| NUTRITION 21 INC Item 1A RISK FACTORS An investment in the Company involves the following risks, among others |
| WE HAVE NOT BEEN PROFITABLE FOR THE LAST FOUR FISCAL YEARS We had net losses of dlra10dtta317 million, dlra7dtta044 million, dlra5dtta901 million and dlra10dtta506 million for the fiscal years ended on June 30, 2006, 2005, 2004, and 2003, respectively |
| We have had net operating losses periodically from our inception as a Company in 1983 through the fiscal year ended June 30, 2006 |
| As of June 30, 2006, our accumulated losses aggregated approximately dlra72dtta285 million |
| In the fiscal years ending June 30, 2007, 2008 and 2009, respectively, we expect to incur approximately dlra1dtta0 million, dlra1dtta0 million and dlra0dtta8 million of expenses for accretion of debt discount and amortization of debt issuance costs on preferred stock we issued in 2005 |
| The issuance of additional securities may increase these expenses |
| RISK ASSOCIATED WITH MARKETING We will likely continue to be unprofitable in the future should we fail to increase our revenues significantly from the retail distribution arrangements reached with mass retailers |
| To succeed with these arrangements we will have to launch and maintain successful marketing campaigns to encourage consumers to purchase branded products stocked by these retailers |
| Our failure to promptly stimulate such demand could cause retailers to terminate their relationship with us |
| Our arrangements with mass retailers are terminable by them on notice |
| During the fourth quarter of fiscal year 2006, the revenue recognized from shipments to mass retailers was approximately dlra0dtta2 million |
| RISK ASSOCIATED WITH THE ACQUISITION OF ICELAND HEALTH, INC We acquired Iceland Health in August 2006 and do not expect to file with the SEC financial statements related to the acquisition until November 8, 2006, as permitted by relevant SEC regulations |
| Accordingly investors do not now have information about this acquisition that would likely be useful to them in their assessment of the business prospects of Iceland Health’s business |
| In any event, significant positive contributions by Iceland Health on the Company’s results depends, among other things, on the Company’s ability to successfully introduce Iceland Health’s omega-3 products into the Companyapstas distribution channels with strong marketing campaigns, and on the successful integration of Iceland Health into our current business |
| 23 _________________________________________________________________ POSSIBLE NEED FOR ADDITIONAL FUNDS To support the marketing and other expenses we envision, we may also need to raise additional funds |
| There is no assurance that additional funds will be available on terms favorable to the Company and its shareholders, or at all |
| RISK ASSOCIATED WITH LACK OF DIVERSIFICATION Our business currently depends on two basic products: chromium picolinate and related compounds, and omega 3 fish oils and fatty acids |
| Our failure to diversify beyond these products could affect us adversely if, for whatever reason, we do not achieve satisfactory levels of sales of these products |
| SEVERAL RESEARCHERS HAVE QUESTIONED THE SAFETY OF CHROMIUM PICOLINATE, AND WE MAY BE LIABLE FOR DAMAGES IF OUR PRODUCTS ARE PROVEN TO HAVE HARMFUL SIDE EFFECTS In 1995 and 2002, a research group headed by Dianne Stearns, Ph |
| D (University of Dartmouth College and Northern Arizona University) administered chromium picolinate in a laboratory to Chinese hamster ovary cell lines and reported safety concerns |
| Also, in 2003, a research group headed by John Vincent, Ph |
| D (University of Alabama) administered chromium picolinate to fruit flies and reported safety concerns |
| See “The Chromium Franchise” for recent safety announcements issued by the United States’ Food & Drug Administration (FDA) and the United Kingdom’s Food Standards Agency (FSA) |
| However, the Stearns and Vincent studies can nevertheless reduce the marketability of our products |
| In addition, if in fact safety concerns are well founded for humans, our viability will be affected since our revenues are primarily derived from the sale of chromium picolinate for inclusion in nutritional supplement products |
| Harmful effects could also result in legal action against our Company |
| We have dlra5dtta0 million of product liability insurance for the products we currently market and intend to obtain product liability insurance for products we will market in the future |
| We may not succeed in obtaining additional insurance or obtaining insurance sufficient to cover all possible liabilities |
| No material liability claims have been asserted against us to date |
| WE HAVE LIMITED EXPERIENCE IN SALES TO THE CONSUMER MARKET We have limited experience in sales of branded products to the consumer market, and we have not been successful in this market |
