SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT UNDER SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended December 31, 2005
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-22710
INTERPHARM HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
75 Adams Avenue, Hauppauge, New York 11788
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 952-0214
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
Large accelerated filer |_| Accelerated filer|_| Non-accelerated filer |X|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act.)
YES |_| NO |X|
As of the close of business on February 10, 2006, there were 32,463,607 shares
of the Registrant's $0.01 par value per share Common Stock outstanding.
INTERPHARM HOLDINGS, INC.
TABLE OF CONTENTS
PART I Financial Information Page
Item 1. Financial Statements & Notes ......................................1-19
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations.....................20-28
Item 3. Quantitative and Qualitative Disclosures about Market Risk...........28
Item 4. Controls and Procedures..............................................28
PART II ther Information Required in Report
Item 4.......................................................................30
Item 6.......................................................................30
Forward Looking Statements and Associated Risks..............................31
Signatures Page..............................................................32
Exhibits/Certifications...................................................33-36
See Notes To Condensed Consolidated Financial Statements.
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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(In thousands, except share data)
ASSETS
December 31, June 30,
2005 2005
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CURRENT ASSETS (Unaudited)
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Cash and cash equivalents $ 6,394 $ 537
Accounts receivable, net 7,046 7,664
Inventories 9,344 8,941
Prepaid expenses and other current assets 1,479 1,156
Deferred tax assets 87 87
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Total Current Assets 24,350 18,385
Land, building and equipment, net 26,632 21,872
Deferred tax assets 4,228 4,326
Investment in APR, LLC 1,022 1,022
Deposits 161 785
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TOTAL ASSETS $ 56,393 $ 46,390
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt $ 6,561 $ 10,340
Accounts payable, accrued expenses and other liabilities 10,580 6,233
Deferred revenue 1,637 --
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Total Current Liabilities 18,778 16,573
OTHER LIABILITIES
Long-term debt, less current maturities 14,029 6,691
Other liabilities -- 15
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TOTAL LIABILITIES 32,807 23,279
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, 10,000,000 shares authorized; issued and outstanding -
6,608,233; aggregate liquidation preference
of $5,483,095 343 343
Common stock, $0.01 par value, 70,000,000 shares authorized;
shares issued - 32,463,607 at December 31, 2005 and 32,338,607
at June 30, 2005 325 324
Additional paid-in capital 21,832 19,104
Stock subscription receivable (112) --
Unearned compensation (2,180) --
Retained earnings 3,378 3,340
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TOTAL STOCKHOLDERS' EQUITY 23,586 23,111
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 56,393 $ 46,390
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See Notes to Condensed Consolidated Financial Statements.
1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
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(In thousands, except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
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2005 2004 2005 2004
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SALES, Net $ 16,213 $ 8,838 $ 30,760 $ 17,891
COST OF SALES (including related party rent expense of $102 and $204 for the
three and six months ended December 31, 2005 and 2004,
respectively) 11,034 6,245 21,597 13,358
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GROSS PROFIT 5,179 2,593 9,163 4,533
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OPERATING EXPENSES
Selling, general and administrative 2,201 1,226 4,639 2,313
Related party rent 18 18 36 36
Research and development 1,885 364 4,031 539
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TOTAL OPERATING EXPENSES 4,104 1,608 8,706 2,888
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OPERATING INCOME 1,075 985 457 1,645
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OTHER INCOME (EXPENSE)
Interest expense, net (99) -- (190) (3)
Loss on disposal of fixed asset (7) -- (7) --
Gain on sale of marketable securities -- 9 -- 9
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TOTAL OTHER INCOME (EXPENSE) (106) 9 (197) 6
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INCOME BEFORE INCOME TAXES 969 994 260 1,651
PROVISION FOR INCOME TAXES 360 369 98 612
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NET INCOME 609 625 162 1,039
INCOME ATTRIBUTABLE TO PREFERRED STOCKHOLDERS
67 79 90 146
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NET INCOME ATTRIBUTABLE TO
COMMON STOCKHOLDERS $ 542 $ 546 $ 72 $ 893
========== ========== ========== ==========
EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic earnings per share $ 0.02 $ 0.02 $ 0.00 $ 0.04
========== ========== ========== ==========
Diluted earnings per share $ 0.01 $ 0.01 $ 0.00 $ 0.01
========== ========== ========== ==========
Basic weighted average shares outstanding 32,463,607 24,967,190 32,463,607 24,967,178
Diluted weighted average shares and equivalent shares
outstanding 67,554,471 67,981,462 67,400,750 67,978,433
See Notes to Condensed Consolidated Financial Statements.
