was $3.8 million in fiscal year 2010 compared to $4.5 million in fiscal
year 2009. The primary reasons for the decline were a reduction in financing
costs related to a $0.5 million reduction in fiscal year 2010 in dividend
payments on Series I preferred stock, as well as a $0.2 million reduction in
interest paid to the previous owners of Iceland Health, Inc.
Net Loss From Discontinued
Operations
The net
loss from discontinued operations in fiscal year 2010 was comprised of a loss
from the sale of the Branded Products Group ($2.1 million), partially offset by
income from the discontinued operations ($0.3 million) compared to a net loss
from discontinued operations of $16.6 million in fiscal year 2009. Fiscal year
2009 was negatively impacted by a non-cash charge of $17.5 million for
impairment of goodwill and other intangible assets with indefinite
lives.
Net Loss
Net loss
of $3.6 million in fiscal year 2010 was $17.2 million less than the net loss of
$20.8 million in fiscal year 2009. A non-cash impairment charge of $17.5 million
for goodwill and other intangible assets with indefinite lives in fiscal year
2009 was the primary reason for the change.
Liquidity and Capital
Resources
Cash and
cash equivalents at June 30, 2010 were $0.9 million compared to $1.4 million at
June 30, 2009.
During
the year ended June 30, 2010, cash provided by operating activities was $4.2
million compared to cash used in operating activities of $1.3 million in the
comparable period a year ago. A lower net loss ($3.6 million) in fiscal 2010
compared to fiscal year 2009 ($20.8 million) is the primary reason for the
improvement.
13
During
the year ended June 30, 2010, cash used in investing activities was $0.3 million
compared to cash provided of $4.3 million for the year ended June 30,
2009. The sale of $4.0 million of its auction rate securities and a
$1.0 million reduction of the restricted cash balance occurred in fiscal year
2009 and did not recur in the current period.
During
the year ended June 30, 2010, net cash used in financing activities was $4.4
million compared to net cash used of $6.4 million in fiscal year 2009. In the
fiscal year ended June 30, 2009, the Company redeemed its Series I preferred
stock, in full, for $3.6 million.
Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. For several
years we have incurred significant losses, and have relied on financing
activities to supplement cash from operations. At June 30, 2010, we
had cash and cash equivalents of $0.9 million, a decrease of $0.5 million from
June 30, 2009. We have incurred annual operating losses and, as a result, at
June 30, 2010, we had an accumulated deficit of approximately $132.8
million.
In
September 2011, the holders of our Series J Convertible Preferred Stock have the
right to redeem the Series J for approximately $17.8 million. Our continuation
is based on our ability to generate or obtain sufficient cash to meet our
obligations on a timely basis and ultimately to attain profitable
operations.
The
Company is considering all strategic options to improve its liquidity and
provide it with working capital to fund its continuing operations
including further reducing its expenditures, disposing of certain assets,
attaining further operating efficiencies, restructuring debt financing, and
ultimately generating additional high-margin revenues. While we continue to seek
financing alternatives, there can be no assurance that we will be
successful. If adequate funds are not available or are not available
on acceptable terms, the Company will likely not be able to take advantage of
unanticipated opportunities, develop or enhance services or products, respond to
competitive pressures or continue as a going concern. There can be no
assurance that in the future we can operate profitably or at all.
Results of
Operations
2.
Year ended June 30, 2009 vs. year ended June 30, 2008
Revenues
Net sales
were $7.3 million in fiscal year 2009 compared to $7.7 million in fiscal year
2008. A decline in sales of chromium picolinate for animal consumption and zinc
picolinate was the primary reason for the change.
Cost of
Revenues
Cost of
revenues were $1.7 million in fiscal year 2009 compared to $1.9 million in
fiscal year 2008. Lower product sales of chromium picolinate for animal
consumption and zinc picolinate was the primary reason for the
change.
General and Administrative
Expenses (“G&A”)
G&A
were $3.9 million in fiscal year 2009 compared to $6.2 million in fiscal year
2008. A reduction in legal costs ($0.6 million), the absence of termination
charges ($0.4 million) in fiscal year 2009, lower professional and share based
compensation charges ($0.4 million), and overall reductions in general and
administrative costs ($0.9 million) account for the majority of the
improvement.
14
Advertising and Promotion
Expenses (“Advertising”)
Advertising
was $0.6 million for fiscal year 2009 compared to $0.9 million in fiscal year
2008. A decision to spend only for target-specific advertising was
the primary reason for the improvement.
Research and Development
Expenses (“R&D”)
R&D
was $0.4 million in fiscal year 2009 compared to $1.0 million in fiscal year
2008. Lower spending for clinical research was the primary reason for the
improvement.
Operating
Loss
An
operating loss for fiscal year 2009 was $16 thousand compared to a loss of $3.7
million in fiscal year 2008. A decline in G&A ($2.3 million), lower
depreciation and amortization expense ($1.1 million) and a reduction in R&D
spend ($0.6 million) were the primary reasons for the change.
Interest Expense,
net
Interest
expense, net was $4.4 million in fiscal year 2009 compared to $3.5 million in
fiscal year 2008.
Lower
interest income ($0.2 million) as well as a full year’s impact of financing
costs related to Series J convertible preferred stock ($0.7 million) account for
the change.
Loss from Discontinued
Operations
Loss from
discontinued operations was $16.6 million in fiscal year 2009 compared to $9.7
million in fiscal year 2008. Excluding the fiscal year 2009 non-cash impairment
charge of $17.5 million, reductions in advertising expenditures ($16.6 million)
account primarily for the change.
Net Loss
Net loss
for fiscal year 2009 was $20.8 million compared to $16.9 million in fiscal year
2008. The reduction in the loss from continuing operations of $3.0 million was
offset by the increase in the net loss from discontinued operations ($6.9
million) as noted above.
Critical Accounting Policies
and Estimates
The
preparation of the consolidated financial statements requires the Company to
make estimates and judgments that affect the reported amounts of assets,
liabilities and expenses. On an on-going basis, the Company evaluates
its estimates, including those related to uncollectible accounts receivable,
inventories, intangibles and other long-lived assets. The Company
bases its estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
|
·
|
The
Company maintains allowances for uncollectible accounts receivable for
estimated losses resulting from the inability of its customers to make
required payments. If the financial condition of the Company’s
customers were to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be
required.
|
15
|
·
|
The
Company carries inventories at the lower of cost or estimated net
realizable value. If actual market conditions are less
favorable than those projected by management write-downs may be
required.
|
|
·
|
Property,
plant and equipment, patents, trademarks and other intangible assets owned
by the Company are depreciated or amortized, over their estimated useful
lives. Useful lives are based on management’s estimates over
the period that such assets will generate revenue. Intangible
assets with definite lives are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying value of an asset may
not be recoverable. Future adverse changes in market conditions
or poor operating results of underlying capital investments or intangible
assets could result in losses or an inability to recover the carrying
value of such assets, thereby possibly requiring an impairment charge in
the future.
|
|
·
|
The
Company accounts for its stock-based compensation arrangements in
accordance with the provisions of ASC 718 - Stock Compensation.
Stock-based employee compensation cost is measured at the grant date,
based on the estimated fair value of the award, and is recognized as
expense over the requisite service period. The Company has no awards with
market or performance conditions. The valuation provisions apply to new
awards and to awards that were outstanding on the effective date and
subsequently modified or cancelled.
|
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
Not
applicable.
Item
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
financial statements are included herein commencing on page F-1.
Item
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING
AND FINANCIAL DISCLOSURE
|
Not
applicable.
Item
9A.
|
CONTROLS
AND PROCEDURES
|
Disclosure
Controls and Procedures
Disclosure
controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by Nutrition 21, Inc. in the
reports it files or submits under the Securities Exchange Act of 1934 (the
“Exchange Act”) is recorded, processed, summarized and reported within the time
periods specified by the Commission’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures
designed to provide reasonable assurance that information required to be
disclosed by Nutrition 21, Inc. in the reports it files or submits under the
Exchange Act is accumulated and communicated to management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.
Under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, Nutrition 21, Inc. has evaluated
the effectiveness of its disclosure controls and procedures (as such term is
defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of June 30,
2010, and based upon this evaluation the Chief Executive Officer and Chief
Financial Officer have concluded that these controls and procedures are
effective in providing reasonable assurance of compliance.
16
Management’s
Annual Report On Internal Control Over Financial Reporting
Nutrition
21, Inc.’s management is responsible for establishing and maintaining an
adequate system of internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal
control system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of consolidated financial
statements for external purposes, in accordance with generally accepted
accounting principles. Because of inherent limitations, internal
control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
and procedures may deteriorate.
There
were no significant changes in our internal controls over financial reporting or
in other factors during the period ended June 30, 2010, which have materially
affected, or are reasonably likely to affect our internal controls over
financial reporting.
Nutrition
21, Inc.’s management, including the Chief Executive Officer and Chief Financial
Officer, has conducted an evaluation of the effectiveness of its internal
control over financial reporting as of June 30, 2010, based on the framework in
Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation, management
concluded that our internal control over financial reporting was effective as of
June 30, 2010.
This
annual report does not include an attestation report of J.H. Cohn LLP, Nutrition
21, Inc.’s independent registered public accounting firm, regarding internal
control over financial reporting. Management’s report is not subject
to attestation by J.H. Cohn LLP.
