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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 000-24693
NUTRACEUTIX, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
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<S> <C>
DELAWARE 91-1689591
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
8340 - 154TH AVENUE NORTHEAST
REDMOND, WASHINGTON 98052
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(425) 883-9518
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Number of shares of issuer's common stock outstanding as of November 7, 2000:
17,802,197
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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NUTRACEUTIX, INC.
FORM 10-QSB
TABLE OF CONTENTS
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PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements 1
Balance sheets at September 30, 2000 (unaudited)
and December 31, 1999 1
Statements of Operations for the three month and nine month
periods ended September 30, 2000 and September 30, 1999
(unaudited) 3
Statements of Cash Flows for the nine month periods ended
September 30, 2000 and September 30, 1999 (unaudited) 4
Notes to Financials 6
Item 2. Management's Discussion and Analysis of Financial
Condition of Plan of Operation 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NUTRACEUTIX, INC.
BALANCE SHEETS
ASSETS
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<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash $ 217,718 $ 149,321
Accounts receivable-net 1,216,579 936,627
Inventories 1,607,940 1,746,474
Prepaid expenses 149,925 112,021
Total current assets 3,192,162 2,944,443
EQUIPMENT AND FURNITURE-net 1,727,575 1,461,324
OTHER ASSETS-net 739,302 795,019
$ 5,659,039 $ 5,200,786
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit $ 1,064,500 $ 839,500
Current maturities of long-term obligations 237,515 203,998
Current maturities of capital lease obligations 217,885 217,394
Accounts payable-trade 911,126 550,900
Accounts payable-MET-Rx -- 662,841
Accrued liabilities 70,107 84,952
Deferred revenue 160,647 15,461
Total current liabilities 2,661,780 2,575,046
LONG-TERM OBLIGATIONS, less current maturities 509,110 533,730
CAPITAL LEASE OBLIGATIONS, less current maturities 493,017 248,148
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock authorized, 5,000,000 shares at $.01 par value -- --
Common stock authorized, 30,000,000 shares $.001 par value 17,762 17,489
Additional contributed capital 11,777,857 11,725,754
Accumulated deficit (9,800,487) (9,899,381)
Total stockholders' equity 1,995,132 1,843,862
$ 5,659,039 $ 5,200,786
</TABLE>
The accompanying notes are an integral part of these statements.
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NUTRACEUTIX, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Net revenues $ 2,229,065 $ 3,460,522 $ 6,232,536 $ 7,782,963
Cost of revenues 1,615,435 2,530,024 4,619,820 5,691,236
Gross profit 613,630 930,498 1,612,716 2,091,727
Operating expenses
Selling and marketing 131,572 198,095 404,470 620,337
Research and development 102,878 56,143 252,473 224,035
General and administrative 352,073 367,670 1,187,323 1,075,620
586,523 621,908 1,844,266 1,919,992
Operating profit (loss) 27,107 308,590 (231,550) 171,735
Other income (expense)
Interest expense (80,139) (77,718) (226,199) (183,333)
Other 495,067 14,028 556,643 (21,993)
414,928 (63,690) 330,444 (205,326)
NET EARNINGS (LOSS) $ 442,035 $ 244,900 $ 98,894 $ (33,591)
Net earnings (loss) $ 0.025 $ 0.014 $ 0.006 $ (0.002)
per share
Net earnings (loss) $ 0.024 $ 0.013 $ 0.005 $ (0.002)
per share assuming
dilution
</TABLE>
The accompanying notes are an integral part of these statements.