2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
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(In thousands)
Additional Stock
Preferred Stock Common Stock Paid-In Subscription
Shares Amount Shares Amount Capital Receivable
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - July 1, 2005 6,608 $ 343 32,339 $ 324 $ 19,104 $ --
Dividends Declared - Series A-1 -- -- -- -- -- --
Fair value of unvested stock
options upon adoption of FAS
123 (R) -- -- -- -- 2,604 --
Amortization of unearned compensation -- -- -- -- -- --
Common stock subscribed -- -- 125 1 132 (133)
Collection on stock subscription
receivable -- -- -- -- -- 21
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE - December 31, 2005 6,608 $ 343 32,464 $ 325 $ 21,840 $ (112)
============ ============ ============ ============ ============ ============
Total
Unearned Retained Stockholders'
Compensation Earnings Equity
------------ ------------ ------------
BALANCE - July 1, 2005 $ -- $ 3,340 $ 23,111
Dividends Declared - Series A-1 -- (124) (124)
Fair value of unvested stock
options upon adoption of FAS
123 (R) (2,604) -- --
Amortization of unearned compensation 416 -- 416
Common stock subscribed -- -- --
Collection on stock subscription
receivable -- -- 21
Net income -- 162 162
------------ ------------ ------------
BALANCE - December 31, 2005 $ (2,188) $ 3,378 $ 23,586
============ ============ ============
See Notes to Condensed Consolidated Financial Statements.
3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
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(In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
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2005 2004 2005 2004
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NET INCOME $ 609 $ 625 $ 162 $ 1,039
OTHER COMPREHENSIVE LOSS
Unrealized loss on marketable securities, net -- (3) -- --
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TOTAL COMPREHENSIVE INCOME $ 609 $ 622 $ 162 $ 1,039
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See Notes to Condensed Consolidated Financial Statements.
4
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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(In thousands)
Six Months Ended
December 31,
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 162 $ 1,039
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Adjustment to reconcile net income to net
cash provided by operating activities
Gain on sale of marketable securities -- (9)
Loss on disposal of fixed asset 7 --
Bad debt expense 11
Depreciation and amortization 685 557
Vested options expense 416 --
Deferred tax expense 98 583
Changes in operating assets and liabilities
Accounts receivable 608 1,007
Inventories (403) (1,746)
Prepaid expenses and other current assets (323) (170)
Accounts payable, accrued expenses and other liabilities 4,373 (572)
Deferred revenue 1,637 --
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TOTAL ADJUSTMENTS 7,109 (350)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 7,271 689
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of building and equipment (4,589) (3,142)
Deposits (111) (576)
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NET CASH USED IN INVESTING ACTIVITIES (4,700) (3,718)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank line of credit -- (425)
Proceeds from long-term debt 3,630 1,500
Payment of Series A-1 dividends (165) (179)
Collections on stock subscription receivable 21 --
Repayments of long-term debt (200) (154)
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NET CASH PROVIDED BY FINANCING ACTIVITIES 3,286 742
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,857 (2,287)
CASH AND CASH EQUIVALENTS - Beginning 537 2,885
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CASH AND CASH EQUIVALENTS - Ending $ 6,394 $ 598
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See Notes To Condensed Consolidated Financial Statements.