PART
III
Item
10. Directors, Executive Officers and Corporate Governance.
The
information called for by Item 10 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2010 fiscal year.
The
Company has a code of ethics that applies to all of its employees, officers, and
directors, including its principal executive officer and principal financial and
accounting officer. The text of the Company’s code of ethics is posted on its
website at www.nutrition21.com. The Company intends to disclose future
amendments to, or waivers from, certain provisions of the code of ethics for
executive officers and directors in accordance with applicable SEC
requirements.
Item
11. Executive Compensation.
The
information called for by Item 11 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2010 fiscal year.
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
information called for by Item 12 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2010 fiscal year.
17
Item
13. Certain Relationships and Related Transactions, and Director
Independence.
The
information called for by Item 13 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2010 fiscal year.
Item
14. Principal Accounting Fees and Services.
The
information called for by Item 14 is incorporated by reference from the
Company’s definitive proxy statement for the 2010 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Exchange Act no later than 120
days after the end of the Company’s 2010 fiscal year.
PART
IV
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a)
|
1.
Financial Statements
|
The
financial statements are listed in the Index to Consolidated Financial
Statements on page F-1 and are filed as part of this annual report.
2.
Financial Statement Schedules
None
3.
Exhibits
The Index
to Exhibits following the Signature Page indicates the Exhibits, which are being
filed herewith, and the Exhibits, which are incorporated herein by
reference.
18
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NUTRITION
21, INC.
|
By: /s/
Michael A. Zeher
|
Michael
A. Zeher, President and
|
Chief
Executive Officer
|
Dated: September
22, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this Report has been
signed below, as of September 21, 2010, by the following persons on behalf of
Registrant and in the capacities indicated.
/s/
Michael A. Zeher
|
Michael
A. Zeher, President and
|
Chief
Executive Officer
|
/s/
John H. Gutfreund
|
John
H. Gutfreund,
|
Chairman
of the Board
|
/s/
P. George Benson
|
P.
George Benson, Director
|
/s/
Warren D. Cooper
|
Warren
D. Cooper Director
|
/s/
Peter Mann
|
Peter
Mann, Director
|
/s/
Alan J. Kirschbaum
|
Chief
Financial Officer, Vice
|
President
Finance and Treasury
|
(Principal
Financial Officer and
|
Principal
Accounting Officer)
|
19
EXHIBITS
3.01
|
Certificate
of Incorporation (1)
|
3.01a
|
Certificate
of Amendment to the Certificate of Incorporation (2)
|
3.01b
|
Certificate
of Amendment to the Certificate of Incorporation (3)
|
3.01c
|
Certificate
of Amendment to the Certificate of Incorporation (11)
|
3.01d
|
Certificate
of Amendment to the Certificate of Incorporation (11)
|
3.01e
|
Certificate
of Amendment to the Certificate of Incorporation (12)
|
3.01f
|
Form
of Certificate of Amendment of Series I 6% Convertible Preferred Stock,
designated as Exhibit 4.2 in the related Form 8-K (24)
|
3.01g
|
Form
of Certificate of Amendment of Series J 8% Convertible Preferred Stock,
designated as Exhibit 4.2 in the related Form 8-K (29)
|
4.1
|
Form
of Securities Purchase Agreement dated March 31, 2005 between
Nutrition 21, Inc. and various investors, designated as Exhibit 4.1 in the
related Form 8-K (24)
|
4.2
|
Form
of Registration Rights Agreement, designated as Exhibit 4.3 in the related
Form 8-K (24)
|
4.3
|
Form
of Common Stock Purchase Warrant, designated as Exhibit 4.4 in the related
Form 8-K (24)
|
4.4
|
Letter
Agreement dated March 9, 2005 with Bristol Investment Group, Inc.,
designated as Exhibit 4.5 in the related Form 8-K (24)
|
4.5
|
Form
of Common Stock and Warrant Purchase Agreement May 19, 2006 by and among
Nutrition 21, Inc. and investors signing on the signatory pages thereto,
designated as Exhibit 4.1 in the related Form 8-K (26)
|
4.6
|
Form
of Registration Rights Agreement by and among Nutrition 21, Inc. and
investors signing on the signatory pages thereto, designated as Exhibit
4.2 in the related Form 8-K (26)
|
4.7
|
Form
of Warrant issued to investors other than to CD Investment Partners, Ltd.,
designated as Exhibit 4.3 in the related Form 8-K (26)
|
4.8
|
Form
of Common Stock and Warrant Purchase Agreement by and between Nutrition
21, Inc. and CD Investment Partners, Ltd., designated as Exhibit 4.4 in
the related Form 8-K (26)
|
4.9
|
Form
of Registration Rights Agreement entered into by and between Nutrition 21,
Inc. and CD Investment Partners, Ltd., designated as Exhibit 4.5 in the
related Form 8-K (26)
|
4.10
|
Form
of Warrant issued to CD Investment Partners, Ltd., designated as Exhibit
4.6 in the related Form 8-K
(26)
|
20
4.11
|
Form
of Letter Agreement by and among Nutrition 21, Inc., C.E. Unterberg,
Towbin, LLC and Dresdner Kleinwort Wasserstein Securities LLC, designated
as Exhibit 4.7 in the related Form 8-K (26)
|
4.12
|
Form
of Warrant issued to each of C.E. Unterberg, Towbin, LLC and Dresdner
Kleinwort Wasserstein Securities LLC, designated as Exhibit 4.8 in the
related Form 8-K (26)
|
4.13
|
Form
of Securities Purchase Agreement dated September 10, 2007
between Nutrition 21, Inc. and various investors, designated as Exhibit
4.1 in the related Form 8-K (29)
|
4.14
|
Form
of Registration Rights Agreement, designated as Exhibit 4.3 in the related
Form 8-K (29)
|
4.15
|
Form
of Common Stock Purchase Warrant, designated as Exhibit 4.4 in the related
Form 8-K (29)
|
4.16
|
Letter
Agreement dated August 9, 2007 with CE Unterberg, Towbin (now called
Collins Stewart LLC) designated as Exhibit 4.5 in the related Form 8-K
(29)
|
4.17
|
Form
of Common Stock Purchase Warrant with Collins Stewart LLC and Life Science
Group, Inc., designated as Exhibit 4.6 in the related Form 8-K
(29)
|
10.01
|
Form
of Incentive Stock Option Plan (8)
|
10.02
|
Form
of Non-qualified Stock Option Plan (8)
|
10.02a
|
Form
of 1989 Stock Option Plan (1)
|
10.02b
|
Form
of 1991 Stock Option Plan (1)
|
10.02c
|
Form
of 1998 Stock Option Plan (15)
|
10.24
|
Exclusive
Option and Collaborative Research Agreement dated July 1, 1988 between the
Company and the University of Maryland (4)
|
10.25
|
Lease
dated as of February 7, 1995, between the Company and Keren Limited
Partnership (7)
|
10.26
|
License
Agreement dated as of December 12, 1996 between Licensee Applied
Microbiology, Inc. and Licensor Aplin & Barrett Limited.
(9)
|
10.27
|
License
Agreement dated as of December 12, 1996 between Licensee Aplin &
Barrett Limited and Licensor Applied Microbiology, Inc.
(9)
|
10.28
|
Supply
Agreement dated as of December 12, 1996 between Aplin & Barrett
Limited and Applied Microbiology, Inc. (9)
|
10.29
|
Stock
and Partnership Interest Purchase Agreement dated as of August 11, 1997,
for the purchase of Nutrition 21. (10)
|
10.30
|
Sublease
dated as of September 18, 1998, between the Company and Abitibi
Consolidated Sales Corporation (12)
|
21
10.31
|
Strategic
Alliance Agreement dated as of August 13, 1999 between AMBI Inc. and QVC,
Inc. (15)*
|
10.32
|
Asset
Purchase Agreement made as of December 30, 1999, by and between ImmuCell
Corporation and AMBI Inc. (16)
|
10.33
|
License
Agreement entered into as of August 2, 2000 between AMBI Inc. and
Biosynexus Incorporated. (17)*
|
10.34
|
License
and Sublicense Agreement entered into as of August 2, 2000 between AMBI
Inc. and Biosynexus Incorporated. (17)*
|
10.35
|
Amended
and Restated By-laws, and Rights Agreement adopted September 12, 2002
(20)
|
10.36
|
Amendment
No. 1 to the Amended and Restated By-laws (27)
|
10.37
|
Nutrition
21, Inc. 2001 Stock Option Plan. (21)
|
10.38
|
Nutrition
21, Inc. 2002 Inducement Stock Option Plan. (21)
|
10.39
|
Nutrition
21, Inc. Change of Control Policy adopted September 12, 2002.