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NUTRACEUTIX, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
Increase (Decrease) in Cash SEPTEMBER 30,
2000 1999
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 98,894 $ (33,591)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities
Depreciation and amortization 303,069 274,750
Settlement of MET-Rx accounts payable (345,000) --
Write-off of start-up costs -- 50,266
Changes in assets and liabilities
Accounts receivable (279,952) (789,441)
Inventories 138,534 (1,539,778)
Prepaid expenses (37,904) 54,516
Accounts payable 42,385 1,589,645
Accrued liabilities and deferred revenue 130,341 (30,965)
----------- -----------
Net cash provided by (used in) operating
activities 50,367 (424,598)
----------- -----------
Cash flows from investing activities:
Purchase of equipment and furniture (41,172) (126,444)
Patent and technology rights expenditures (52,655) (45,110)
----------- -----------
Net cash used in investing activities (93,827) (171,554)
----------- -----------
Cash flows from financing activities:
Payments on long-term obligations and
capital lease obligations (392,255) (312,989)
Proceeds from long-term obligations 226,736 161,539
Net proceeds on line of credit 225,000 708,000
Net proceeds from issuance of common stock 52,376 109,375
----------- -----------
Net cash provided by financing activities 111,857 665,925
----------- -----------
Net increase in cash 68,397 69,773
----------- -----------
Cash at beginning of period 149,321 93,440
----------- -----------
Cash at end of period $ 217,718 $ 163,213
=========== ===========
Cash paid during the period for interest $ 226,199 $ 114,028
=========== ===========
Noncash investing and financing activities:
Purchase of equipment under capital lease obligations $ 419,776 $ 205,569
=========== ===========
Issuance of common stock to prepay royalties $ - $ 15,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
3
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NUTRACEUTIX, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. FINANCIAL STATEMENTS
The unaudited financial statements of Nutraceutix, Inc. (the Company)
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire fiscal year ending December 31, 2000. The
accompanying unaudited financial statements and related notes should be read in
conjunction with the audited financial statements and the Form 10-KSB of the
Company, for its fiscal year ended December 31, 1999.
NOTE 2. INVENTORIES
Inventories are stated at the lower of cost or market; cost is
determined by the first-in, first-out method. Inventories consist of the
following:
<TABLE>
<CAPTION>
September 30,
2000 December 31, 1999
(unaudited)
---------- ----------
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Raw materials $1,189,299 $1,122,128
Work in progress 331,206 589,720
Finished goods 87,435 34,626
---------- ----------
$1,607,940 $1,746,474
========== ==========
</TABLE>
NOTE 3. NET EARNINGS (LOSS) PER SHARE
Basic earnings per share are based on the weighted average number of
shares outstanding during each quarter and income available to common
shareholders. Earnings per share assuming dilution are based on the assumption
that outstanding stock options were exercised. The weighted average shares for
computing basic earnings per share were 17,698,588 and 17,489,812 for the three
months ended September 30, 2000 and 1999, respectively, and 17,563,589 and
17,299,794 for the nine months ended September 30, 2000 and 1999, respectively.
The weighted average shares for computing dilution were 1,728,479 for the three
and nine months ended September 30, 2000 and 2,105,832 for the three months
ended September 30, 1999. Options to purchase 1,141,800 and 1,262,066 shares of
common stock at or above $.75 and $.56 a share for the three and nine months
ended September 30, 2000 and three months ended September 30, 1999 were not
included in the computation of diluted EPS as the options' exercise price was
greater than the average market price of the common shares.
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Because of the net loss for the nine months ended September 30, 1999,
common stock equivalent shares were not included in the calculation of diluted
earnings per share as their inclusion would be anti-dilutive.
NOTE 4. MET-RX AGREEMENT
On September 18, 2000, the Company entered into an agreement with MET-Rx
USA, Inc. (MET-Rx), which terminated the Product Sales and Sublicense Agreement
for Controlled Delivery Technology and Molecular Dispersion Technology Products,
entered into on March 6, 2000 (the "Sublicense Agreement"). The termination
agreement required MET-Rx to pay the Company a one-time payment of $150,000 to
satisfy all of MET-Rx's obligations under the Sublicense Agreement. In
conjunction with the termination agreement, certain accounts payable totaling
$345,000 due to MET-Rx were forgiven. As a result, the Company recognized a gain
of approximately $495,000 for the three months ended September 30, 2000, which
is included in Other Income.
NOTE 5. FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In December 1999, the SEC staff issued Staff Accounting Bulletin 101,
Revenue Recognition in Financial Statements, (SAB 101), which outlines four
basic criteria that must be met before registrants can record revenue (a)
persuasive evidence that an arrangement exists; (b) delivery has occurred or
services have been rendered; (c) the seller's price to the buyer is fixed and
determinable; and (d) collectibility is reasonably assured. The SEC staff
originally deferred the implementation date of SAB 101 (through SAB 101A and SAB
101B) until no later than the fourth quarter of fiscal years beginning after
December 15, 1999. The Company believes the adoption of SAB 101 will have no
significant impact on the Company's financial statements.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION OR PLAN OF
OPERATION
The following discussion and analysis should be read in conjunction with
the financial statements, including the notes thereto, appearing in this Form
10-QSB and in the Company's 1999 annual report on Form 10-KSB.