5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
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(In thousands)
Six Months Ended
December 31,
2005 2004
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 160 $ 105
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Income taxes $ -- $ 31
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Non-Cash Investing or Financing Transactions:
Conversion of Series C preferred stock to common stock $ -- $ 2
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Issuance of common stock in exchange for subscription receivable $ 133 $ --
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Acquisition of machinery and equipment in exchange for capital lease payable $ 128 $ --
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Reclassification of equipment deposits to building and equipment $ 735 $ --
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Declaration of preferred dividends $ 124 $ 179
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See Notes To Condensed Consolidated Financial Statements.
6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 1 - Condensed Consolidated Financial Statements
The accompanying interim unaudited condensed consolidated financial
statements include the accounts of Interpharm Holdings, Inc. and its
subsidiaries that are hereafter referred to as (the "Company"). All
intercompany accounts and transactions have been eliminated in
consolidation.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the instructions
to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles
generally accepted in the United States of America for complete
financial statements. In the opinion of management, such interim
statements reflect all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial position and the
results of operations and cash flows for the interim periods
presented. The operating results for the three and six months ended
December 31, 2005 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2006. For
further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's Form 10-K for the
year ended June 30, 2005.
NOTE 2 - Summary of Significant Accounting Policies
Nature of Business
Interpharm Holdings, Inc., through its wholly-owned subsidiary,
Interpharm, Inc. ("Interpharm, Inc."), is in the business of
developing, manufacturing and marketing generic prescription
strength and over-the-counter pharmaceutical products for wholesale
distribution throughout the United States. The majority of the
Company's sales have been derived from sales of Ibuprofen tablets in
both over-the-counter and prescription strength.
Earnings Per Share
Basic earnings per share ("EPS") of common stock is computed by
dividing net income attributable to common stockholders by the
weighted average number of shares of common stock outstanding during
the period. Diluted EPS reflects the amount of net income for the
period available to each share of common stock outstanding during
the reporting period, giving effect to all potentially dilutive
shares of common stock from the potential exercise of stock options
and warrants and conversions of convertible preferred stocks. In
accordance with Emerging Issues Task Force ("EITF") Issue No. 03-6,
"Participating Securities and the Two-Class Method Under FASB
Statement No. 128, Earnings Per Share," in periods when there is a
net income, the Company uses the two-class method to calculate the
effect of the participating Series K on the calculation of basic EPS
and the if-converted method is used to calculate the effect of the
participating Series K on diluted EPS. In periods when there is a
net loss, the effect of the participating Series K is excluded from
both basic and diluted EPS.
Use of Estimates in the Financial Statements
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those
estimates. Significant estimates include deferred tax asset
valuations and inventory overhead costing estimates.
Capitalization of Interest and Other Costs
The Company capitalizes interest on borrowings and certain other
direct costs during the active construction period of major capital
projects. Capitalized costs are added to the cost of the underlying
assets and will be depreciated over the useful lives of the assets.
The Company capitalized approximately $320,000 during the six month
period ended December 31, 2005 in connection with its capital
improvements to the Brookhaven, NY facility.
7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
Stock Based Compensation
Effective July 1, 2005, the Company adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123(Revised 2004), "Share-Based Payment,"
("SFAS 123(R)"), using the modified-prospective-transition method.
As a result, the Company's net income before taxes for the six
months ended December 31, 2005 is $416,000 lower than if it had
continued to account for share-based compensation under Accounting
Principles Board ("APB") opinion No. 25.