(21)
|
10.40
|
Nutrition
21, Inc. 2005 Stock Plan (23)
|
10.41
|
Agreement
and General Release and Waiver entered into as of November 30, 2005
between Nutrition 21, Inc. and Gail Montgomery (25)
|
10.42
|
Loan
and Security Agreement between Gerber Finance, Inc. as Lender and
Nutrition 21, LLC and Iceland Health, LLC as Co-Borrowers
(28)
|
10.43
|
Nutrition
21, Inc. Guarantee (28)
|
10.44
|
Nutrition
21, LLC Guarantee (28)
|
10.45
|
Iceland
Health, LLC Guarantee (28)
|
10.46
|
Amended
and Restated Merger Agreement for the purchase of Iceland Health, Inc.
dated as of August 25, 2006 (30)
|
10.47
|
Agreement
and General Release and Waiver entered into as of April 28, 2008 between
Nutrition 21, Inc. and Paul Intlekofer (31)
|
10.48
|
Employment
Agreement entered into as of July 14, 2008 between Nutrition 21, Inc. and
Michael A. Zeher (32)
|
10.49
|
Confidentiality
and Non-Compete Agreement entered into as of July 14, 2008 between
Nutrition 21, Inc. and Michael A. Zeher (32)
|
10.50
|
Resignation
Agreement and General Release and Waiver dated September 19, 2009 between
Nutrition 21, Inc. and Mark Stenberg
(33)
|
22
10.51
|
Consulting
Agreement dated September 19, 2009 between Nutrition 21, Inc. and Mark
Stenberg (33)
|
10.52
|
Forbearance
Agreement dated August 18, 2009 among Nutrition 21, inc. and certain of
its subsidiaries and Gerber Finance Inc. (34)
|
23.1
|
Consent
of J.H. Cohn LLP (35)
|
31.1
|
Certification
of President and Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (35)
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (35)
|
32.1
|
Certification
of President and Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (35)
|
32.2
|
Certification
of Chief financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (35)
|
(1)
|
Incorporated
by reference to the Company's Report on Form 10-K for
1991.
|
(2)
|
Incorporated
by reference to the Company's Report on Form 8-K dated September 4,
1992.
|
(3)
|
Incorporated
by reference to the Company's Registration Statement on Form S-8 dated
August 8, 1996, file No. 333-09801.
|
(4)
|
Incorporated
by reference to the Company's Report on Form 10-K for
1988.
|
(5)
|
Incorporated
by reference to the Company's Report on Form 10-K for the fiscal period
January 31, 1992 through August 31, 1992.
|
(6)
|
Incorporated
by reference to the Company's Report on Form 10-K for
1994.
|
(7)
|
Incorporated
by reference to the Company's Report on Form 10-K for
1995.
|
(8)
|
Incorporated
by reference to the Company’s Registration Statement on Form S-1
originally filed April 15, 1986, file No. 33-4822.
|
(9)
|
Incorporated
by reference to the Company's Report on Form 8-K dated December 27,
1996.
|
(10)
|
Incorporated
by reference to the Company's Report on Form 8-K dated August 25,
1997.
|
(11)
|
Incorporated
by reference to the Company's Report on Form 10-K/A2 for
1997.
|
(12)
|
Incorporated
by reference to the Company's Report on Form 10-K/A for
1998.
|
(13)
|
Incorporated
by reference to the Company's Report on Form 10-Q for the quarter ended
September 30. 1998.
|
(14)
|
Incorporated
by reference to the Company's Report on Form 8-K dated February 3,
1999.
|
(15)
|
Incorporated
by reference to the Company's Report on Form 10-K for
1999.
|
23
(16)
|
Incorporated
by reference to ImmuCell Corporation’s Report on Form 8-K dated January
13, 2000.
|
(17)
|
Incorporated
by reference to the Company's Report on Form 10-K for
2000.
|
(18)
|
Incorporated
by reference to the Company's Report on Form 10-Q for the quarter ended
December 31. 2000.
|
(19)
|
Incorporated
by reference to the Company’s Report on Form 10-K for
2001.
|
(20)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated September 18,
2002.
|
(21)
|
Incorporated
by reference to the Company’s Report on Form 10-K for
2002.
|
(22)
|
Incorporated
by reference to the Company’s Report on Form 10-K/A for
2003.
|
(23)
|
Incorporated
by reference to the Company’s Report on Form 8-K for
2005.
|
(24)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated April 4,
2005.
|
(25)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated December 15,
2005.
|
(26)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated May 23,
2006.
|
(27)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated April 30,
2007.
|
(28)
|
Incorporated
by reference to the Company’s Report on form 8-K dated July 31,
2007.
|
(29)
|
Incorporated
by reference to the Company’s Report on form 8-K dated September 12,
2007.
|
(30)
|
Incorporated
by reference to the Company’s Report on form 8-K dated April 29,
2006.
|
(31)
|
Incorporated
by reference to the Company’s Report on form 8-K dated April 29,
2008.
|
(31)
|
Incorporated
by reference to the Company’s Report on form 8-K dated April 29,
2009
|
(32)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated July 15,
2008
|
(33)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated September 25,
2008
|
(34)
|
Incorporated
by reference to the Company’s Report on Form 8-K dated August 19,
2009
|
(35)
|
Filed
herewith.
|
* Subject
to an order by the Securities and Exchange Commission granting confidential
treatment. Specific portions of the document for which confidential
treatment has been granted have been blacked out. Such portions have
been filed separately with the Commission pursuant to the application for
confidential treatment.
24
NUTRITION 21, INC.
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
FILED
WITH THE ANNUAL REPORT OF THE
COMPANY
ON FORM 10-K
JUNE 30,
2010
PAGE
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
F-2
|
CONSOLIDATED
BALANCE SHEETS AT JUNE 30, 2010 AND 2009
|
F-3
|
CONSOLIDATED
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2010, 2009 AND
2008
|
F-5
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT FOR THE YEARS ENDED JUNE 30, 2010,
2009 AND 2008
|
F-6
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED JUNE 30, 2010, 2009 AND
2008
|
F-7
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
F-8
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Stockholders and Board of Directors
Nutrition
21, Inc.
We have
audited the accompanying consolidated balance sheets of Nutrition 21, Inc. and
subsidiaries as of June 30, 2010 and 2009, and the related consolidated
statements of operations, stockholders’ deficit and cash flows for each of the
years in the three-year period ended June 30, 2010. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Nutrition 21,
Inc. and subsidiaries as of June 30, 2010 and 2009, and their consolidated
results of operations and cash flows for each of the years in the three-year
period ended June 30, 2010, in conformity with accounting principles generally
accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred significant
recurring losses, has relied on financing activities to supplement cash from
operations and has an accumulated deficit of $132.8 million at June 30, 2010. In
addition, in September 2011, the Company’s Series J Convertible Preferred Stock
must be redeemed for approximately $17.8 million. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
Management’s plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ J.H.
Cohn LLP
Roseland,
New Jersey
September
22, 2010
F-2
NUTRITION
21, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands)
June 30,
2010
|
June 30,
2009
|
|||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 835 | $ | 1,373 | ||||
Restricted
cash
|
100 | — | ||||||
Accounts
receivable (less allowances for doubtful accounts and returns of $1,231
and $1,459 at June 30, 2010 and 2009, respectively)
|
1,495 | 2,752 | ||||||
Other
receivables
|
224 | 516 | ||||||
Inventories
|
173 | 3,878 | ||||||
Prepaid
expenses and other current assets
|
104 | 467 | ||||||
Total
current assets
|
2,931 | 8,986 | ||||||
Property
and equipment, net
|
57 | 46 | ||||||
Patents,
trademarks and other amortizable intangibles (net of accumulated
amortization of $27,011 and $26,643 at June 30, 2010 and 2009,
respectively)
|
588 | 766 | ||||||
Goodwill
|
— | 636 | ||||||
Other
intangibles with indefinite lives
|
— | 3,000 | ||||||
Other
assets
|
386 | 1,389 | ||||||
TOTAL
ASSETS
|
$ | 3,962 | $ | 14,823 |
See accompanying notes to consolidated
financial statements.
F-3
NUTRITION
21, INC.
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except share and per share data)
June 30,
2010
|
June 30,
2009
|
|||||||
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
||||||||
LIABILITIES
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable
|
$ | 719 | $ | 4,439 | ||||
Accrued
expenses
|
1,321 | 2,218 | ||||||
Deferred
income
|
— | 361 | ||||||
Current
portion of long-term debt
|
— | 4,457 | ||||||
Total
current liabilities
|
2,040 | 11,475 | ||||||
Deferred
income taxes
|
— | 1,200 | ||||||
8%
Series J convertible preferred stock subject to mandatory redemption
(redemption value $17,750 at June 30, 2010 and 2009)
|
15,068 | 13,218 | ||||||
Total
liabilities
|
17,108 | 25,893 | ||||||
Commitments
and contingencies
|
||||||||
STOCKHOLDERS’
DEFICIT:
|
||||||||
Preferred
stock, $0.01 par value, authorized 5,000,000 shares, 100,000 shares
designated as Series H, none issued and outstanding, 9,600 shares
designated as Series I convertible preferred stock, 9,600 issued, none
outstanding, 17,750 shares designated as Series J convertible preferred
stock, 17,750 issued and outstanding at June 30, 2010 and 2009,
respectively (see liabilities above).
|
— | — | ||||||
Common
stock, $0.005 par value, authorized 500,000,000 shares at June 30, 2010
and 150,000,000 shares at June 30, 2009; 96,225,520 and 71,231,450 shares
issued and outstanding at June 30, 2010 and 2009,
respectively.
|
479 | 353 | ||||||
Additional
paid-in capital
|
119,215 | 117,761 | ||||||
Accumulated
deficit
|
(132,840 | ) | (129,184 | ) | ||||
Total
stockholders’ deficit
|
(13,146 | ) | (11,070 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
$ | 3,962 | $ | 14,823 |
See accompanying notes to consolidated
financial statements.