Except for the historical information contained herein, the matters
discussed in this quarterly report contain forward-looking statements that are
based on Management's beliefs and assumptions, current expectations, estimates,
and projections. Statements that are not historical facts, including without
limitation, statements which are preceded by, followed by or include the words
"believes", "anticipates," "plans," "expects," "may," "should," or similar
expressions, are forward-looking statements. Many of the factors that will
determine the Company's future results are beyond the ability of the Company to
control or predict. These statements are subject to risks and uncertainties and,
therefore, actual results may differ materially.
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The Company disclaims any obligation to update any forward-looking
statements whether as a result of the new information, future events or
otherwise.
Important factors that may affect future results include, but are not
limited to: the impact of competitive products and pricing, product development,
changes in law and regulations, customer demand, litigation, availability of
future financing and uncertainty of market acceptance of new products.
A more detailed discussion of these factors is presented in the
Company's 1999 annual report on Form 10-KSB under the heading "Outlook - Issues
and Uncertainties."
NET REVENUES
Net revenues decreased 36% or $1,231,457 to $2,229,065 for the quarter
ended September 30, 2000 from net revenues of $3,460,522 for the quarter ended
September 30, 1999 and decreased 20% or $1,550,427 to $6,232,536 for the nine
months ended September 30, 2000 from net revenues of $7,782,963 for the nine
months ended September 30, 1999. An analysis of the Company's four revenue
generating centers is outlined below:
PROPRIETARY TECHNOLOGY
Revenues from proprietary technology decreased 30% or $606,499 to
$1,417,639 for the quarter ended September 30, 2000 from revenues of $2,024,138
for the quarter ended September 30, 1999 and increased 12% or $393,085 to
$3,745,170 for the nine months ended September 30, 2000 from revenues of
$3,352,085 for the nine months ended September 30, 1999.
Calcium d-glucarate sales increased 38% or $101,400 to $370,674 for the
quarter ended September 30, 2000 compared to $269,274 for the quarter ended
September 30, 1999 and increased 49% or $290,233 to $888,338 for the nine months
ended September 30, 2000 compared to $598,105 for the nine months ended
September 30, 1999. The increases are attributed to the addition of 21 new
sub-licensees since December 31, 1999, as well as, increased orders for product
from existing customers.
LIVEBAC sales decreased 10% or $40,463 to $362,227 for the quarter ended
September 30, 2000 compared to $402,690 for the quarter ended September 30, 1999
and increased 44% or $448,279 to $1,477,335 for the nine months ended September
30, 2000 compared to $1,029,056 for the nine months ended September 30, 1999.
The year-to-date sales of products produced using the LIVEBAC technology
reflects the addition of new customers and increased sales to current customers.
Management believes that the quarterly downturn is due to timing of orders and
is not representative of future sales.
Proprietary delivery system technology sales decreased 49% or $667,436
to $684,738 for the quarter ended September 30, 2000 compared to $1,352,174 for
the quarter ended September 30, 1999 and decreased 20% or $345,427 to $1,379,497
for the nine months ended September 30, 2000 compared to $1,724,924 for the nine
months ended September 30, 1999. During the fourth quarter of 1999, MET-Rx USA
was acquired by Rexall Sundown and in turn, Rexall Sundown was itself acquired
by Royal Numico in the first quarter of 2000. During the quarter
6
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ending June 30, 2000, Rexall Sundown cancelled all in-house orders for products
containing androstiene in response to the Food and Drug Administration review of
the regulations surrounding the sale of these products. The cancellation of the
androstiene orders resulted in the lowest quarterly sales of CDT/MDT technology
products since the first quarter of 1999. For the quarter ended September 30,
2000, sales to MET-Rx USA decreased 99% or $1,337,194 to $14,980 compared to
$1,352,174 for the quarter ended September 30, 1999 and decreased 59% or
$1,015,185 to $709,739 for the nine months ended September 30, 2000 compared to
$1,724,924 for the nine months ended September 30, 1999. New customers
sub-licensed to sell proprietary delivery system technology during the nine
months ended September 30, 2000 represent 98% or $669,758 of all proprietary
technology sales.
