UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: OCTOBER 31, 2008
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-18349
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MEDICAL NUTRITION USA, INC. |
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) |
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DELAWARE |
| 11-3686984 |
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(STATE OR OTHER JURISDICTION OF |
| (I.R.S. EMPLOYER |
INCORPORATION OR ORGANIZATION) |
| IDENTIFICATION NO.) |
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10 WEST FOREST AVENUE, ENGLEWOOD, NEW JERSEY 07631 |
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) |
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(201) 569-1188 |
REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE |
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(FORMER NAME, IF CHANGED SINCE LAST REPORT) |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 o
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 “accelerated filer,” large accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act (Check one):
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| Large Accelerated Filer | o | Accelerated Filer | o |
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| Non-Accelerated Filer | o | 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 o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date 13,854,833 shares of common stock as of December 12, 2008.
MEDICAL NUTRITION USA, INC.
FORM 10Q - INDEX
2
MEDICAL NUTRITION USA, INC.
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| October 31, |
| January 31, |
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| 2008 |
| 2008 |
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| (Unaudited) |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 7,595,300 |
| $ | 5,208,000 |
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Short term investments |
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| 2,000,000 |
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| 4,336,800 |
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Accounts receivable, net of allowance of $49,700 and $45,000, respectively |
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| 1,163,200 |
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| 1,054,500 |
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Inventories |
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| 520,600 |
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| 401,800 |
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Deferred income taxes |
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| 350,000 |
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| 877,700 |
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Prepaid income taxes |
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| 10,500 |
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| 232,000 |
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Other current assets |
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| 142,000 |
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| 179,800 |
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Total current assets |
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| 11,781,600 |
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| 12,290,600 |
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Fixed Assets, net of accumulated depreciation and amortization of $316,900 and $248,500, respectively |
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| 277,900 |
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| 199,000 |
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Other Assets: |
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Deferred income taxes |
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| 1,116,400 |
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| 480,000 |
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Security deposits |
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| 15,300 |
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| 15,300 |
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Investment in Organics Corporation of America |
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| 125,000 |
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| 125,000 |
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Intangible assets, net of amortization |
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| 270,300 |
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| 252,700 |
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| $ | 13,586,500 |
| $ | 13,362,600 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current Liabilities: |
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Accounts payable |
| $ | 519,400 |
| $ | 364,800 |
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Accrued expenses |
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| 767,000 |
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| 466,000 |
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Accrued rebates |
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| 49,900 |
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| 61,700 |
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Total current liabilities |
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| 1,336,300 |
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| 892,500 |
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Stockholders’ Equity: |
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Preferred stock $0.001 par value, 5,000,000 shares authorized; no shares issued or outstanding at October 31, 2008 and January 31, 2008 |
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| — |
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| — |
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Common stock, $0.001 par value; 20,000,000 shares authorized;13,854,833 and 14,045,483 issued, respectively |
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| 13,900 |
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| 14,000 |
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Additional paid-in-capital |
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| 24,828,400 |
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| 24,687,900 |
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Accumulated deficit |
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| (12,361,800 | ) |
| (12,005,800 | ) |
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| 12,480,500 |
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| 12,696,100 |
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Less: treasury stock, at cost; 53,842 and 52,562 shares, respectively |
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| (230,300 | ) |
| (226,000 | ) |
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Total stockholders’ equity |
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| 12,250,200 |
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| 12,470,100 |
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| $ | 13,586,500 |
| $ | 13,362,600 |
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3
See notes to condensed financial statements.
MEDICAL NUTRITION USA, INC.
CONDENSED STATEMENTS OF OPERATIONS
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| NINE MONTHS ENDED |
| THREE MONTHS ENDED |
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| 2008 |
| 2007 |
| 2008 |
| 2007 |
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| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
| (Unaudited) |
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Sales |
| $ | 10,063,200 |
| $ | 9,604,300 |
| $ | 3,426,700 |
| $ | 3,419,800 |
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Cost of sales |
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| 4,717,800 |
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| 4,476,600 |
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| 1,614,700 |
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| 1,624,600 |
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Gross profit |
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| 5,345,400 |
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| 5,127,700 |
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| 1,812,000 |
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| 1,795,200 |
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Selling, general and administrative expenses |
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| 5,898,800 |
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| 4,461,200 |
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| 1,899,600 |
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| 1,519,900 |
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Research and development |
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| 51,500 |
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| 108,000 |
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| — |
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| 16,600 |
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Operating (loss) income |
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| (604,900 | ) |
| 558,500 |
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| (87,600 | ) |
| 258,700 |
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Interest income |
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| 184,900 |
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| 310,400 |
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| 63,100 |
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| 111,100 |
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(Loss) income before income taxes |
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| (420,000 | ) |
| 868,900 |
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| (24,500 | ) |
| 369,800 |
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Income tax (benefit) expense |
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| (64,000 | ) |
| 434,700 |
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| 26,400 |
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| 149,800 |
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Net (loss) income |
| $ | (356,000 | ) | $ | 434,200 |
| $ | (50,900 | ) | $ | 220,000 |
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(Loss) earnings per common share: |
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Basic |
| $ | (0.03 | ) | $ | 0.03 |
| $ | (0.00 | ) | $ | 0.02 |
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Diluted |
| $ | (0.03 | ) | $ | 0.03 |
| $ | (0.00 | ) | $ | 0.01 |
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Weighted average common shares outstanding |
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Basic |
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| 13,898,967 |
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| 14,113,806 |
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| 13,834,616 |
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| 14,172,265 |
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Diluted |
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| 13,898,967 |
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| 15,591,788 |
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| 13,834,616 |
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| 15,541,512 |
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See notes to condensed financial statements.