| Although we have entered into distribution arrangements with mass retailers, we have only limited experience in marketing to the consumer market |
| We have hired the former principals of Iceland Health as executives of the Company but, although these executives have experience in direct response marketing, they have not engaged in distribution through retail channels |
| TO SELL PRODUCTS IN HEALTH CARE CHANNELS, WE WILL HAVE TO SUCCESSFULLY COMMUNICATE OUR PRODUCT HEALTH BENEFITS TO THE MEDICAL COMMUNITY We plan to build awareness for our products through media campaigns that leverage research outcomes, and through testimonials from health care professionals |
| If these efforts are not successful we will not be able to compete in this market and the products we propose for this market will fail |
| 24 _________________________________________________________________ IF WE ARE UNABLE TO DEFEND OUR MARKET POSITION FROM LARGER, BETTER-FINANCED COMPETITORS, OUR BUSINESS COULD SUFFER In considering our competitive position in chromium-based products, we distinguish between our existing ingredients business, on the one hand, and our prospective therapeutic branded products, on the other |
| We have a relatively strong position for existing stand-alone chromium sales where we believe that we have an approximately 80prca share of the market, and we have a 15prca market share for sales of chromium into multi-ingredient products, based on reports on retail sales furnished by SPINS and Information Resources Inc |
| SPINS and Information Resources Inc |
| are in the business of providing sales and marketing data |
| Our major competitor is InterHealth Nutraceuticals Inc |
| which is a privately held company that markets chromium polynicotinate |
| Based on SPINS data, we estimate that InterHealth has approximately a 12prca share of the market for stand-alone chromium sales |
| Our therapeutic branded business confronts many large established companies in a huge industry that serves the diabetes therapeutic market |
| The market is served by the major pharmaceutical companies such as Eli Lilly, Johnson & Johnson, Bristol-Myers Squibb, and GlaxoSmithKline that offer various medications to diabetics |
| Our success in this arena will in large part depend on our obtaining a scientific consensus that our supplement offers benefits that are competitive with the numerous products offered by companies that participate in this business |
| Our omega-3 business is highly competitive |
| As we enter retail distribution channels with our omega-3 products, we will be entering an intensely competitive market with large established companies and brands such as Bumble Bee Seafoods, Nordic Naturals and Puritan’s Pride |
| The nutritional product industry and the related drug industries are, of course, intensely competitive |
| Our competitors include major companies with raw materials and finished product divisions that also engage in the development and sale of dietary supplements |
| The great majority of these competitors have financial and technical resources as well as production and marketing capabilities substantially greater than ours |
| In addition, many of our competitors have experience significantly greater than we have in the development and testing of new or improved products |
| OUR PRODUCTS MAY BECOME OBSOLETE DUE TO TECHNOLOGICAL ADVANCES We are developing products in areas that are undergoing rapid technological advances and we may be unable to take advantage of these advances |
| In addition, the successful application of these technological advances by competitors may render our products obsolete |
| The Company is not aware of any studies that compare the relative advantages or disadvantages of the Companyapstas chromium-based products as against these other products |
| Research supporting competitors &apos claims in the nutrition supplement market is not subject to mandatory review by any government agency |
| Therefore, new products can appear and be brought to market rapidly and with little advance notice |
| Competitive products may appear or be supported by new research before we are able to respond with new product development or countervailing research |
| If competing products are developed that customers believe are superior to our products, sales of our products could decline and our business would be harmed |
| 25 _________________________________________________________________ IF WE ARE NOT ABLE TO MEET REGULATORY REQUIREMENTS THAT APPLY TO OUR PRODUCTS, WE WILL NOT BE ABLE TO MARKET THEM WITH CLAIMS FOR THEIR USE The US Food and Drug Administration regulates the labeling and marketing of our dietary supplements under the Dietary Supplement and Health Education Act, also known as DSHEA Under DSHEA, we are required to submit for FDA approval claims regarding the effect of our dietary supplements on the structure or function of the body |