During the third quarter of 2000, the Company acquired an exclusive
worldwide license to another controlled delivery technology patent for all
applications in health/dietary supplements, over-the-counter (OTC) products and
prescription drugs. This new controlled delivery patent was developed in the
laboratories of Dr. Reza Fassihi at Temple University School of Pharmacy in
Philadelphia, Pennsylvania and was issued by the U.S. Patent Office on July 18,
2000. Management anticipates a future growth in revenues derived from licensing
fees and research and development contract payments as a result of this
exclusive license.
PRIVATE LABEL MANUFACTURING OF HEALTH SUPPLEMENTS
Sales of private label manufacturing of health supplements decreased 64%
or $494,518 to $280,355 for the quarter ended September 30, 2000 compared to
$774,873 for the quarter ended September 30, 1999 and decreased 71% or
$1,752,151 to $709,923 for the nine months ended September 30, 2000 compared to
$2,462,074 for the nine months ended September 30, 1999.
In 1999, the Company manufactured non-proprietary, powder fill products
for MET-Rx USA as an interim service. There have been no sales in the powder
fill business during the current nine months ended and management does not
expect further sales. The decrease in private label manufacturing reflects the
loss of non-proprietary product sales to MET-Rx USA totaling $191,467 for the
quarter ended September 30, 1999 and $1,371,643 for the nine months ended
September 30, 1999 of which $69,319 and $554,069 respectively, were powder fill
products.
Additionally, there was a decrease of $425,678 in sales to Rexall
Showcase International for non-proprietary products from the quarter ended
September 30, 1999 to the quarter ended September 30, 2000.
FERMENTATION
Sales of fermentation products increased 3% or $12,362 to $371,576 for
the quarter ended September 30, 2000 compared to $359,214 for the quarter ended
September 30, 1999 and increased 37% or $363,001 to $1,332,816 for the nine
months ended September 30, 2000 compared to $969,815 for the nine months ended
September 30, 1999. Sales to new customers, increased sales to existing
customers and the alliance with Biotal, Inc. for the manufacture of MICRO-CELL
feed additive product account for the increase in fermentation sales. Management
expects to realize an increase in fermentation sales and a corresponding
decrease in
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COBACTIN feed additive sales under the agreement with Biotal, Inc.
COBACTIN
The Company's sales of COBACTIN microbial feed additives decreased 47%
or $142,802 to $159,495 for the quarter ended September 30, 2000 compared to
$302,297 for the quarter ended September 30, 1999 and decreased 55% or $554,362
to $444,627 for the nine months ended September 30, 2000 compared to $998,989
for the nine months ended September 30, 1999. These diminishing results reflect
the September 1, 1999 agreement with Biotal, Inc. that reduced the sales price
of COBACTIN feed additive, and correspondingly decreased sales and marketing
expenses, and increased sales of fermentation products through the manufacture
of MICRO-CELL feed additive product for Biotal, Inc. Management believes that
lowered sales continue to reflect the impact of the conversion of COBACTIN
customers to the MICRO-CELL two-phase feeding program.
GROSS PROFIT
Gross profit decreased 34% or $316,868 to $613,630 for the quarter ended
September 30, 2000 compared to $930,498 for the quarter ended September 30,
1999. Gross profit decreased 23% or $479,011 to $1,612,716 for the nine months
ended September 30, 2000 compared to $2,091,727 for nine months ended September
30, 1999. The decline in gross profit reflects the decrease in total product
revenues and the discontinuance of the MET-Rx USA business.
SELLING AND MARKETING EXPENSES
Selling and marketing expenses decreased 34% or $66,523 to $131,572 for
the quarter ended September 30, 2000 from $198,095 for the quarter ended
September 30, 1999. For the nine months ended September 30, 2000 selling and
marketing expenses also decreased 35% or $215,867 to $404,470 from $620,337 for
the nine months ended September 30, 1999. Under the agreement with Biotal, Inc.,
selling and marketing expenses are decreased.