4
MEDICAL NUTRITION USA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
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| NINE MONTHS ENDED |
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| 2008 |
| 2007 |
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| (Unaudited) |
| (Unaudited) |
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Operating Activities: |
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Net (loss) income |
| $ | (356,000 | ) | $ | 434,200 |
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Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
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Depreciation and amortization expense |
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| 113,400 |
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| 73,700 |
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Provision for losses on accounts receivable |
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| 9,600 |
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| 1,600 |
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Deferred income tax (benefit) expense |
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| (108,700 | ) |
| 417,400 |
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Stock based compensation |
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| 871,600 |
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| 777,600 |
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Changes in operating assets and liabilities |
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Accounts receivable |
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| (118,300 | ) |
| (38,100 | ) |
Inventories |
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| (118,800 | ) |
| 12,500 |
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Prepaid income taxes |
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| 221,500 |
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| (243,000 | ) |
Other current assets |
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| 37,800 |
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| (225,300 | ) |
Accounts payable |
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| 154,600 |
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| (94,200 | ) |
Accrued expenses |
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| 301,000 |
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| 213,800 |
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Accrued rebates |
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| (11,800 | ) |
| (21,700 | ) |
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Net cash provided by operating activities |
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| 995,900 |
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| 1,308,500 |
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Investing Activities: |
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Acquisition of fixed assets |
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| (147,300 | ) |
| (77,000 | ) |
Increase in trademark costs |
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| (42,300 | ) |
| — |
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Capitalized patent costs |
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| (19,600 | ) |
| (18,900 | ) |
Website development costs |
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| (700 | ) |
| — |
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Redemption of short term investments |
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| 2,336,800 |
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| — |
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Purchase of short term investments |
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| — |
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| (4,280,000 | ) |
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Net cash provided by (used in) investing activities |
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| 2,126,900 |
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| (4,375,900 | ) |
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Financing Activities: |
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Income tax benefit from exercise of stock options |
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| 40,800 |
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| — |
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Stock repurchase plan |
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| (814,200 | ) |
| — |
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Purchase of treasury stock |
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| (4,300 | ) |
| — |
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Proceeds from exercise of stock options |
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| 42,200 |
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| 203,200 |
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Net cash (used in) provided by financing activities |
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| (735,500 | ) |
| 203,200 |
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Net change in cash |
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| 2,387,300 |
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| (2,864,200 | ) |
Cash and cash equivalents- beginning of period |
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| 5,208,000 |
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| 8,103,300 |
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Cash and cash equivalents - end of period |
| $ | 7,595,300 |
| $ | 5,239,100 |
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Supplemental information: |
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Taxes paid during the period |
| $ | 3,939 |
| $ | 258,800 |
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See notes to condensed financial statements.
5
MEDICAL NUTRITION USA, INC.
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
NINE MONTHS ENDED OCTOBER 31, 2008 (UNAUDITED)
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| Additional |
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| Total |
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| Common Stock |
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| Accumulated |
| Treasury Stock |
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| Shares |
| Amount |
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| Shares |
| Amount |
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Balance at January 31, 2008 |
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| 13,992,921 |
| $ | 14,000 |
| $ | 24,687,900 |
| $ | (12,005,800 | ) |
| (52,562 | ) | $ | (226,000 | ) | $ | 12,470,100 |
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Exercise of options |
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| 69,297 |
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| 42,200 |
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| — |
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| — |
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| — |
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| 42,200 |
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Restricted stock |
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| 2,053 |
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| — |
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Stock based compensation |
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| — |
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| — |
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| 871,600 |
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| — |
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| — |
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| — |
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| 871,600 |
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Income tax benefit from exercise of stock option |
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| — |
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| — |
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| 40,800 |
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| — |
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| — |
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| — |
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| 40,800 |
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Stock repurchase plan |
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| (262,000 | ) |
| (100 | ) |
| (814,100 | ) |
| — |
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| — |
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| — |
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| (814,200 | ) |
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Purchase of treasury stock |
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| (1,280 | ) |
| — |
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| — |
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| — |
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| (1,280 | ) |
| (4,300 | ) |
| (4,300 | ) |
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Net loss |
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| — |
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| — |
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| (356,000 | ) |
| — |
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| — |
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| (356,000 | ) |
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Balance at October 31, 2008 |
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| 13,800,991 |
| $ | 13,900 |
| $ | 24,828,400 |
| $ | (12,361,800 | ) | $ | (53,842 | ) | $ | (230,300 | ) | $ | 12,250,200 |
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See notes to condensed financial statements.
6
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 1.Organization and Business:
Medical Nutrition USA, Inc. (a Delaware Corporation) (Medical Nutrition or the Company) is primarily engaged in the development and distribution of nutritional and health products.
The Company develops nutritional supplements for sale to physicians, dispensing medical clinics, nursing homes and network marketing companies. The Company’s products are sold under its own brands and/or under private labels domestically in the United States.
The accompanying financial statements of Medical Nutrition USA, Inc. have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, these financial statements do not include all of the information and notes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month period ending October 31, 2008 are not necessarily indicative of the results that may be expected for the current fiscal year ending January 31, 2009 or any future period. While management of the Company believes that the disclosures presented are adequate to make the information not misleading, these financial statements should be read in conjunction with the financial statements and the notes included in the Company’s Annual Report on Form 10-KSB for the fiscal year ended January 31, 2008.