| DSHEA also requires FDA approval for health claims that relate dietary supplements to disease prevention |
| Under DSHEA, within 30 days after first marketing a product, a company must submit to the FDA for review each claim (other than a qualified health claim) by the company that the product benefits bodily structure or function |
| If the FDA believes that a claim suggests the product is intended to diagnose, treat, cure or prevent a disease, it will reject the claim, usually within three months, in which case the company may no longer make the claim |
| To date, the FDA has not rejected any of our claims for benefit to bodily structure and function that are significant for the marketing of our products |
| Should the FDA in the future reject significant claims, we may be unable to interest consumers in purchasing our products |
| The FDA review of health claims requires significant scientific agreement that the totality of the data supports the claims that a product prevents disease |
| We applied for a qualified health claim on December 19, 2003, related to the prevention of diabetes |
| In August 2005, the FDA recognized chromium picolinate as a safe nutritional supplement that may reduce risk of insulin resistance and possibly type 2 diabetes, and concluded that there is credible evidence to support the following qualified health claim: “One small study suggests that chromium picolinate may reduce the risk of insulin resistance, and therefore possibly may reduce the risk of type 2 diabetes |
| FDA concludes, however, that the existence of such a relationship between chromium picolinate and either insulin resistance or type 2 diabetes is highly uncertain |
| ” The FDA declined to permit other qualified health claims that were proposed by the Company |
| WE ARE SUBJECT TO A FEDERAL TRADE COMMISSION CONSENT AGREEMENT THAT MAY ADVERSELY AFFECT OUR BUSINESS The Federal Trade Commission ( "e FTC "e ) regulates product-advertising claims, and requires that claims be supported by competent and reliable scientific evidence |
| Prior to our acquisition of a California limited partnership called Nutrition 21 ( "e Nutrition 21 LP "e ), the FTC opened an inquiry into certain of the claims that Nutrition 21 LP was making for chromium picolinate |
| The inquiry was terminated by the FTC with Nutrition 21 LP entering into a consent agreement that requires Nutrition 21 LP to support its claims by competent and reliable scientific evidence |
| After we acquired Nutrition 21 LP, we undertook new clinical studies to support the claims we intended to make for our products |
| The FTC has subsequently audited our chromium picolinate advertising and has not found either a lack of competent and reliable scientific evidence or a failure to comply with the consent agreement |
| We are discussing with the FTC whether we should have any liability for weight loss advertising claims that were made on QVC, Inc |
| televised shopping programs for Lite Bites consumer products |
| The FTC continues to monitor our advertising and could limit our advertising in ways that could make marketing our products more difficult or result in lost sales |
| WE HAVE NO PROPRIETARY RIGHTS IN OUR OMEGA 3 PRODUCT Although the manufacturer of our omega-3 product uses a patented distillation process to remove toxins and dioxins form the fish oils from which the product is derived, the product itself is not patented |
| Further it competes with omega 3-fatty acids that are derived by competitors directly from algae in a process that does not need to remove toxins and dioxin |
| 26 _________________________________________________________________ IF WE DO NOT ENFORCE OUR PATENT RIGHTS, OR ARE UNSUCCESSFUL ENFORCING OUR PATENT RIGHTS, WE WILL FACE INCREASED COMPETITION Our significant patents consist of: · three method of use patents that expire in 2009 that cover the use of chromium picolinate for improving body composition, glucose stabilization and cholesterol maintenance, · another method of use patent that expires in 2015 and covers the use of high doses of chromium picolinate for glucose stabilization, · four patents that expire in 2017 and cover the use of chromium for relieving the symptoms of depression and pre-menstrual syndrome, · two composition of matter patents that expire in 2017 and cover chromium picolinate and biotin compositions and their use for stabilizing serum glucose, · one composition of matter patent that expires in 2017 and covers a composition of chromium picolinate and other ingredients and its use for improving body composition, and · 11 other chromium-based patents that expire in 2017, 2018 and 2021 that cover a range of compositions and uses for which we do not offer products |
| We have also applied for eight other United States patents relating to improving insulin sensitivity, reducing hyperglycemia, and treatment of diabetes, dyslipidemia, hypercholesterolemia and other diseases |