Prior to July 1, 2005, the Company's stock-based employee
compensation plans were accounted for under the recognition and
measurement provisions of Accounting Principles Board Opinion
("APB") No. 25, "Accounting for Stock Issued to Employees" ("APB
25"), and related Interpretations, as permitted by Financial
Accounting Standards Board ("FASB") Statement No. 123, "Accounting
for Stock-Based Compensation," ("SFAS 123"). The Company did not
recognize stock-based compensation cost in its statement of
operations for periods prior to July 1, 2005 as all options granted
had an exercise price equal to the market value of the underlying
common stock on the date of grant. However, compensation expense was
recognized under APB 25 for certain options granted to non employees
of the Company based upon the intrinsic value (the difference
between the exercise price at the date of grant and the deemed fair
value of the common stock).
Three and six months ended December 31, 2004
As was permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended SFAS No.
123, "Accounting for Stock-Based Compensation," the Company elected
to continue to follow the intrinsic value method in accounting for
its stock-based employee compensation arrangements as defined by APB
No. 25, "Accounting for Stock Issued to Employees," and related
interpretations including FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation, an
interpretation of APB No. 25." No stock-based employee compensation
cost is reflected in operations, as all options granted under those
plans had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table
illustrates the effect on net income and net income per share as if
the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation: (in thousands,
except for per share data)
Three Months Six Months
Ended Ended
December 31, December 31,
---------------------------
2004 2004
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Net income, as reported $ 625 $ 1,039
Less: Stock-based employee compensation
expense determined under fair value-based
method for all awards, net of income tax 656 1,313
------------ ------------
Pro forma net loss $ (31) $ (274)
============ ============
Basic net income (loss) per share
As reported $ 0.02 $ 0.04
============ ============
Pro forma $ -- $ (0.01)
============ ============
Diluted net income (loss) per share
As reported $ 0.01 $ 0.01
============ ============
Pro forma $ -- $ (0.01)
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8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
The fair values of Company common stock options granted to employees
were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected
volatility of 145% (2) risk-free interest rate of 4.25% and (3)
expected average life of 10 years.
Accounts Receivable
Accounts receivables are comprised of amounts owed to the Company
through the sales of its products throughout the United States.
These accounts receivable are presented net of allowances for
doubtful accounts, sales returns and customer chargebacks.
Allowances for doubtful accounts were $26,000 and $66,000 at
December 31, 2005 and June 30, 2005, respectively. Allowances for
sales returns were $86,000 and $0 at December 31, 2005 and June 30,
2005, respectively. The allowance for doubtful accounts is based on
a review of specifically identified accounts in addition to an
overall aging analysis. Judgments are made with respect to the
collectibility of accounts receivable based on historical experience
and current economic trends. Actual losses could differ from those
estimates. Allowances for customer chargebacks were $1,907,000 and
$425,000 at December 31, 2005 and June 30, 2005, respectively. The
Company sells some of its products indirectly to various government
agencies referred to below as "indirect customers." The Company
enters into agreements with its indirect customers to establish
pricing for certain products. The indirect customers then
independently select a wholesaler from which to actually purchase
the products at these agreed-upon prices. The Company will provide
credit to the selected wholesaler for the difference between the
agreed-upon price with the indirect customer and the wholesaler's
invoice price if the price sold to the indirect customer is lower
than the direct price to the wholesaler. This credit is called a
chargeback. The provision for chargebacks is based on expected
sell-through levels by the Company's wholesale customers to the
indirect customers, and estimated wholesaler inventory levels. As
sales to the large wholesale customers increase, the reserve for
chargebacks will also generally increase. However, the size of the
increase depends on the product mix. The Company continually
monitors the reserve for chargebacks and makes adjustments to the
reserve as deemed necessary. Actual chargebacks may differ from
estimated reserves.
Sales Incentives
In the current year the Company has offered a sales incentive to one
of its customers in the form of an incentive volume price
adjustment. The Company accounts for sales incentives in accordance
with EITF 01-9, "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of Vendor's Products)" ("EITF 01-9").