Note 2.Significant Accounting Policies:
Concentration of credit risk - The Company maintains its cash and cash equivalents in several bank accounts at four financial institutions. The balances at these financial institutions, at times, may exceed federally insured limits. At October 31, 2008, the Company had approximately $9.1 million in excess of FDIC insured limits.
The other financial component, that principally subjects the Company to significant concentrations of credit risk, is trade accounts receivable.
Cash and cash equivalents -The Company invests its excess cash in highly liquid short-term investments. The Company considers short-term investments that are purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consisted of cash and money market accounts.
Short-term investments – The Company’s investments consist of U.S. Government backed securities, corporate commercial paper and certificates of deposit. The Company’s short-term investment policy requires investments to be rated AAA with a maturity of six months or less.
The Company accounts for short-term investments as held to maturity investments pursuant to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Under this Statement, securities that the Company has the positive intent and ability to hold to maturity are classified as held to maturity securities and are carried at cost.
Accounts receivable - - The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts in trade accounts receivable. The Company’s estimate is based on a review of the current status of these accounts and historical trends. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts may change in the future should historical trends or current account status require.
7
MEDICAL NUTRITION USA, INC.
NOTES TO CONSDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 2.Significant Accounting Policies (continued):
Inventories - Inventories, which consist primarily of purchased finished foods, are stated at the lower of cost or market, using the “first-in, first-out” (FIFO) cost method.
Fixed assets - Furniture, fixtures and equipment, and leasehold improvements are stated at cost and depreciated and amortized over their estimated useful lives, which range from 3 to 7 years. Leasehold improvements are amortized over the lesser of their useful lives or lease terms. Depreciation and amortization are calculated using the straight-line method for financial reporting purposes. Expenditures for repairs and maintenance, which do not extend the useful life of the property, are expensed as incurred.
Intangible assets – Patent application costs relate to the Company’s U.S. patent applications and consist primarily of legal fees, the underlying clinical studies and other direct fees. The recoverability of the patent application costs is dependent upon, among other factors, the success of the underlying clinical studies used to support the patent. The Company is amortizing the costs over the shorter of their useful lives or seventeen years. Other deferred costs are being amortized on a straight line basis over a five year period. Trademarks costs are stated at cost and are amortized over 17 years. Website Costs are stated at cost and are amortized over 5 years.
Research and development - The Company utilizes independent third parties to design and test certain products and to conduct clinical trials and studies on its products. These expenditures are accounted for as research and development costs and are expensed as incurred.
Income taxes – The Company provides for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), “Accounting for Income Taxes”. SFAS 109 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.
Fair value of financial instruments -The estimated fair values for financial instruments under SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. Additionally, the carrying value of all other monetary assets and liabilities is estimated to be equal to their fair value due to the short-term nature of these instruments.
Revenue recognition – Revenue is recognized when all four of the following conditions exist: persuasive evidence of an arrangement exists; services have been rendered or delivery occurred; the price is fixed or determinable; and collectibility is reasonably assured. Revenue from product sales is recognized upon shipment of products to customers.
Share-based compensation - -The Company implemented SFAS No.123(R), “Share-Based Payment,” using the modified prospective transition method. SFAS No. 123(R) requires that costs resulting from all share-based payment transactions be recognized in the financial statements at their fair values. Stock-based compensation expense is generally recognized ratably over the requisite service period. Total share-based compensation expense recorded as selling, general and administrative expenses in the condensed statements of operations for the three months ended October 31, 2008 and 2007 was $296,100 and $286,500, respectively. Total share-based compensation for the nine months ended October 31, 2008 and 2007 was $871,600 and $777,600, respectively.
8
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 2.Significant Accounting Policies (continued):
Earnings per share – The Company’s financial statements are presented in accordance with Statement of Financial Accounting Standards No. 128 (SFAS 128), “Earnings Per Share”. Basic earnings per common share are computed using the weighted average number of common shares outstanding during the period.
Diluted earnings per common share utilizes the treasury stock method for calculating the dilutive effect of employee stock options, and nonvested shares. These instruments will have a dilutive effect under the treasury stock method only when the respective period’s average market value of the underlying Company common stock exceeds the actual proceeds. In applying the treasury stock method, assumed proceeds include the amount, if any, the employee must pay upon exercise, the amount of compensation cost for future services that the Company has not yet recognized, and the amount of tax benefits, if any, that would be credited to additional paid-in capital assuming exercise of the options and the vesting of nonvested shares. In accordance with SFAS 128, diluted earnings per share are not presented in periods during which the Company incurred a net loss. For the three months ended October 31, 2007, the potentially dilutive common stock equivalents, consisting of stock options, which were excluded from the net income per share calculations due to their anti-dilutive effect was 0. For the nine months ended October 31, 2007, the potentially dilutive common stock equivalents, consisting of stock options, which were excluded from the net income per share calculations due to their anti-dilutive effect was 27,500. All potentially dilutive shares for the three and nine months ended October 31, 2008, consisting of options and restricted stock were anti-dilutive and excluded from the calculations due to the net loss.
Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the period. Diluted EPS is computed considering the potentially dilutive effect of outstanding stock options and nonvested shares of restricted stock. A reconciliation of the numerators and denominators of basic and diluted per share computations follows:
|
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|
|
|
|
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|
|
|
|
| October 31, |
| October 31, |
| ||||||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
| ||||
|
|
|
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| ||||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| ($ | 356,000 | ) | $ | 434,200 |
| ($ | 50,900 | ) | $ | 220,000 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares (Basic) |
|
| 13,898,967 |
|
| 14,113,806 |
|
| 13,834,616 |
|
| 14,172,265 |
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|
|
|
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|
|
|
|
|
|
Dilutive effect of outstanding options and nonvested shares of restricted stock |
|
| — |
|
| 1,477,982 |
|
| — |
|
| 1,369,247 |
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| ||||||||
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Weighted average common shares including assumed conversions (Diluted) |
|
| 13,898,967 |
|
| 15,591,788 |
|
| 13,834,616 |
|
| 15,541,512 |
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| ||||||||
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|
|
|
Basic net (loss) income per share |
| $ | (0.03 | ) | $ | 0.03 |
| $ | (0.00 | ) | $ | 0.02 |
|
Diluted net (loss) income per share |
| $ | (0.03 | ) | $ | 0.03 |
| $ | (0.00 | ) | $ | 0.01 |
|
9
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 2.Significant Accounting Policies (continued):
Carrying values of long-lived assets - - The Company evaluates the carrying values of its long-lived assets to be held and used in the business by reviewing undiscounted cash flows. Such evaluations are performed whenever events and circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the projected undiscounted cash flows over the remaining lives of the related assets does not exceed the carrying values of the assets, the carrying values are adjusted for the differences between the fair values and the carrying values.
Use of estimates – In preparing financial statements in conformity with accounting principles generally accepted in the United State of America, management is required to make estimates and assumptions that affect the reported amounts of assets and the disclosures of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from those estimates.
Recent Pronouncements - - In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“FAS 157”), which addresses how companies should measure fair value when they are required to use a fair value measure for recognition or disclosure purposes under generally accepted accounting principles (“GAAP”). As a result of FAS 157, there is now a common definition of fair value to be used throughout GAAP, which is expected to make the measurement of fair value more consistent and comparable. FAS 157 is effective for the first fiscal year beginning after November 15, 2007, which was the Company’s fiscal year beginning February 1, 2008. The adoption of this pronouncement did not have a material impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS 159”). FAS 159 permits companies to choose to measure certain financial instruments and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. FAS 159 is effective as of the beginning of the entity’s fiscal year that begins after November 15, 2007, which was our fiscal year beginning February 1, 2008. The adoption of this pronouncement did not have a material impact on our financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FASB Statement No. 141. FAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling interest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the business combination. FAS 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our fiscal year beginning February 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - an amendment of Accounting Research Bulletin No. 51” (“FAS 160”), which establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes reporting requirements that provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. FAS 160 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our fiscal year beginning February 1, 2009. We are currently evaluating the potential impact, if any, of the adoption of FAS 160 on our financial position, results of operations and cash flows.
10
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 2.Significant Accounting Policies (continued):
In December 2007, the Emerging Issues Task Force (EITF) issued EITF Issue No. 07-1, “Accounting for Collaborative Arrangements.” EITF 07-1 provides guidance concerning: determining whether an arrangement constitutes a collaborative arrangement within the scope of the Issue; how costs incurred and revenue generated on sales to third parties should be reported in the income statement; how an entity should characterize payments on the income statement; and what participants should disclose in the notes to the financial statements about a collaborative arrangement. EITF 07-1 is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008, which will be our fiscal year beginning February 1, 2009. We are in the process of evaluating the impact, if any, of adopting EITF 07-1 on our financial statements.
Note 3.Fixed Assets:
Fixed assets consisted of the following at October 31, 2008 and January 31, 2008, respectively:
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| October 31, |
| January 31, |
| ||
|
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|
| ||||
|
| 2008 |
| 2008 |
| ||
|
|
|
| ||||
Furniture, fixtures and equipment |
| $ | 544,400 |
| $ | 397,100 |
|
Leasehold improvements |
|
| 50,400 |
|
| 50,400 |
|
|
|
|
| ||||
|
|
| 594,800 |
|
| 447,500 |
|
|
|
|
|
|
|
|
|
Less: Accumulated depreciation and amortization |
|
| 316,900 |
|
| 248,500 |
|
|
|
|
| ||||
|
| $ | 277,900 |
| $ | 199,000 |
|
|
|
|
|
Depreciation and amortization expense was $25,700 and $16,000 for the three months ended October 31, 2008 and 2007, respectively. Depreciation and amortization expense was $68,400 and $42,800 for the nine months ended October 31, 2008 and 2007, respectively.
Note 4.Intangible Assets:
Intangible assets consisted of the following at October 31, 2008 and January 31, 2008, respectively:
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| October 31, |
| January 31, |
| ||
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| ||||
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| 2008 |
| 2008 |
| ||
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| ||||
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| ||
Patent application and other deferred costs |
| $ | 279,600 |
| $ | 260,000 |
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Trademarks |
|
| 104,300 |
|
| 62,000 |
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|
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|
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Website development costs |
|
| 20,900 |
|
| 20,200 |
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| ||||
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|
| $ | 404,800 |
| $ | 342,200 |
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Less accumulated amortization |
|
| 134,500 |
|
| 89,500 |
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| ||||
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|
| $ | 270,300 |
| $ | 252,700 |
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|
Intangible amortization expense was $15,800 and $10,500 for the three months ended October 31, 2008 and 2007, respectively. Intangible amortization expense was $45,000 and $30,900 for the nine months ended October 31, 2008 and 2007, respectively. Other deferred costs are being amortized on a straight line basis over a five year period.
11
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 5.Major Customer and Major Vendor-Related Party:
Major Customer
For the three months ended October 31, 2008, two customers accounted for approximately 27% of total revenues, representing $941,700 of sales as compared to 37% or $1,281,700 of sales in the prior year quarter for the same customers. For the nine months ended October 31, 2008, two customers accounted for approximately 28% of total revenues, representing $2,822,600 of sales as compared to 33% or $3,138,700 of sales in the prior year nine months for the same customers.