| If we do not obtain patent protection, our ability to develop and market products for these disease states will be adversely affected, since we will be subject to competition on the products we develop |
| To date, we have not been denied a patent on any application |
| However, there is no guarantee a patent will be granted in each instance |
| Composition of matter patents protect the manufacture, sale or use of a product |
| Method of use patents are more difficult to enforce since the actual infringer is the person that takes the chromium picolinate for the patented use |
| In order to enforce a method of use patent against manufacturers or sellers, the patent owner must prove contributory or induced infringement, which is more difficult than enforcing a composition of matter patent |
| We are from time to time faced with competition from companies, including importers, that disregard our patent rights |
| Companies frequently take calculated risks that we will not sue to enforce our patent rights against them and that we will not prevail in any suits that we do bring |
| In considering whether to bring a suit, we take into account the legal costs of enforcing the patent |
| Competitors who disregard our patent rights can undercut our prices because they avoid paying for the technology in their products |
| We brought approximately 20 patent infringement suits under a composition of matter patent that expired in 2001 |
| These suits were settled in our favor, in some cases by agreement of the infringing party to purchase designated amounts of products from us, and in other cases by cash payments to us |
| We also brought one infringement suit under our patent that covers the use of chromium picolinate for stabilizing serum glucose |
| This suit was settled by agreement of the infringing party to purchase from us all of its requirements for chromium picolinate over a designated period |
| We currently have one patent infringement suit pending, and are evaluating bring other patent infringement suits |
| 27 _________________________________________________________________ IF WE ARE UNABLE TO MAINTAIN A NASDAQ LISTING FOR OUR SECURITIES THE LIQUIDITY OF OUR STOCK WILL BE REDUCED AND INVESTORS MAY BE UNABLE TO SELL THEM, OR MAY BE ABLE TO SELL THEM ONLY AT REDUCED PRICES We are currently in compliance with Nasdaqapstas minimum dlra1dtta00 bid price requirement for continued listing on the Nasdaq Capital Market |
| If we fail to meet the dlra1dtta00 bid price requirement for at least 30 consecutive business days, we will be provided time to achieve compliance, generally up to one year provided we satisfy the criteria for continued listing other than the minimum bid price |
| The period during which our common stock will continue to be listed on the Nasdaq Capital Market may be extended further subject to certain conditions |
| Throughout this period the Company can regain compliance by maintaining a dlra1dtta00 per share bid price for a minimum of 10 consecutive business days |
| Should the Company not be in compliance at the end of this period, its common stock will be subject to delisting from the Nasdaq Capital Market |
| Under certain circumstances, to ensure that the company can sustain long-term compliance, Nasdaq may require the closing bid price to equal or to exceed the dlra1dtta00 minimum bid price requirement for more than 10 consecutive business days before determining that a company complies with Nasdaqapstas minimum dlra1dtta00 bid price requirement |
| The liquidity of our common stock will be reduced if our securities fail to maintain a Nasdaq listing |
| Purchasers of our common stock would likely find it more difficult to sell our common stock, and the market value of our common stock would likely decline |
| In addition, if we fail to maintain a Nasdaq listing for our securities, and no other exclusion from the definition of a "e penny stock "e under the Exchange Act is available, then any broker engaging in a transaction in our securities would be required to provide any customer with a risk disclosure document, disclosure of market quotations, if any, disclosure of the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market values of our securities held in the customerapstas accounts |
| The bid and offer quotation and compensation information must be provided prior to effecting the transaction and must be contained on the customerapstas confirmation |
| If brokers become subject to the "e penny stock "e rules when engaging in transactions in our securities, they would become less willing to engage in these transactions, which will make it more difficult for purchasers of our common stock to dispose of their shares |
| Should we fail to maintain our Nasdaq listing and should we then or thereafter not be listed on the Bulletin Board we will be required to redeem our Preferred Stock before the four-year period fixed for maturity |