The terms of this volume based sales incentive require the customer
to purchase a minimum quantity of the Company's products during a
specified period of time. The incentive offered is based upon a
fixed dollar amount per unit sold to the customer. The Company makes
an estimate of the ultimate amount of the incentive the customer
will earn based upon past history with the customer and other facts
and circumstances. The Company has the ability to estimate this
volume incentive price adjustment, as there does not exist a
relatively long period of time for the particular adjustment to be
earned. Any change in the estimated amount of the volume incentive
is recognized immediately using a cumulative catch-up adjustment. In
accordance with EITF 01- 9, the Company records the provision for
this sales incentive when the related revenue is recognized. The
accrual for sales incentives at December 31, 2005 was $1.6 million
and reported as deferred revenue on the Company's balance sheet. The
Company's sales incentive liability may prove to be inaccurate, in
which case the Company may have understated or overstated the
provision required for these arrangements. Therefore, although the
Company makes its best estimate of its sales incentive liability,
many factors, including significant unanticipated changes in the
purchasing volume of its customer, could have significant impact on
the Company's liability for sales incentives and the Company's
reported operating results.
9
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
Reclassifications
Certain reclassifications have been made to the unaudited condensed
consolidated financial statements for the prior period in order to
have it conform to the current period's classifications. These
reclassifications have no effect on previously reported net income.
Recently Issued Accounting Pronouncements
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess
freight and handling costs, and wasted materials (spoilage) are
required to be recognized as current period costs. The provisions of
SFAS No. 151 are effective for the Company's fiscal year 2006. The
adoption of SFAS No. 151 has had no material impact on the Company's
condensed consolidated financial position, results of operations, or
cash flows.
In December 2004, the FASB issued SFAS No. 123 (R) amending SFAS No.
123, which, for the Company, became effective beginning the first
quarter of fiscal 2006. SFAS No. 123 (R) requires the Company to
expense stock options based on grant date fair value in its
financial statements. Further, the adoption of SFAS No. 123 (R)
requires additional accounting related to the income tax effects and
additional disclosure regarding the cash flow effects resulting from
share-based payment arrangements. The adoption of SFAS No. 123 (R)
has had no effect on the Company's condensed consolidated cash
flows, but impacts its results of operations.
In March 2005, the FASB issued FASB Interpretation No. 47,
"Accounting for Conditional Asset Retirement Obligations" ("FIN
47"), which is effective no later than the end of fiscal years
ending after December 15, 2005, with early adoption encouraged. FIN
47 clarifies that the phrase "conditional asset retirement
obligation," as used in FASB Statement No. 143, "Accounting for
Asset Retirement Obligations" (SFAS No. 143), refers to a legal
obligation to perform an asset retirement activity for which the
timing and/or method of settlement are conditional on a future event
that may or may not be within the control of the Company. The
obligation to perform the asset retirement activity is unconditional
even though uncertainty exists about the timing and/or method of
settlement.
Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the
measurement of the liability when sufficient information exists.
SFAS No. 143 acknowledges that in some cases, sufficient information
may not be available to reasonably estimate the fair value of an
asset retirement obligation. FIN 47 also clarifies when an entity
would have sufficient information to reasonably estimate the fair
value of an asset retirement obligation. The adoption of FIN 47 did
not have an effect on the Company's condensed consolidated financial
position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and
Error Corrections" ("SFAS No. 154"). SFAS 154 requires retrospective
application to prior periods' financial statements of changes in
accounting principle. It also requires that the new accounting
principle be applied to the balances of assets and liabilities as of
the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be
made to the opening balance of retained earnings for that period
rather than being reported in an income statement. The statement
will be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company
does not expect the adoption of SFAS No. 154 will have a material
effect on its condensed consolidated financial position or results
of operations.
In June 2005, the EITF reached consensus on Issue No. 05-6,
"Determining the Amortization Period for Leasehold Improvements"
("EITF 05-6"). EITF 05-6 provides guidance on determining the
amortization period for leasehold
10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
improvements acquired in a business combination or acquired
subsequent to lease inception. The guidance in EITF 05-6 will be
applied prospectively and is effective for reporting periods
beginning after June 29, 2005. The adoption of EITF 05-6 did not
have a material impact on the Company's condensed consolidated
financial position or results of operations.