As of October 31, 2008, these two customers had an aggregate open accounts receivable balance of $373,000 which represented 31% of the Company’s total accounts receivable.
Major Vendor-Related Party
During the three months ended October 31, 2008 and 2007, the Company acquired $1,197,300 and $1,312,100, respectively, of finished goods purchases from Organics Corporation of America (“Organics”), an approximate 1% shareholder of the Company, under a supply agreement. During the nine months ended October 31, 2008, the Company purchased $3,530,900 and $3,862,400, respectively. As of October 31, 2008, the Company had an accounts payable balance with Organics of $319,000. The Company owns approximately 5% of the outstanding stock of Organics.
Note 6.Stockholders’ Equity:
MNI Stock Repurchase Plan
In December 2007, the Company’s Board of Directors approved the Medical Nutrition USA, Inc. Stock Repurchase Plan (the “Plan”). The Plan allowed for the purchase of up to 500,000 shares of Company common stock on the open market and from employees through July 31, 2008. As of July 31, 2008, the Company had purchased 184,000 shares from employees of the Company and 264,000 shares on the open market. These repurchased shares are deemed authorized and unissued shares available for issuance. The Plan expired on July 31, 2008.
2000 Long-Term Incentive Stock Plan
On October 19, 2000, the stockholders approved the 2000 Long-Term Incentive Stock Plan (the “2000 Plan”). Under the 2000 Plan, the Company may grant stock options, stock appreciation rights (SAR’s) or stock awards. All employees of the Company are eligible to participate in the 2000 Plan. The 2000 Plan authorizes the issuance, in the aggregate, of up to 240,000 shares of common stock. No stock option, SAR or other award, may be granted under the 2000 Plan after October 27, 2009. The maximum number of shares for which awards may be granted to any person in any fiscal year is 12,000. The purchase price per share for each stock option may not be less than 100% of the fair market value on the date of grant and may not be for more than five years. In the case of incentive stock options granted to an optionee who, at the time of grant, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company, the exercise price per share may not be less than 110% of the fair market value on the date of grant and the option may not be exercisable for more than five years. At October 31, 2008, 39,000 stock option grants were outstanding under the 2000 Plan.
12
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 6.Stockholders’ Equity (continued):
2003 Omnibus Equity Incentive Plan
Effective as of April 22, 2003, the Board of Directors (the “Board”) adopted the 2003 Omnibus Equity Incentive Plan (the 2003 Plan). The purpose of the 2003 Plan is to promote the long-term success of the Company and the creation of stockholder value by (a) encouraging employees, outside directors and consultants to focus on critical long-range objectives, (b) encouraging the attraction and retention of employees, outside directors and consultants with exceptional qualifications and (c) linking employees, outside directors and consultants directly to stockholder interests through increased stock ownership. The 2003 Plan seeks to achieve this purpose by providing for awards in the form of restricted shares, stock units, options (which may constitute incentive stock options or non-statutory stock options) or stock appreciation rights.
Initially, the 2003 Plan authorized the issuance, in the aggregate, of up to 1,000,000 shares of common stock, increased by 250,000 additional shares of common stock as of January 1, 2004. At the 2004 Annual Meeting, the 2003 Plan was amended to provide that as of January 31 of each year, commencing with January 31, 2005, the aggregate number of Common Shares reserved for issuance under the 2003 Plan would automatically increase in an amount equal to the number of Common Shares issued by reason of awards being granted, exercised or settled, as applicable, during the immediately preceding fiscal year. At October 31, 2008, 2,316,684 options were issued and outstanding under the 2003 Plan.
On June 7, 2006, the Board approved amendments to the Company’s 2003 Plan to increase the number of shares of common stock subject to the automatic non-qualified stock option granted to each outside director on the date they first join the Board pursuant to the Plan to 15,000 common shares, to increase the number of shares of common stock subject to the automatic non-qualified stock option granted annually under the 2003 Plan to continuing outside directors to 15,000 common shares, and to increase the number of shares of common stock subject to the automatic non-qualified stock option granted annually under the 2003 Plan to each chairman of a Board committee to 5,000 common shares. The Board also approved the restatement of the 2003 Plan to effect these changes. On July 6, 2006 the Company executed the Amended and Restated 2003 Omnibus Equity Incentive Plan, which includes the revisions set forth above (the “Amended and Restated 2003 Plan”). No other provision of the 2003 Plan was changed.
In addition to the options issued in connection with the plans described above, options exercisable for an additional 453,600 shares remained outstanding as of October 31, 2008, which were issued prior to January 31, 2003 and not pursuant to any formal plan.
A summary of option activity during the nine months ended October 31, 2008 is presented below:
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| Options |
| Weighted |
| ||
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|
|
| ||||
Outstanding at January 31, 2008 |
|
| 2,800,481 |
| $ | 2.36 |
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|
|
|
| ||||
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|
|
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|
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|
Granted |
|
| 83,100 |
| $ | 2.23 |
|
Exercised |
|
| (69,297 | ) | $ | 0.50 |
|
Expired or Surrendered |
|
| (5,000 | ) | $ | 3.98 |
|
|
|
|
| ||||
Outstanding at October 31, 2008 |
|
| 2,809,284 |
| $ | 2.39 |
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|
|
|
|
13
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 6.Stockholders’ Equity (continued):
SFAS No. 123(R) requires the benefits of tax deductions in excess of those recognized in conjunction with compensation expense, to be reported as a financing cash flow, rather than as an operating cash flow. This requirement has the effect of reducing net operating cash flows and increasing net financing cash flows.