F-4
NUTRITION
21, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
YEAR ENDED
JUNE 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Net
sales
|
$ | 8,428 | $ | 7,336 | $ | 7,749 | ||||||
Other
revenues
|
335 | 348 | 708 | |||||||||
TOTAL
REVENUES
|
8,763 | 7,684 | 8,457 | |||||||||
COSTS
AND EXPENSES
|
||||||||||||
Cost
of revenues
|
2,087 | 1,722 | 1,886 | |||||||||
General
and administrative expenses
|
3,214 | 3,883 | 6,197 | |||||||||
Advertising
and promotion expenses
|
740 | 625 | 864 | |||||||||
Research
and development expenses
|
392 | 364 | 954 | |||||||||
Depreciation
and amortization
|
387 | 1,106 | 2,259 | |||||||||
TOTAL
COSTS AND EXPENSES
|
6,820 | 7,700 | 12,160 | |||||||||
OPERATING
INCOME (LOSS)
|
1,943 | (16 | ) | (3,703 | ) | |||||||
Interest
income
|
2 | 93 | 315 | |||||||||
Interest
expense
|
(3,781 | ) | (4,463 | ) | (3,817 | ) | ||||||
LOSS
FROM CONTINUING OPERATIONS BEFORE INCOME TAX BENEFIT
|
(1,836 | ) | (4,386 | ) | (7,205 | ) | ||||||
Income
tax benefit
|
— | (199 | ) | — | ||||||||
LOSS
FROM CONTINUING OPERATIONS
|
(1,836 | ) | (4,187 | ) | (7,205 | ) | ||||||
DISCONTINUED
OPERATIONS
|
||||||||||||
Loss
on discontinued operations, net of $1.2 million of income
taxes
|
(2,140 | ) | — | — | ||||||||
Income
(loss) from discontinued operations
|
320 | (16,622 | ) | (9,737 | ) | |||||||
Loss
from discontinued operations
|
(1,820 | ) | (16,622 | ) | (9,737 | ) | ||||||
NET
LOSS
|
$ | (3,656 | ) | $ | (20,809 | ) | $ | (16,942 | ) | |||
Loss
per common share: continuing operations
|
$ | (0.02 | ) | $ | (0.06 | ) | $ | (0.12 | ) | |||
Loss
per common share: discontinued operations
|
$ | (0.02 | ) | $ | (0.25 | ) | $ | (0.16 | ) | |||
Net
loss per common share
|
$ | (0.04 | ) | $ | (0.31 | ) | $ | (0.28 | ) | |||
Weighted
average number of common shares – basic and diluted
|
81,387,689 | 67,195,724 | 61,796,508 |
See accompanying notes to consolidated
financial statements.
F-5
NUTRITION
21, INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIT
(in
thousands, except share data)
Common Stock
|
Additional
|
Accumulated
|
Accumulated
Other Comprehensive
|
|||||||||||||||||||||
Shares
|
Amount
|
Paid-In Capital
|
Deficit
|
Loss
|
Total
|
|||||||||||||||||||
Balance
at June 30, 2007
|
60,946,443 | $ | 301 | $ | 107,069 | $ | (91,433 | ) | $ | — | $ | 15,937 | ||||||||||||
Issuance
of warrants and beneficial conversion featuresrelated to 8% Series J
convertible preferred stock
|
— | — | 7,330 | — | — | 7,330 | ||||||||||||||||||
Issuance
of common stock for dividends on Series I preferred stock
|
373,677 | 2 | 214 | — | — | 216 | ||||||||||||||||||
Issuance
of common stock for dividends on Series J preferred stock
|
847,540 | 4 | 351 | — | — | 355 | ||||||||||||||||||
Issuance
of common stock for the purchase of Iceland Health, Inc.
|
1,500,000 | 8 | (8 | ) | — | — | — | |||||||||||||||||
Stock-based
compensation expense
|
— | — | 717 | — | — | 717 | ||||||||||||||||||
Exercise
of stock options and warrants
|
87,755 | — | 48 | — | — | 48 | ||||||||||||||||||
Temporary
impairment on investments in auction rate securities
|
— | — | — | — | ( 260 | ) | (260 | ) | ||||||||||||||||
Cancellations
of restricted stock
|
(172,210 | ) | — | — | — | — | - | |||||||||||||||||
Net
loss for the year
|
— | — | — | (16,942 | ) | — | (16,942 | ) | ||||||||||||||||
Balance
at June 30, 2008
|
63,583,205 | 315 | 115,721 | (108,375 | ) | (260 | ) | 7,401 | ||||||||||||||||
Issuance
of common stock for dividends on Series I preferred stock
|
842,907 | 4 | 175 | — | — | 179 | ||||||||||||||||||
Issuance
of common stock for dividends on Series J preferred stock
|
6,795,338 | 34 | 1,387 | — | — | 1,421 | ||||||||||||||||||
Exercise
of stock options
|
10,000 | — | 4 | — | — | 4 | ||||||||||||||||||
Stock-based
compensation expense
|
— | — | 474 | — | — | 474 | ||||||||||||||||||
Reversal
of temporary impairment on investments in auction rate
securities
|
— | — | — | — | 260 | 260 | ||||||||||||||||||
Net
loss for the year
|
— | — | — | (20,809 | ) | — | (20,809 | ) | ||||||||||||||||
Balance
at June 30, 2009
|
71,231,450 | 353 | 117,761 | (129,184 | ) | — | (11,070 | ) | ||||||||||||||||
Issuance
of common stock for dividends on Series J preferred stock
|
25,033,362 | 126 | 1,295 | — | — | 1.421 | ||||||||||||||||||
Stock-based
compensation expense
|
— | — — | 159 | — | — | 159 | ||||||||||||||||||
Cancellation
of restricted stock
|
(39,292 | ) | — | — | — | — | — | |||||||||||||||||
Net
loss for the year
|
— | — | — | (3,656 | ) | — | (3,656 | ) | ||||||||||||||||
Balance
at June 30, 2010
|
96,225,520 | $ | 479 | $ | 119,215 | $ | (132,840 | ) | $ | — | $ | (13,146 | ) |
See accompanying notes to consolidated
financial statements.
F-6
NUTRITION
21, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
YEAR ENDED JUNE 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Cash
flows from operating activities:
|
||||||||||||
Net
loss
|
$ | (3,656 | ) | $ | (20,809 | ) | $ | (16,942 | ) | |||
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||
Depreciation
of property and equipment
|
13 | 30 | 37 | |||||||||
Deferred
income taxes
|
— | (952 | ) | — | ||||||||
Amortization
of intangibles
|
374 | 1,076 | 2,180 | |||||||||
Accretion
of preferred stock and amortization of deferred
financing costs
|
2,355 | 2,300 | 1,806 | |||||||||
Accretion
on note payable to Iceland Health
|
— | 64 | 58 | |||||||||
Convertible
preferred stock dividend paid in common stock charged as interest
expense
|
1,421 | 1,600 | 571 | |||||||||
Stock-based
compensation expense
|
159 | 474 | 717 | |||||||||
Increase
to provision for doubtful accounts and returns
|
— | — | 321 | |||||||||
Impairment of
goodwill and other intangible assets with indefinite lives
|
— | 17,539 | — | |||||||||
Loss
on sale of discontinued operations
|
2,140 | — | — | |||||||||
Changes
in operating assets and liabilities net of effects of
dispositions:
|
||||||||||||
Accounts
receivable
|
908 | 170 | (1,325 | ) | ||||||||
Other
receivables
|
292 | (230 | ) | 58 | ||||||||
Inventories
|
2,304 | (2,864 | ) | 2,931 | ||||||||
Prepaid
expenses, other current assets and other assets
|
363 | 1,265 | (1,863 | ) | ||||||||
Accounts
payable and accrued expenses
|
(2,122 | ) | (134 | ) | (1,668 | ) | ||||||
Deferred
income
|
(361 | ) | (867 | ) | (1,701 | ) | ||||||
Net
cash provided by (used in) operating activities
|
4,190 | (1,338 | ) | (14,820 | ) | |||||||
Cash
flows from investing activities:
|
||||||||||||
Contingent
payments for acquisitions allocated to goodwill, patents and
trademarks
|
(172 | ) | (556 | ) | (981 | ) | ||||||
Purchases
of property and equipment
|
(23 | ) | (10 | ) | (42 | ) | ||||||
Payments
for patents and trademarks
|
(76 | ) | (149 | ) | (180 | ) | ||||||
Redemption
of investments available for sale
|
— | — | 1,000 | |||||||||
Purchase
of investments available for sale
|
— | — | (4,000 | ) | ||||||||
Decrease
in restricted cash
|
— | 1,000 | — | |||||||||
Proceeds
from sale of auction rate securities
|
— | 4,000 | — | |||||||||
Net
cash (used in) provided by investing activities
|
(271 | ) | 4,285 | (4,203 | ) | |||||||
Cash
flows from financing activities:
|
||||||||||||
Proceeds
from stock option exercises
|
— | 4 | 50 | |||||||||
Proceeds
from private placement of 8% Series J convertible preferred stock, net of
issuance costs
|
— | — | 16,603 | |||||||||
Proceeds
from long-term debt, net
|
— | 199 | 1,770 | |||||||||
Repayment
of short-term borrowings and long-term debt
|
(4,457 | ) | (3,000 | ) | 3,000 | |||||||
Redemption
of 6% Series I convertible preferred stock
|
— | (3,594 | ) | — | ||||||||
Net
cash (used in) provided by financing activities
|
(4,457 | ) | (6,391 | ) | 21,423 | |||||||
Net
(decrease) increase in cash and cash equivalents
|
(538 | ) | (3,444 | ) | 2,400 | |||||||
Cash
and cash equivalents at beginning of year
|
1,373 | 4,817 | 2,417 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 835 | $ | 1,373 | $ | 4,817 |
See
accompanying notes to consolidated financial statements.
