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| NXXI > SEC Filings for NXXI > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
The following discussion should be read in conjunction with the condensed consolidated financial statements and related notes thereto of the Company included elsewhere herein.
Forward-Looking Statements and Risk Factors
This quarterly report and the documents incorporated by reference contain forward-looking statements which are intended to fall within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Words such as "anticipates", "expects", "intends", "plans", "believes", "seeks", and "estimates" and similar expressions identify forward-looking statements. Statements that are "forward-looking statements" are based on current expectations and assumptions that are subject to risks and uncertainties. Actual performance and results could differ materially because of factors such as those set forth under "Risk Factors" in Form 10-K/A filed with the Securities and Exchange Commission on October 3, 2008 and this Form 10-Q.
We undertake no obligation to update or review any guidance or other forward-looking information, whether as a result of new information, future developments or otherwise.
Revenues from the Ingredient Products Group are primarily derived from the sale of proprietary ingredients together with the grant of patent licenses to use the ingredients, to manufacturers of vitamin and mineral supplements. The fees for the licenses are bundled on an undifferentiated basis with the price that the Company charges for its ingredients, since licenses are not sold separately.
Revenues from the Branded Products Group are principally derived from the sale of branded products to food, drug and mass retailers. Revenue, net of an estimate for returns, is recognized when the products are received by the retailers or, if the retailer has the right to return all unsold product, revenue is recognized when the end user takes possession of the product. Upon shipment by the Company, amounts billed to customers with the right to return all unsold product are included as accounts receivable, inventory is relieved, the sale is deferred and the gross profit is reflected as a current liability until the product is sold to the end user.
Cost of revenues includes both direct and indirect manufacturing costs. Research and development expenses include internal expenditures as well as expenses associated with third party providers. Advertising and promotion expenses include fees and expenses directly related to the selling of the Company's products including the cost of advertising, promotional expenses and third party fees. General and administrative expenses include salaries and overhead, third party fees and expenses, and costs associated with the operations of the Company. The Company capitalizes patent costs and intangible assets with finite lives, and amortizes them over periods not to exceed seventeen years.
Revenues
Net sales of the Ingredient Products Group were $1.8 million for the three-month period ended September 30, 2008. Sales of chromium picolinate remained stable when compared to last year at this time.
Net product sales of the Branded Products Group were $10.8 million for the three-month period ended September 30, 2008, compared to $9.9 million for the same period a year ago. While branded product sales through the direct response channel were approximately $2.7 million less than the comparable period a year ago, sales to retailers were $3.6 million greater than the comparable period a year ago. A reduction in advertising and promotion expenditures through the direct response channel was the primary reason for the direct response shortfall, while increased distribution from new retailer-specific items, continued consumer awareness and brand name recognition in the retail group more than offset the shortfall.
Other revenues were $51 thousand for the three months ended September 30, 2008 when compared to $0.4 million in the comparable period a year ago. A one-time favorable settlement of a patent infringement lawsuit of $0.3 million in the first quarter of fiscal year 2008 did not recur this current quarter.
Cost of Revenues
Cost of revenues for the Ingredient Products Group were $0.5 million for each of the three-month periods ended September 30, 2008 and 2007, respectively.
Cost of revenues for the Branded Products Group was $4.3 million for the three-month period ended September 30, 2008 compared to $3.5 million for the three-month period ended September 30, 2007. While the cost of products sold through the direct response channel declined $0.9 million due to lower sales, retail product costs increased $1.8 million due primarily to the increased sales of the retail group.
Advertising and Promotion Expenses ("Advertising")
Advertising for the Branded Products Group for the three months ended September 30, 2008 were $5.2 million compared to $9.8 million in the comparable period a year ago. Lower promotional advertising ($3.1 million) for the retail products when compared to the same period a year ago was the primary reason. In addition, advertising to support direct response was reduced by $1.5 million when compared to the comparable period a year ago.
Fluctuations in the Ingredients Product Group were not material.
Unallocated Corporate Expenses
Unallocated corporate expenses for the three-month period ended September 30, 2008 were $2.3 million compared to $1.9 million in the comparable period a year ago. An increase in interest expense of $0.7 million for the three months ended September 30, 2008 when compared to the comparable period a year ago is due primarily to amortization of debt financing costs and accretion related to Series J preferred stock issued in September 2007. Partially offsetting this increase was a decline in general and administrative expenses of $0.3 million due to one-time adjustments related to stock based compensation expense and allowance for doubtful account estimates.
Net Income (Loss)
Net income for the three-month period ended September 30, 2008 was $0.2 million compared to a net loss of $4.0 million in the comparable period a year ago. Cost containment, particularly advertising and promotion expenses, account for the majority of the improvement.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments at September 30, 2008 were $6.7 million compared to $4.8 million at June 30, 2008.
During the three-month period ended September 30, 2008, net cash of $1.5 million was used in operating activities, compared to $5.1 million used in operating activities in the comparable period a year ago. Improved profitability was the primary reason.
During the three-month periods ended September 30, 2008 and 2007, respectively, net cash used in investing activities was $0.2 million.
During the three-month period ended September 30, 2008, net cash used in financing activities was $0.4 million compared to net cash provided by financing activities of $18.2 million. The last fiscal year period included net proceeds of $16.6 million from the September 2007 issuance of 8% Series J Convertible Preferred Stock due 2011. At September 30, 2008, the Company had net borrowings of $1.3 million from Gerber Finance Inc. in accordance with its loan and security agreement.
Our liquidity is affected by many factors, some based on the normal ongoing operations of the business and others related to the uncertainties of the industries in which we compete. At June 30, 2008, the Company reported its auction rate securities ("ARS") at fair value. The Company's ARS are collateralized by student loan portfolios (substantially all of which are guaranteed by the United States Government). Beginning in February 2008, the auctions for all of the ARS then held by us were unsuccessful, resulting in our continuing to hold them beyond their typical auction reset dates. As a result of the lack of liquidity in the ARS market and not as a result of the quality of the underlying collateral, for the year ended June 30, 2008, we recorded a temporary impairment on our ARS of $0.3 million, which is reflected in accumulated other comprehensive loss in our condensed consolidated balance sheet. We have assumed an average maturity of our ARS in excess of one year due to the lack of liquidity in the ARS markets and the long-term remaining duration of the underlying securities; therefore, we have classified these securities as noncurrent on our June 30, 2008 condensed consolidated balance sheet. In addition to adjusting the carrying value of our ARS, if our assessment of the valuation adjustment in future periods is other than temporary, we would record an impairment charge through our condensed consolidated statement of operations. On October 1, 2008, the Company received an offer to repurchase the ARS at the purchase price of face value or par value plus accrued and unpaid interest or dividends. As a result, the Company no longer needs to record a temporary impairment. As a result, the Company believes that it no longer needs to record a temporary impairment and has included the ARS as a short-term investment at their face value of $4.0 million in the accompanying condensed consolidated balance sheet at September 30, 2008.
If necessary, the Company will seek any necessary additional funding through arrangements with corporate collaborators, through public or private sales of its securities, including equity securities, or through bank financing. There is no assurance that additional funds will be available on terms favorable to the Company and its shareholders, or at all.
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