The income tax benefits derived from the exercise of non-qualified stock options and disqualifying dispositions of incentive stock options in excess of any amounts previously classified as a deferred tax asset, when realized, are credited to additional paid-in capital. The tax benefit realized on the tax deductions from option exercises under stock-based compensation arrangements was approximately $40,800 and is recorded as additional paid in capital. This was calculated utilizing the with and without method.
For the three and nine months ended October 31, 2008 and 2007, the Company has estimated the fair value of each option award on the date of grant using the Black-Scholes model. For the three and nine months ended October 31, 2008 and 2007, respectively, the expected volatility was based on both historical volatility and implied volatility of the Company’s stock. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The Company used historical data to estimate expected option exercise and post-vesting employment termination behavior. The Company utilized the risk-free interest rate for periods equal to the expected term of the option based upon the U.S. treasury yield curve in effect at the time of the grant. The Company has no intention of declaring any dividends.
The fair value of stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for stock options granted in the three and nine months ended October 31, 2008 and 2007:
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|
|
|
|
| Three months ended |
| Nine months ended |
| ||||||||
|
| Oct. 31, 2008 |
| Oct. 31, 2007 |
| Oct. 31, 2008 |
| Oct. 31, 2007 |
| ||||
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|
|
|
|
| ||||||||
Expected term until exercised, years |
|
| 6 |
|
| 6 |
|
| 6 |
|
| 6 |
|
Expected stock price volatility, average |
|
| 66 | % |
| 61 | % |
| 66 | % |
| 61 | % |
Risk-free interest rate |
|
| 3.5 | % |
| 5 | % |
| 3.5 | % |
| 5 | % |
Expected dividend yield |
|
| 0 |
|
| 0 |
|
| 0 |
|
| 0 |
|
Weighted-average fair value per option |
| $ | 1.24 |
| $ | 1.64 |
| $ | 1.24 |
| $ | 2.68 |
|
Restricted Stock Awards
The following table summarizes the status of restricted stock as of October 31, 2008, and changes during the nine months then ended:
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|
|
|
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|
|
| Shares |
| Weighted |
| ||
|
|
|
| ||||
Nonvested at January 31, 2008 |
|
| 325,833 |
| $ | 4.26 |
|
Granted |
|
| — |
|
| — |
|
Vested |
|
| (3,333 | ) | $ | 4.15 |
|
Forfeited |
|
| — |
|
| — |
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|
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| ||||
Nonvested at October 31, 2008 |
|
| 322,500 |
| $ | 4.26 |
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|
14
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 7.Income Taxes:
The components of the provision for income taxes consist of the following:
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| Nine Months Ended |
| Nine Months Ended |
| ||
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| ||||
Current - Federal |
|
| — |
|
| — |
|
Current - State |
| $ | 3,800 |
| $ | 17,300 |
|
Deferred - Federal |
|
| (70,800 | ) |
| 346,800 |
|
Deferred - State |
|
| 3,000 |
|
| 70,600 |
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|
|
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| ||||
|
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|
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Income tax (benefit) expense |
| ($ | 64,000 | ) | $ | 434,700 |
|
|
|
|
|
Income tax (benefit) expense was calculated using the statutory tax rate. The difference between the effective tax rate and the statutory tax rate is mainly due to nondeductible stock based compensation expense.
|
|
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|
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| Nine Months Ended |
| Nine Months Ended |
| ||
|
| October 31, 2008 |
| October 31, 2007 |
| ||
|
|
|
| ||||
Statutory Federal income tax rate |
|
| -34.0 | % |
| 34.0 | % |
State taxes, net of Federal benefit |
|
| 0.8 | % |
| 4.8 | % |
Stock based compensation |
|
| 15.0 | % |
| 7.4 | % |
Other |
|
| 3.0 | % |
| 3.8 | % |
|
|
|
| ||||
Effective income tax rate |
|
| -15.2 | % |
| 50.0 | % |
|
|
|
|
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax reporting. The Company utilizes the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law or rates.
The Company has Federal income tax loss carryforwards as of October 31, 2008 of approximately $2,958,800. The Federal Net Operating Loss (“NOL”) carryforwards expire beginning in 2020 and will be fully expired during 2025. The Company has various state NOL’s of approximately $508,400 which expire during 2012.
Effective January 1, 2007, the Company adopted Financial Interpretation (“FIN”) No. 48,Accounting for Uncertainty in Income Taxes-An Interpretation of FASB Statement No. 109. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than fifty percent likely of being realized upon ultimate settlement. The interpretation also provides guidance on derecognition, classification, interest and penalties, and other matters.
The tax years 2004-2007 remain open to examination by the major taxing jurisdictions to which we are subject.
15
MEDICAL NUTRITION USA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2008
Note 8.Commitments and Contingencies:
Government Regulations
The Company’s nutritional and health products are produced by third parties in various plants under applicable government regulations. The Company depends upon its vendors to comply with such regulations. Failure by such vendors to comply with the applicable regulations could result in fines and/or seizure of the food products. Presently, the Company is not a party to any such lawsuits.