F-7
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
Note
1:
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
|
a)
|
Nature of
Operations
|
Nutrition
21, Inc. (“Nutrition 21”, or together with its subsidiaries, the “Company”) is a
nutritional bioscience company and a supplier of chromium picolinate. The
Company markets Chromax® chromium
picolinate products.
b)
|
Consolidation
|
The
consolidated financial statements include the accounts of Nutrition 21, Inc. and
its wholly owned subsidiaries. All intercompany balances and transactions have
been eliminated in consolidation.
c)
|
Use
of Estimates
|
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (“GAAP”) requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. Estimates also affect the reported amounts
of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
d)
|
Financial
Accounting Standards Board Accounting Standards
Certification
|
Effective
July 1, 2009, the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) became the authoritative source of GAAP. All
existing FASB accounting standards and guidance were superseded by the ASC.
Instead of issuing new accounting standards in the form of statements, staff
positions and Emerging Issues Task Force Abstracts, the FASB now issues
Accounting Standards Updates that update the ASC. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws continue to be additional sources of authoritative GAAP
for SEC registrants.
e)
|
Cash
and Cash
Equivalents
|
The
Company considers all interest-earning liquid investments with a maturity of
less than three months when acquired to be cash equivalents. Cash equivalents
included in the accompanying financial statements include money market accounts,
bank overnight investments and commercial paper.
f)
|
Inventories
|
Inventories,
which consist primarily of finished goods, are carried at the lower of cost (on
a first-in, first-out method) or estimated net realizable value. The
Company’s allowance for inventory obsolescence was $0.2 million and $0.3 million
as of June 30, 2010 and 2009, respectively.
F-8
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
Note
1:
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(continued)
|
g)
|
Property
and Equipment
|
|
Property
and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization is provided using
the straight-line method over the related assets’ estimated useful lives
or the term of the lease, if shorter. The estimated useful
lives are as follows:
|
Leasehold
improvements
|
—
|
Term
of lease
|
Furniture
and fixtures
|
—
|
7
years
|
Machinery
and equipment
|
—
|
5
to 7 years
|
Office
equipment
|
—
|
3
to 5 years
|
Computer
equipment
|
—
|
3
to 5 years
|
h)
|
Patents
and Trademarks
|
|
The
Company capitalizes certain patent and trademark costs. Patent
and trademark costs are amortized over their estimated useful lives,
ranging from 3 to 15 years.
|
i)
|
Revenue
Recognition
|
|
Sales
revenue, net of allowances, is recognized when title transfers either upon
delivery at the customer site or at the factory. There are no customer
acceptance provisions to be met before the recognition of any product
revenue. Revenue is recognized only where collectability of accounts
receivable is reasonably assured. Other revenues are comprised primarily
of license and royalty fees recognized as earned in accordance with
agreements entered into by the Company when there is no further
involvement required by the Company. The Company accrues for related
product returns based on historical
activity.
|
j)
|
Research
and Development
|
Research
and development costs are expensed as incurred.
|
k)
|
Income
Taxes
|
Income
taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for future
tax consequences attributable to the temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply in
the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the period that includes the enactment
date. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized.
F-9
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
Note
1
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(continued)
|
|
l)
|
Accounting For
Warrants Issued With Convertible
Securities
|
The
Company accounts for the intrinsic value of beneficial conversion rights arising
from the issuance of convertible securities with non-detachable conversion
rights that are in-the-money at the commitment date. Such value is
determined after first allocating an appropriate portion of the proceeds
received to warrants or any other detachable instruments included in the
exchange.
m)
|
Impairment
of Amortizable Long-Lived
Assets
|
The
Company reviews long-lived tangible assets and certain intangible assets with
finite useful lives for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to future undiscounted cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value.
n)
|
Advertising
Costs
|
Advertising
costs are expensed as incurred. The amount charged to expense during
fiscal years 2010, 2009 and 2008 was $0.2 million.
o)
|
Goodwill
and Other Intangibles with Indefinite
Lives
|
Goodwill
consists principally of the excess of cost over the fair value of net assets
acquired. Other intangibles
with indefinite lives are the registered tradenames acquired with the
acquisition of Iceland Health. Such assets are not amortized. Instead
they are tested annually for impairment.
Goodwill
and intangible assets deemed to have indefinite lives are not amortized but
instead are tested for impairment at least annually and
more frequently upon the occurrence of certain events.
We review
the carrying value of our intangible assets and goodwill for impairment whenever
events or circumstances indicate that their carrying amount may not be
recoverable. Significant negative industry or economic trends, including a lack
of recovery in the market price of our common stock, disruptions to our
business, unexpected significant changes or planned changes in the use of the
intangible assets, and mergers and acquisitions could result in the need to
reassess the fair value of our assets and liabilities which could lead to an
impairment charge for any of our intangible assets or goodwill. The value of our
indefinite lived intangible assets and goodwill could also be impacted by future
adverse changes such as: (i) any future declines in our operating results, (ii)
a significant slowdown in the economy or (iii) any failure to meet the
performance projections included in our forecasts of future operating results.
We evaluate these assets, including purchased intangible assets deemed to have
indefinite lives, on an annual basis or more frequently, if indicators of
impairment exist. As of June 30, 2010, all goodwill and intangible assets with
indefinite lives had been written off.
F-10
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
Note
1
|
NATURE
OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
(continued)
|
o)
|
Goodwill
and Other Intangibles with Indefinite Lives
(continued)
|
Evaluations
of impairment involve management estimates of asset useful lives and future cash
flows. Significant management judgment is required in the forecasts of future
operating results that are used in the evaluations. It is possible, however,
that the plans and estimates used may prove to be inaccurate. If our actual
results, or the plans and estimates used in future impairment analysis, are
lower than the original estimates used to assess the recoverability of these
assets, we could incur additional impairment charges in a future
period.
p)
|
Reclassification
|
Certain
reclassifications (approximately $16.6 million and $9.7 million of losses from
discontinued operations for fiscal years 2009 and 2008, respectively) have been
made to prior years’ financial statements to conform to the 2010
presentation.
Note
2
|
LIQUIDITY AND CAPITAL
RESOURCES
|
Our
consolidated financial statements have been prepared assuming that we will
continue as a going concern, which contemplates the realization of assets and
the settlement of liabilities in the normal course of business. For several
years we have incurred significant recurring losses, and have relied on
financing activities to supplement cash from operations. At June 30,
2010, we had cash and cash equivalents of $0.9 million, a decrease of $0.5
million from June 30, 2009. We have incurred annual operating losses and, at
June 30, 2010, we had an accumulated deficit of approximately $132.8
million.
In
September 2011, the Company must redeem its Series J Convertible Preferred Stock
for approximately $17.8 million. Our continuation as a going concern is subject
to our ability to generate or obtain sufficient cash or restructure to meet this
obligation in a timely manner.
The
Company decided to refocus its energies and capital on its more profitable core
segment. As a result, on December 29, 2009, the Company sold its Branded
Products Group. For the year ended June 30, 2010, revenues from discontinued
operations were $4.5 million and losses from discontinued operations were $1.9
million compared with revenues of $31.9 million and losses from discontinued
operations of $16.6 million in the comparable period a year ago. Losses from
discontinued operations in fiscal year 2009, include a non-cash impairment
charge of $17.5 million related to goodwill and other intangibles with
indefinite lives. The net loss from continuing operations for the year ended
June 30, 2010 was $1.8 million compared to $4.2 million for the comparable
period a year ago. The improvement in continuing operations is due primarily to
the Company’s ongoing emphasis on cost control as well as strong chromium
picolinate sales for human consumption. The Company expects liquidity to improve
as a result of the sale of the Branded Products Group. For fiscal year 2008,
revenues from discontinued operations were $38.6 million and losses from
discontinued operations were $9.7 million.
F-11
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
3
|
RECENTLY ADOPTED
ACCOUNTING GUIDANCE
|
In
January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance
to amend the disclosure requirements related to recurring and nonrecurring fair
value measurements. The guidance requires new disclosures on the transfers
of assets and liabilities between Level 1 (quoted prices in active market for
identical assets or liabilities) and Level 2 (significant other observable
inputs) of the fair value measurement hierarchy, including the reasons and the
timing of the transfers. Additionally, the guidance requires a roll forward
of activities on purchases, sales, issuance, and settlements of the assets and
liabilities measured using significant unobservable inputs (Level 3 fair value
measurements). The guidance became effective with the reporting period beginning
January 1, 2010, except for the disclosure on the roll forward activities
for Level 3 fair value measurements, which will become effective with the
reporting period beginning July 1, 2011. Other than requiring additional
disclosures, adoption of this new guidance did not and will not have a material
impact on our financial statements.