RESEARCH AND DEVELOPMENT EXPENSES
Research and Development expenses increased 83% or $46,735 to $102,878
for the quarter ended September 30, 2000 from $56,143 for the quarter ended
September 30,1999 and increased 13% or $28,438 to $252,473 for the nine months
ended September 30, 2000 from $224,035 for the nine months ended September 30,
1999. The increase in expenses reflects the appointment of William D. St. John
as Chief Science Officer for the future development and discovery of proprietary
technologies.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses decreased 4% or $15,597 to $352,073
for the quarter ended September 30, 2000 compared to $367,670 for the quarter
ended September 30, 1999 and increased 10% or $111,703 to $1,187,323 for the
nine months ended September 30, 2000 compared to $1,075,620 for the nine months
ended September 30, 1999.
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INTEREST EXPENSE
Interest expense increased 3% or $2,421 to $80,139 for the quarter ended
September 30, 2000 compared to $77,718 for the quarter ended September 30, 1999
and increased 23% or $42,866 to $226,199 for the nine months ended September 30,
2000 compared to $183,333 for the nine months ended September 30, 1999. The
year-to-date increase was due to the addition of equipment leases in 1999 and
during the first quarter of 2000, as well as an increase in borrowing under the
line of credit.
OTHER INCOME
Other income was $495,067 for the quarter ended September 30, 2000
compared to $14,028 for the quarter ended September 30, 1999 and $556,643 for
the nine months ended September 30, 2000 compared to other expense of $21,993
for the nine months ended September 30, 1999. The significant increase in other
income in the quarter ended September 30, 2000 is the accounting for a one-time,
non-recurring settlement agreement with MET-Rx USA/Rexall Sundown for agreement
termination and cancelled purchase orders for CDT/MDT products during the first
nine month of 2000. The terms of the settlement agreement consisted of a
one-time cash payment, forgiveness of accounts payable and termination of the
exclusive license agreement. See Note 4 of Notes to Financial Statements.
NET EARNINGS
The net earnings for the quarter ended September 30, 2000 were $442,035
compared to net earnings of $244,900 for the quarter ended September 30, 1999
and for the nine months ended September 30, 2000 were $98,894 compared to the
net loss of $33,591 for the nine months ended September 30, 1999.
Management believes that the Company has substantially realized the
adverse effects of the decision by MET-Rx USA/Rexall Sundown to cancel the
androstiene orders during the first half of 2000. Management does not anticipate
any future CDT/MDT androstiene business with MET-Rx USA/Rexall Sundown due to
regulatory issues. Other income realized by the settlement agreement with Rexall
Sundown/MET-Rx USA diminished the negative impact of the terminated MET-Rx USA
CDT/MDT androstiene business. The settlement agreement along with the corrective
actions and expense controls initiated late in the second quarter has mitigated
the unfavorable effects of the lost MET-Rx sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its operations and capital requirements primarily
through borrowing and operations. As of September 30, 2000 the Company had
working capital of $530,382 as compared to working capital of $369,397 at
December 31, 1999. The recognized increase in working capital at September 30,
2000 was the outcome of the net earnings for the nine months ended.
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The Company's conventional bank line of credit for $1,200,000 was
renewed on May 1, 2000 for a term of twelve months subject to compliance with
financial covenants. As of September 30, 2000, the Company had an available
balance of $135,500 for borrowing. The bank line of credit continues to be
collateralized by accounts receivable, inventory and equipment. The Company
anticipates that its working capital needs for the remainder of the year will be
met from operations and available borrowing capacity.
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed as part of this report:
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<CAPTION>
EXHIBIT NO. DESCRIPTION
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<S> <C>
10.1 Temple University - of the Commonwealth
System of Higher Education License
Agreement, effective September 6, 2000
11.1 Computation of Earnings (Loss) Per Share
27 Financial Data Schedule for the Quarter
Ended September 30, 2000
</TABLE>
(b) Reports on Form 8-K
None.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NUTRACEUTIX, INC.
Date: November 13, 2000. By: /s/ David T. Howard
-----------------------------------------
DAVID T. HOWARD
Chief Executive Officer, President,
(Principal Executive Officer)
Date: November 13, 2000. By: /s/ Steven H. Moger
-----------------------------------------
STEVEN H. MOGER
Vice President, Operations
(Principal Financial Officer)
11