Bonus Plan
On June 7, 2005, the Company approved a bonus plan for officers based on a formula which takes into account sales and EBITDA, with annual targets to be set at the level of the annual operating plan approved by the Board of Directors. The plan allows for payment up to 100% of the officers base salary. The percentage combination of cash and common stock of the Company used to pay the bonuses will be at the discretion of the Board of Directors, but in no case will the cash portion be less than 25% of the bonuses awarded. For the three months ended October 31, 2008 and 2007, the Company expensed $10,200 and $70,200 in bonuses based on this plan, respectively. For the nine months ended October 31, 2008 and 2007, the Company expensed $205,600 and $218,400 in bonuses based on this plan, respectively.
Note 9.401(k) Plan
In March 2007, the Company established a 401(k) retirement plan (“plan”) for all eligible employees. In January 2008, the Company amended the plan to include a maximum Company contribution of 4 percent of base salary for the first 5 percent of elected base salary deferrals. Employees are eligible to contribute the maximum as allowed by law. For the three months ended October 31, 2008 and 2007, the 401(k) expense was $21,400 and zero, respectively. For the nine months ended October 31, 2008 and 2007, the 401(k) expense was $63,400 and zero, respectively. The 401(k) expense is included in selling, general and administrative expenses.
16
ITEM 2. Management’s Discussion and Analysis or Plan of Operations
FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact are “forward-looking statements” for purposes of federal and state securities laws, including, but not limited to, any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing.
Forward-looking statements may include the words “may,” “could,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect” or “anticipate” or other similar words. These forward-looking statements present the Company’s estimates and assumptions only as of the date of this report. Except for the Company’s ongoing obligation to disclose material information as required by the federal securities laws, the Company does not intend, and undertakes no obligation, to update any forward-looking statements.
Although the Company believes that the expectations reflected in any of the forward-looking statements are reasonable, actual results could differ materially from those projected or assumed or any of the Company’s forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and inherent risks and uncertainties.
For a detailed description of factors that could cause actual results to differ materially from those expressed in any forward-looking statement, please see “Risk Factors” in Part I, Item 1-Business, of the Company’s Annual Report on Form 10-KSB for the fiscal year ended January 31, 2008.
Results of Operations
The following discussion of the financial condition and results of operation of the Company should be read in conjunction with the Financial Statements and the related Notes included elsewhere in this report.
Three Months Ended October 31, 2008 Compared to Three Months Ended October 31, 2007
Sales for the three months ended October 31, 2008 were $3,426,700 as compared with $3,419,800 for the three months ended October 31, 2007, an increase of $6,900. The increase was primarily attributable to an increase in branded sales offset by a decrease in private label sales. Branded product sales increased approximately 11% to $3,048,000 from $2,746,600. Effective March 1, 2008, the Company reduced the price of certain Pro-Stat® formulas by approximately 12% on a weighted average basis. This decrease was implemented to allow the Company to more aggressively increase its market share and to strengthen its competitive position. The Company sold 26% more units of branded product for the quarter ended October 31, 2008 than the same quarter in the prior fiscal year. Almost all of the Company’s branded product sales were from formulations of hydrolyzed collagen. Private label sales decreased 44% to approximately $378,700 from $673,200 for the comparable prior year period.
Cost of sales for the three months ended October 31, 2008 was $1,614,700 as compared with $1,624,600 for the three months ended October 31, 2007, both at 47% of sales. Gross profit percentage was 53% for both periods due to the potentially negative impact by the sales price decrease noted above, being offset by reductions in product costs and the increased sales of higher margin branded products.
Selling, general and administrative expenses for the three months ended October 31, 2008, increased by $379,700 to $1,899,600, from $1,519,900 for the three months ended October 31, 2007. This increase was primarily attributable to an increase in selling and marketing expenses of approximately $360,700 resulting from expanded sales efforts of the Company’s branded products which includes increased personnel costs and trade show costs.
For the three months ended October 31, 2008, the Company had an operating loss of $ (87,600) as compared to operating income of $258,700 for the three months ended October 31, 2007. The decrease in operating income is due to the reasons described above.
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Interest income was $63,100 for the three months ended October 31, 2008, compared to $111,100 in the prior fiscal quarter. The decrease is due to reduced interest rates and lower cash balances resulting from cash used by the Company in repurchasing its own common stock under the stock repurchase plan described below.
The Company recorded a tax provision of $26,400 for the quarter ended October 31, 2008 compared to a tax provision of $149,800 for the quarter ended October 31, 2007. For tax purposes, the Company’s income is calculated prior to certain GAAP charges for stock-based compensation, which is not tax deductible. The Company has a deferred tax asset of $1,466,400 and $1,257,200 as of October 31, 2008 and 2007, respectively, resulting from previous net operating losses, will be applied against income taxes due.
The Company’s net loss for the three months ended October 31, 2008 was $(50,900), or $(0.00) per share, compared to a net income for the three months ended October 31, 2007 of $220,000 or $0.02 per share. The decrease in income is due to the reasons described above.
Nine Months Ended October 31, 2008 Compared to Nine Months Ended October 31, 2007
Sales for the nine months ended October 31, 2008 were $10,063,200 as compared with $9,604,300 for the nine months ended October 31, 2007, an increase of 5%. This increase was primarily attributable to an increase in branded product sales of approximately 13% to $9,043,100 from $8,032,600. Effective March 1, 2008, the Company reduced the price of certain Pro-Stat® formulas by approximately 12% on a weighted average basis. This decrease was implemented to allow the Company to more aggressively increase its market share and to strengthen its competitive position. The Company sold 28% more units of branded product for the nine months ended October 31, 2008 than the same period in the prior fiscal year. Almost all of the Company’s branded product sales were from formulations of hydrolyzed collagen. Private label sales decreased 35% to approximately $1,020,100 from $1,571,800 for the comparable prior year period.