On
July 1, 2009, the Company adopted guidance issued by the FASB on business
combinations. The guidance retains the fundamental requirements that the
acquisition method of accounting (previously referred to as the purchase method
of accounting) be used for all business combinations, but requires a number of
changes, including changes in the way assets and liabilities are recognized and
measured as a result of business combinations. It also requires the
capitalization of in-process research and development at fair value and requires
the expensing of acquisition-related costs as incurred.
On
July 1, 2009, the Company adopted guidance issued by the FASB that changes
the accounting and reporting for non-controlling interests. Non-controlling
interests are to be reported as a component of equity separate from the parent’s
equity, and purchases or sales of equity interests that do not result in a
change in control are to be accounted for as equity transactions. In addition,
net income attributable to a non-controlling interest is to be included in net
income and, upon a loss of control, the interest sold, as well as any interest
retained, is to be recorded at fair value with any gain or loss recognized in
net income. Adoption of the new guidance had no material impact on the financial
statements.
Note
4
|
STOCK-BASED
COMPENSATION
|
The
Company has adopted seven stock option plans which permit the grant of share
options and shares to its employees for up to 16.0 million shares of common
stock. The Company believes that such awards better align the
interests of the employees with those of its stockholders. Option awards are
generally granted with an exercise price equal to the market price of the
Company’s stock at the date of grant; those options generally vest ratably over
several years from the date of grant and expire ten years from the date of
grant. Approximately 3.8 million options remain available for grant
under these plans at June 30, 2010.
Share-Based Compensation
Information
The
Company granted 2.3 million stock options in the year ended June 30, 2010 with
an exercise price equal to the market price at a date of grant and a fair market
value of $72 thousand based on Black-Scholes option pricing
model.
F-12
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
4 STOCK-BASED COMPENSATION
(continued)
The
weighted average assumptions used in the Company’s Black-Scholes option pricing
model related to stock option grants during the years ended June 30, 2010, 2009
and 2008 were as follows:
June
30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Expected
option lives
|
2.0-10.0
years
|
5.0-10.0
years
|
3.2-5.0
years
|
|||||||||
Volatility
|
107.12-134.61 | % | 99.13 | % | 99.16 | % | ||||||
Risk-free
interest rate
|
0.72 | % | 1.48 | % | 3.23 | % | ||||||
Dividend
yield
|
0 | % | 0 | % | 0 | % | ||||||
Forfeiture
rate
|
13 | % | 10 | % | 16 | % |
The
Company has not paid nor does it contemplate paying a dividend in the near
future. As such a 0% dividend yield was used. The years of
expected lives are based on the Company’s historical employee exercise
information. Expected volatilities are based on historical volatility. The
risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of the grant.
Share-based
compensation expense recognized in the consolidated statement of operations for
the years ended June 30, 2010, 2009 and 2008 is based on awards ultimately
expected to vest, and has been reduced for estimated forfeitures. Forfeitures
are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates. Pre-vesting
forfeitures are estimated to be approximately 13% based on historical
experience.
The
Company recorded $0.2 million, $0.5 million and $0.7 million in share-based
compensation expense in the years ended June 30, 2010, 2009 and 2008,
respectively. Share-based compensation expense is recorded in
selling, general and administrative expenses.
The
following is a summary of option activity for the year ended June 30,
2010.
OPTIONS
|
Shares
|
Weighted-Average
Exercise Price
|
Weighted–Average
Remaining
Contractual
Term (Yrs.)
|
Aggregate
Intrinsic Value
($000)
|
||||||||||||
Outstanding
at July 1, 2009
|
4,799 | $ | 0.67 | |||||||||||||
Granted
|
2,255 | $ | 0.06 | |||||||||||||
Exercised
|
— | — | ||||||||||||||
Forfeited
or expired
|
(1,059 | ) | $ | 0.81 | ||||||||||||
Outstanding
at June 30, 2010
|
5,995 | $ | 0.42 | 6.7 | $ | 0 | ||||||||||
Exercisable
at June 30, 2010
|
3,990 | $ | 0.53 | 5.7 | $ | 0 |
F-13
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
4 STOCK-BASED COMPENSATION
(continued)
The
weighted-average grant-date fair value of options granted during the fiscal
years 2010, 2009 and 2008 was $0.03, $0.28 and $0.44 per share,
respectively. The total intrinsic value of options exercised during
the fiscal year ended June 30, 2008 was $37 thousand.
A summary
of the status of the Company’s nonvested options as of June 30, 2010 and changes
during the year ended June 30, 2010 is presented below:
NONVESTED OPTIONS
|
Options
|
Weighted-
Average
Grant-Date
Fair Value
|
||||||
Nonvested
at July 1, 2009
|
1,956 | $ | 0.37 | |||||
Granted
|
1,128 | $ | 0.03 | |||||
Vested
|
(752 | ) | $ | 0.50 | ||||
Forfeited
|
(327 | ) | $ | 0.94 | ||||
Nonvested
at June 30, 2010
|
2,005 | $ | 0.28 |
At June
30, 2010, there was $0.2 million of unrecognized compensation costs related to
non-vested options. The costs are expected to be recognized over a
weighted-average period of 2 years.
The total
fair value of shares vested during the years ended June 30, 2010, 2009 and 2008
was $0.4 million, $0.4 million and $0.2 million, respectively.
During
the year ended June 30, 2010, the Company did not grant any shares of restricted
stock.
The
following is a summary of restricted stock award activity for the year ended
June 30, 2010.
RESTRICTED STOCK
|
Shares
|
Weighted-
Average
Exercise Price
|
Weighted–
Average
Remaining
Contractual
Term (Yrs.)
|
Aggregate
Intrinsic Value
|
||||||||||||
Outstanding
at July 1, 2009
|
169 | $ | 1.57 | |||||||||||||
Granted
|
— | |||||||||||||||
Exercised
|
— | |||||||||||||||
Forfeited
or expired
|
(38 | ) | ||||||||||||||
Outstanding
at June 30, 2010
|
131 | $ | 1.57 | — | $ | — | ||||||||||
Exercisable
at June 30, 2010
|
131 | $ | 1.57 | — | $ | — |
F-14
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
5 FINANCIAL INSTRUMENTS AND
MAJOR CUSTOMERS
The fair
value of cash and cash equivalents, accounts receivable. accounts payable and
accrued expenses approximate carrying amounts due to the short maturities of
these instruments.
Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist principally of cash and cash equivalents and accounts
receivable. Concentrations of credit risk with respect to accounts
receivable are limited as the Company performs on-going credit evaluations of
its customers. On a periodic basis, the Company evaluates its
accounts receivable and establishes an allowance for doubtful accounts, based on
a history of past write-offs and collections and current credit
considerations. Management does not believe that significant credit
risk exists at June 30, 2010.
The
Company places its cash equivalents with financial institutions and brokerage
houses. The Company has substantially all of its cash in two bank
accounts. The balances are insured by the FDIC up to
$250,000. Such cash balances may exceed FDIC limits. At June 30,
2010, the Company had $0.6 million in excess of FDIC limits.
The
Company sells its products to customers worldwide. The Company
performs ongoing credit evaluations of its customer’s financial condition and
limits the amount of credit extended as deemed appropriate, but generally
requires no collateral. The Company maintains reserves for credit
losses based on past write-offs, collections and current credit evaluations and,
through June 30, 2010, such losses have been within management’s
expectations.
In fiscal
year 2010, three customers accounted for approximately 39% of total revenues. In
fiscal year 2009, one customer accounted for 24% of total revenues. For fiscal
year 2010, two customers accounted for more than 52% of accounts receivable,
net, while in fiscal year 2009, two customers accounted for more than 56% of
accounts receivable, net. In fiscal year 2008, no customer accounted for 10% of
total revenues, while in fiscal year 2008, three customers accounted for more
than 54% of accounts receivable, net.
Note
6 PROPERTY AND EQUIPMENT,
NET
The
components of property and equipment, net, at June 30, 2010 and 2009 are as
follows:
2010
|
2009
|
|||||||
Furniture
and fixtures
|
$ | 486 | $ | 498 | ||||
Machinery
and equipment
|
176 | 176 | ||||||
Office
equipment and leasehold improvements
|
563 | 544 | ||||||
Computer
equipment
|
848 | 844 | ||||||
2,073 | 2,062 | |||||||
Less: accumulated
depreciation and amortization
|
(2,016 | ) | (2,016 | ) | ||||
Property
and equipment, net
|
$ | 57 | $ | 46 |
Depreciation
expense was $13 thousand, $30 thousand and $37 thousand for the years ended June
30, 2010, 2009 and 2008, respectively.
F-15
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
7 PATENTS TRADEMARKS AND OTHER
AMORTIZABLE INTANGIBLES
During
fiscal years 2010, 2009 and 2008, changes in patents, trademarks and other
amortizable intangibles relate to the investment of $0.2 million, in each
of the respective years, in existing patents, which will be amortized over the
remaining life of the patents. No significant residual value is estimated for
these intangible assets. Intangible asset amortization expense was $0.4 million
for fiscal year 2010, $1.1 million for fiscal year 2009, and $2.2 million for
fiscal year 2008. The components of intangible assets are as
follows:
June 30,
|
||||||||||||||||
2010
|
2009
|
|||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
|||||||||||||
Patents
and licenses
|
$ | 9,772 | $ | (9,582 | ) | $ | 9,582 | $ | (9,582 | ) | ||||||
Trademarks,
trade names and other amortizable intangible assets
|
17,827 | (17,429 | ) | 17,827 | (17,061 | ) | ||||||||||
$ | 27,599 | $ | (27,011 | ) | $ | 27,409 | $ | (26,643 | ) |
Amortization
expense for the net carrying amount of intangible assets at June 30, 2010 is
estimated to be approximately $0.6 million in fiscal year 2011.
Note
8 GOODWILL AND OTHER
INTANGIBLES WITH INDEFINITE LIVES
The
majority of our goodwill and the trade name Iceland Health were recorded in
connection with the acquisition of IH in August 2006. In June 2009, we
determined that based on our current economic environment, the decline of our
market capitalization, and disruptions to our business, it was likely that an
indicator of goodwill impairment existed as of the end of the fiscal
year.
To test
for potential impairment, we determined the fair value of each of our reporting
segments based on projected discounted cash flows and market-based multiples
applied to sales and earnings. The results indicated an impairment, because the
current carrying value exceeded their fair value. We then determined the implied
fair value, and accordingly recorded an impairment charge of $14.8 million
against goodwill and $2.7 million against other intangibles with indefinite
lives. As a result of the sale of discontinued operations, the remainder of
goodwill and other intangibles with indefinite lives ($3.6 million) was written
off in fiscal year 2010.
Note
9 ACCRUED
EXPENSES
The
following items are included in accrued expenses at June 30, 2010 and
2009:
2010
|
2009
|
|||||||
Consulting
and professional fees payable
|
$ | 223 | $ | 181 | ||||
Accrued
compensation and related expense
|
286 | 89 | ||||||
Accrued
expenses related to products
|
14 | 726 | ||||||
Accrued
financing costs
|
433 | 744 | ||||||
Other
accrued expenses
|
365 | 478 | ||||||
$ | 1,321 | $ | 2,218 |
F-16
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
10 8%
SERIES J CONVERTIBLE PREFERRED STOCK
On September 10, 2007, the Company
entered into a securities purchase agreement under which the Company, for
$17,750,000, sold to private investors 17,750 shares of 8% Series J Convertible
Preferred Stock (the “Preferred Stock”) and warrants to purchase 6,715,218
shares of common stock.
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
$1.2158 per share (a total of 14,599,441 shares of common stock at June 30,
2010), subject to anti-dilution provisions and other limitations. The
Company’s stockholders approved the transaction at the Company’s annual meeting
on November 29, 2007. Subject to certain conditions, the Company can
force conversion of the Preferred Stock if the 20 consecutive trading day volume
weighted average price of the common stock is at least $3.6474.
The
Preferred Stock pays cumulative dividends at the annual rate of
8%. Dividends are payable in cash, provided that in certain
circumstances the Company may elect to pay dividends in shares of common stock
valued at 90% of the then 20 day consecutive trading day volume weighted average
price. The Company must redeem the Preferred Stock at the original
issue price plus accrued dividends on September 11, 2011, or earlier on the
occurrence of certain default events. Accordingly, the carrying value
of the preferred stock is included in noncurrent liabilities in the consolidated
balance sheets. The Securities Purchase Agreement among other
things also limits borrowings by the Company and the issuance of additional
series of preferred stock by the Company.
The
warrants are exercisable commencing March 11, 2008 and ending on March 11, 2013
at $1.2158 per share subject to anti-dilution provisions and other
limitations. The warrants may in certain circumstances 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.
The
Company, based on relative fair value, initially recorded additional paid-in
capital of $7.2 million relating to a beneficial conversion feature of the
Preferred Stock and the fair value of the warrants with the remaining $10.5
million of the proceeds recorded as a long-term liability. As
a result, dividends on the
Preferred Stock are charged as interest expense. Related issuance
costs of $1.1 million, classified as other assets on the consolidated balance
sheets, are amortized over the term of the Preferred Stock using the effective
interest rate method. As of June 30, 2010, there is $0.4 million remaining. In
addition, debt discount is being accreted based on the redemption price and
charged to interest expense over the term of the Preferred Stock.
In fiscal
year 2010, $1.9 million was charged to interest expense for
accretion. For the year ended June 30, 2010, the Company issued
25,033,362 shares of common stock with a fair value of $1.4 million in lieu of a
cash dividend.
Note
11 SHORT-TERM
BORROWINGS
The
Company and Gerber Finance, Inc. had entered into a loan and security agreement
(“Agreement”) on July 27, 2007. As of November 15, 2009, the Company
had repaid its obligation and cancelled the Agreement.
The
Company and JP Morgan Chase Bank, NA (“Chase”) entered into a loan agreement
that expired on January 7, 2009 whereby the Company borrowed $3.0 million at
LIBOR +0.500 percentage points. During the quarter ended March 31, 2009, the
Company repaid the loan and the loan agreement was cancelled.
F-17
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
12 STOCKHOLDERS’
DEFICIT
On May
19, 2006, the Company completed separate private placements of 5,555,557 shares
of common stock at $1.80 per share for aggregate gross proceeds of $10.0
million. The Company also issued to the investors 2,222,222 five year
warrants that are exercisable at $2.20 per share. At June 30, 2008,
all of these warrants remain outstanding. The Company adopted a Shareholder
Rights Plan on September 12, 2002. Under this plan, the Company distributed, as
a dividend, one preferred share purchase right for each share of
Common Stock of the Company held by
stockholders of record as of the close of business on September 25,
2002.
The
Rights Plan is designed to deter coercive takeover tactics, including the
accumulation of shares in the open market or through private transactions, and
to prevent an acquirer from gaining control of the Company without offering a
fair price to all of the Company's stockholders. The Rights will
expire on September 11, 2012. Each Right entitles stockholders to buy one
one-thousandth of a share of newly created Series H Participating Preferred
Stock of the Company for $3.00 per share. Each one one-thousandth of
a share of the Series H Preferred Stock is designed to be the functional
equivalent of one share of Common Stock.
The
Rights will be exercisable only if a person or group acquires beneficial
ownership of 30% or more of the Company's Common Stock or commences a tender or
exchange offer upon consummation of which such person or group would
beneficially own 30% or more the Company's Common Stock.
If any
person or group (an "Acquiring Person") becomes the beneficial owner of 30% or
more of the Company's Common Stock then (1) the Rights become exercisable for
Common Stock instead of Preferred Stock, (2) the Rights held by the Acquiring
Person and certain affiliated parties become void, and (3) the Rights held by
others are converted into the right to acquire, at the purchase price specified
in the Right, shares of Common Stock of the Company having a value equal to
twice such purchase price. The Company will generally be entitled to
redeem the Rights, at $.001 per right, until 10 days (subject to extension)
following a public announcement that an Acquiring Person has acquired a 30 %
position.
Warrants
Issued for Services
In
addition to the warrants issued to the private investors, the Company, from time
to time, has issued warrants to purchase Common Stock
to non-employees for services rendered. Warrants are
granted to purchase the Company’s Common Stock with exercise prices set at fair
market value on the date of grant. The terms of the warrants vary depending on
the circumstances, but generally expire in three to five years.
The
Company had outstanding warrants issued to non-employees for services as
follows:
WARRANTS
|
Number
|
Wtd-Avg
Exercise
Price
|
Wtd-Avg
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||||
Outstanding
at July 1, 2009
|
97,222 | $ | 1.80 | |||||||||||||
Granted
|
— | — | ||||||||||||||
Exercised
|
— | — | ||||||||||||||
Forfeited
or expired
|
— | — | ||||||||||||||
Outstanding
at June 30, 2010
|
97,222 | $ | 1.80 | 1.9 | — | |||||||||||
Exercisable
at June 30, 2010
|
97,222 | $ | 1.80 | 1.9 | — |
F-18
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in
thousands)
Note
12 STOCKHOLDERS’ DEFICIT
(concluded)
No
warrants were exercised in fiscal years 2010 and 2009. The warrants
expire 2012.
The
Company recorded compensation expense associated with warrants issued to
non-employees for services rendered of $14 thousand during fiscal years 2010,
2009 and 2008, respectively..
Note
13 LOSS PER
COMMON SHARE
Diluted
loss per common share for the fiscal years ended June 30, 2010, 2009 and 2008,
does not reflect the total of any of the incremental shares related to the
assumed conversion or exercise of preferred stock, stock options and warrants
(26,470,232, 31,249,775 and 33,063,355 shares, respectively) as the effect of
such inclusion would be anti-dilutive because of the reported net
loss.
Note
14 BENEFIT
PLANS
Through
September 19, 2004, eligible employees of the Company were entitled to
participate and to accrue benefits in the AB Mauri Food Inc. Retirement Plan, a
non-contributory defined benefit pension plan (the “Pension Plan”) maintained by
AB Mauri Food Inc. No additional pension benefits accrue under the
Pension Plan for services performed or compensation paid on or after September
19, 2004. Service with the Company after September 19, 2004 will be
considered solely for purposes of vesting and for determining eligibility for
early retirement benefits.