Cost of sales for the nine months ended October 31, 2008 was $4,717,800 as compared with $4,476,600 for the nine months ended October 31, 2007, both at 47% of sales. Gross profit percentage for the nine months ended October 31, 2008 and October 31, 2007 were 53% for both periods.
Selling, general and administrative expenses for the nine months ended October 31, 2008, increased by 32% or $1,437,600 to $5,898,800, from $4,461,200 for the nine months ended October 31, 2007. This increase was primarily attributable to an increase in selling and marketing expenses of approximately $1,146,300 resulting from expanded sales efforts of the Company’s branded products which includes increased personnel costs and trade show costs. In addition, there were increased personnel costs of $238,000 in the administrative department due the increased headcount and salaries.
For the nine months ended October 31, 2008, the Company had an operating loss of $ (604,900) as compared to operating income of $558,500 for the nine months ended October 31, 2007. The decrease in operating income is due to the reasons described above.
Interest income was $184,900 for the nine months ended October 31, 2008, compared to $310,400 in the prior period. The decrease is due to reduced interest rates and lower cash balances resulting from cash used by the Company in repurchasing its own common stock under the stock repurchase plan described below.
The Company recorded a tax benefit of $64,000 for the nine months ended October 31, 2008 at an effective rate of (15.2%) compared to a tax provision of $434,700 for the nine months ended October 31, 2007 at an effective rate of 50%. For tax purposes, the Company’s income is calculated prior to certain GAAP charges for stock-based compensation, which is non tax deductible.
The Company’s net loss for the nine months ended October 31, 2008 was $(356,000), or $(0.03) per share, compared to a net income for the nine months ended October 31, 2007 of $434,200 or $0.03 per share. The decrease in income is due to the reasons described above.
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Liquidity and Capital Resources
At October 31, 2008, the Company had cash, cash equivalents and short term investments of $9,595,300 as compared to $9,544,800 at January 31, 2008. At October 31, 2008, approximately 97% of accounts receivable were less than 30 days past due. Cash provided by operations during the nine months ended October 31, 2008 was $995,900 as compared to $1,308,500 in the comparable prior fiscal period.
The Company’s future capital requirements will depend on many factors including: costs of its sales and marketing activities and its education programs for its markets, competing product and market developments, the costs of developing or acquiring new products, the costs of expanding its operations, and its ability to continue to generate positive cash flow from its sales.
If the Company raises additional funds through the issuance of common stock or convertible securities, the percentage ownership of its then-current stockholders will be reduced and such equity securities may have rights, preferences or privileges senior to those of the holders of its common stock. If the Company raises additional funds through the issuance of additional debt securities, these new securities could have certain rights, preferences and privileges senior to those of the holders of its common stock, and the terms of these debt securities could impose restrictions on the Company’s operations.
Company Stock Repurchase Plan
In December 2007, the Company’s Board of Directors approved the Medical Nutrition USA, Inc. Stock Repurchase Plan (the “Plan”). The Plan allowed for the purchase of up to 500,000 shares of Company stock on the open market and from employees. The Plan commenced on January 15, 2008. For the three months ended July 31, 2008, the Company purchased 80,700 shares on the open market. As of July 31, 2008, the Company had purchased 184,000 shares from employees of the Company and 264,000 shares on the open market. These repurchased shares are deemed authorized and unissued shares available for issuance. The Plan expired on July 31, 2008.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Cash, cash equivalents and short-term investments at October 31, 2008 totaled $9.6 million. These amounts are primarily invested in short-term federal debt mutual funds, AAA rated commercial paper and certificates of deposits. We believe that we have limited exposure to financial market risks, including changes in interest rates. The fair value of our investment portfolio or related income would not be significantly impacted by changes in interest rates due mainly to the short-term nature of our investment portfolio.
ITEM 4T. 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 Medical Nutrition USA, 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 Medical Nutrition USA, 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, Medical Nutrition USA, 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 October 31, 2008, 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.
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Changes in Internal Control over Financial Reporting
Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, Medical Nutrition USA, Inc. has evaluated the changes in internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal quarter ended October 31, 2008 and have concluded that no change has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.
1-A The effect of general economic conditions and the current financial crisis
Recent distress in the financial markets has resulted in declines in institutional spending, which can affect demand for the Company’s products. Healthcare institutions are exhibiting more stringent cost concerns and implementing aggressive cost reductions. If the national economy or credit markets in general were to deteriorate further, it is possible that such changes could put negative pressure on our customers, affecting our cash flows. There can be no assurance that our liquidity will not be affected by changes in the financial markets and the global economy.
While we do not anticipate that we will need additional financing or equity during the next fiscal year, tightening of the credit markets could make it more difficult for us to enter into agreements for new indebtedness or obtain funding through the issuance of our securities. The effects of these changes could also require us to make additional changes to our current plans and strategy.
In addition, the current credit crisis is having a significant negative impact on businesses around the world, and the impact of this crisis on our major raw material suppliers cannot be predicted. The inability of key suppliers to access liquidity, or the insolvency of key suppliers, could lead to their failure to deliver products or services. If we are unable to procure products and services when needed, or if we experience deterioration in demand for our products over an extended period of time, our sales and cash flows could be negatively impacted in future periods.
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| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 |
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| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act Of 2002 and Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934 |
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| 32. | Certification of Periodic Financial Reports by the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| MEDICAL NUTRITION USA, INC. | |
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Dated: December 15, 2008 | By: | /s/ Frank J. Kimmerling |
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| Frank J. Kimmerling |
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| Chief Financial Officer |
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