The
Company made its final payment of $0.2 million in fiscal year 2008.
In
addition, the Company also maintains a 401(k) defined contribution
plan. Contributions to the plan for the fiscal years 2010, 2009 and
2008 were $0.1 million each year.
Note
15 INCOME
TAXES
The
provisions (benefits) for income taxes for the fiscal years ended June 30, 2010,
2009 and 2008 consist of the following (in thousands):
2010
|
2009
|
2008
|
||||||||||
Current
state taxes
|
$ | 0 | $ | 0 | $ | 0 | ||||||
Deferred
|
0 | (199 | ) | — | ||||||||
$ | (0 | ) | $ | (199 | ) | $ | 0 |
F-19
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
15 INCOME
TAXES (continued)
Income
taxes attributed to the pre-tax loss differed from the amounts computed by
applying the U.S. federal statutory tax rate to the pre-tax loss as a result of
the following (in thousands):
2010
|
2009
|
2008
|
||||||||||
Income
benefit at U.S. statutory rate
|
$ | (1,243 | ) | $ | (7,396 | ) | $ | (5,760 | ) | |||
Increase/
(reduction) in income taxes resulting from:
|
||||||||||||
Change
in valuation allowance
|
(205 | ) | 880 | 4,546 | ||||||||
True
up of deferred tax asset
|
167 | (7 | ) | 660 | ||||||||
Non
deductible interest and dividends
|
1,272 | 1,327 | 1,323 | |||||||||
State
tax (benefits), net of federal
|
— | (157 | ) | (775 | ) | |||||||
Impairment
of goodwill
|
— | 5,154 | — | |||||||||
Other
items
|
9 | — | 6 | |||||||||
Total
income tax (benefit) provision
|
$ | 0 | $ | (199 | ) | $ | 0 |
The tax
effects of temporary differences that give rise to deferred taxes and deferred
tax assets and deferred tax liabilities at June 30, 2010 and 2009 are presented
below:
2010
|
2009
|
|||||||
Deferred
tax assets:
|
||||||||
Net
operating loss carry forwards
|
$ | 19,353 | $ | 19,984 | ||||
Accrued
expenses
|
595 | 746 | ||||||
Allowance
for doubtful accounts and returns
|
492 | 130 | ||||||
Inventory
reserve
|
77 | 116 | ||||||
Intangible
and fixed assets
|
3,669 | 4,616 | ||||||
Other
|
2 | 1 | ||||||
Total
gross deferred tax assets
|
24,188 | 25,593 | ||||||
Less
valuation allowance
|
(24,188 | ) | (25,593 | ) | ||||
Net
deferred tax assets
|
$ | — | $ | — | ||||
Deferred
tax liabilities:
|
||||||||
Trade
names
|
$ | — | $ | (1,200 | ) | |||
$ | — | $ | (1,200 | ) |
At June
30, 2010, the Company has available, for Federal and state income tax purposes,
net operating loss carry forwards of approximately $48.0 million expiring
through 2030. A valuation allowance is provided when it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. Ultimate utilization/availability of such net operating
losses and credits is dependent upon the Company’s ability to generate taxable
income in future periods and may be significantly curtailed if a significant
change in ownership occurs in accordance with the provisions of the Tax Reform
Act of 1986 as amended.
As of
June 30, 2010 and 2009, the Company had no liabilities related to uncertain tax
positions. Additionally, the Company does not believe there are any tax
positions where it is reasonably possible that the total amounts of unrecognized
tax benefits will significantly increase or decrease in the next twelve months
from June 30, 2010.
F-20
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands)
Note
15 INCOME
TAXES (concluded)
In the
event the Company is required to recognize a liability for uncertain tax
positions, any associated penalties and interest accrued would be recorded as a
component of income tax expense. There have been no income tax related penalties
or interest assessed or recorded as of June 30, 2010 and 2009.
The
Company conducts business principally in the United States. As a result, one or
more of its subsidiaries files income tax returns in the U.S. federal, various
state and local tax jurisdictions. In the normal course of business, the Company
is subject to examination by taxing authorities. The Company is no longer
subject to income tax examinations for tax years before June 30, 2007 in the
U.S.
Note
16 COMPREHENSIVE
LOSS
Comprehensive
loss includes unrealized gains (losses) on the auction rate securities that are
classified as investments. The differences between net loss and comprehensive
loss for each of these periods are as follows:
Year
Ended
|
||||||||||||
June
30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Net
loss
|
$ | (3,656 | ) | $ | (20,809 | ) | $ | (16,942 | ) | |||
Other
comprehensive income (loss);
|
||||||||||||
Change
in unrealized losses on available-for-sale securities
|
— | 260 | (260 | ) | ||||||||
Comprehensive
loss
|
$ | (3,656 | ) | $ | (20,549 | ) | $ | (17,202 | ) |
Note
17 COMMITMENTS AND
CONTINGENCIES
As of
June 30, 2008, the Company as a third party Defendant, reached a settlement with
QVC concerning a lawsuit filed by the Federal Trade Commission. The Company
agreed to pay to QVC $405 in six installments of $68 plus interest at LIBOR plus
0.75%. The last payment was made in fiscal year 2010.
The
Company leases certain office space in the United States. The lease
expires in the year 2012. Future non-cancelable minimum payments
under this lease are $0.2 million.
U.S.
Customs and Border Protection concluded its review of duties paid by Iceland
Health, LLC on importation of fish oil from Iceland, and in a letter dated March
23, 2010 advised Iceland Health, LLC that it owes $181. The Company has
established an accrual for this amount as of June 30, 2010.
The
Company has entered into various research and license agreements with certain
universities to supplement the Company’s research activities and to obtain for
the Company rights to certain technology. The agreements generally require the
Company to fund the research and to pay royalties based upon a percentage of
product sales.
San
Francisco Technology Inc. filed suit in the United States District Court for the
Northern District of California against Nutrition 21, Inc. (“Nutrition 21”) and
twenty-four other companies with a Complaint for unspecified total
damages. The Complaint against Nutrition 21, Inc. was served on July
22, 2010 and alleges, among other things, that Nutrition 21 falsely marked
Iceland Health Advanced Memory Formula with an expired patent number to deceive
the public. Nutrition 21 believes the suit is without merit and is
unable to predict the outcome of this matter.
F-21
NUTRITION
21, INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
17 COMMITMENTS AND
CONTINGENCIES (concluded)
In
connection with the Company’s purchase agreement for Nutrition 21 on August 11,
1997, the Company made cash payments of $0.2 million for each of the fiscal
years 2010, 2009 and 2008. There are no future commitments.
Note
18 SEGMENT
REPORTING
The
Company had two reportable business segments during fiscal year 2009, as a
supplier of essential minerals, most notably chromium picolinate (Ingredients
Products Group), and as a supplier of finished goods to food, drug and mass
retailers (Branded Products Group). With the sale of the Branded Products Group
on December 29, 2009, the Company classified the Branded Products Group as a
discontinued operation, see Note 19.
Substantially
all of the Company’s revenues are generated in the United States.
Note 19 DISCONTINUED
OPERATIONS
The
Company decided to refocus its energies and capital on its more profitable core
segment, Ingredients. As a result, on December 29, 2009, the Company sold
certain assets and liabilities of its direct response and retail businesses to
Nature’s Products, Inc. and its affiliates. The purchase price was $3.2 million
plus the assumption of certain liabilities. The transaction resulted in a loss
of $2.1 million, which has been recorded in the consolidated statement of
operations as a loss on sale of discontinued operations. Pursuant to the
Purchase Agreement, $0.1 million was deposited into an escrow account to be held
to satisfy certain indemnification claims that may arise, and has been recorded
as restricted cash in the consolidated balance sheets.
For the
year ended June 30, 2010, revenues from discontinued operations were $4.5
million and losses from discontinued operations were $ 1.9 million compared
with revenues of $31.9 million and loss from discontinued operations of $16.6
million in the comparable period a year ago. The loss from discontinued
operations in fiscal year 2009 included a non-cash impairment charge of $17.5
million. The net loss from continuing operations for the year ended June 30,
2010 was $1.8 million compared to $4.2 million for the comparable period a year
ago. For fiscal year 2008, revenues from discontinued operations were $38.6
million and losses from discontinued operations were $9.7 million.
Note
20 SUPPLEMENTAL CASH FLOW
INFORMATION
Year
ended June 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
Supplemental
disclosure of cash flow information:
|
||||||||||||
Cash
paid for interest
|
$ | 201 | $ | 563 | $ | 111 | ||||||
Cash
paid for income taxes
|
— | — | 14 | |||||||||
Supplemental
schedule of non cash investing and financing activities:
|
||||||||||||
Increase
in obligation for Nutrition 21 contingent payment
|
— | 153 | 268 | |||||||||
Issuance
of common stock for dividends on Series I preferred stock
|
— | 179 | 216 | |||||||||
Issuance
of common stock for dividends on Series J preferred stock
|
1,421 | 1,421 | 355 |
F-22
NUTRITION 21,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
($ in
thousands, except share data)
Note
21 SUBSEQUENT
EVENT
On July
1, 2010, the Company issued 27,391,975 shares of common stock to holders of its
Series J Convertible Preferred Stock for dividends
F-23