In September 2005, the FASB ratified the EITF's Issue No. 05-7,
"Accounting for Modifications to Conversion Options Embedded in Debt
Instruments and Related Issues" (EITF 05-7"), which addresses
whether a modification to a conversion option that changes its fair
value effects the recognition of interest expense for the associated
debt instrument after the modification, and whether a borrower
should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value
of the debt (for example, the modification reduces the conversion
price of the debt). The statement will be effective for accounting
modifications of debt instruments beginning in the first interim or
annual reporting period beginning after December 15, 2005. The
adoption of EITF 05-7 is not expected to have a material impact on
the Company's condensed consolidated financial position or results
of operations.
In September 2005, the FASB ratified the EITF's Issue No. 05-8,
"Income Tax Consequences of Issuing Convertible Debt with a
Beneficial Conversion Feature" ("EITF 05-8"), which discusses
whether the issuance of convertible debt with a beneficial
conversion feature results in a basis difference arising from the
intrinsic value of the beneficial conversion feature on the
commitment date (which is recorded in the stockholder's equity for
book purposes, but as a liability for income tax purposes) and, if
so, whether that basis difference is a temporary difference under
FASB Statement No. 109, "Accounting for Income Taxes." The statement
will be effective for financial statements beginning in the first
interim or annual reporting period beginning after December 15,
2005. The adoption of EITF 05-8 is not expected to have a material
impact on the Company's condensed consolidated financial position or
results of operations.
In November 2005, the FASB issued Staff Position No. FAS 123(R)-3,
"Transition Election Related to Accounting for the Tax Effects of
Share-Based Payment Awards." FAS 123(R)-3 provides that companies
may elect to use a specified alternative method to calculate the
historical pool of excess tax benefits available to absorb tax
deficiencies recognized upon adoption of SFAS No. 123 (R). The
option to use the alternative method is available regardless of
whether SFAS No. 123 (R) was adopted using the modified prospective
or modified retrospective application transition method, and whether
it is has the ability to calculate its pool of excess tax benefits
in accordance with the guidance in paragraph 81 of SFAS No. 123 (R).
This method only applies to awards that are fully vested and
outstanding upon adoption of SFAS No. 123 (R). FAS 123(R)-3 became
effective after November 10, 2005. The adoption of FAS 123(R)-3 is
not expected to have a material impact on the Company's condensed
consolidated financial position or results of operations.
In June 2005, the Emerging Issues Task Force ("EITF") issued EITF
05-2, "The Meaning of Conventional Convertible Debt Instrument in
Issue No. 00-19". EITF 05-2 retained the definition of a
conventional convertible debt instrument as set forth in EITF 00-19,
and which is used in determining certain exemptions to the
accounting treatments prescribed under SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities". EITF 05-2 also
clarified that certain contingencies related to the exercise of a
conversion option would not be outside the definition of
"conventional" and determined that convertible preferred stock with
a mandatory redemption date would also qualify for similar
exemptions if the economic characteristics of the preferred stock
are more akin to debt than equity. EITF 05-2 is effective for new
instruments entered into and instruments modified in periods
beginning after June 29, 2005 The Company adopted the provisions of
EITF 05-2 on July 1, 2005, which did not have a material effect on
the Company's condensed consolidated financial position or results
of operations.
11
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 3 - Inventories
Inventories consist of the following: (in thousands)
December 31, June 30,
2005 2005
------------ ------------
(Unaudited)
Finished goods $ 1,103 $ 721
Work in process 5,039 5,539
Raw materials 2,756 2,117
Packaging materials 446 564
------------ ------------
Total $ 9,344 $ 8,941
============ ============
NOTE 4 - Land, Building and Equipment
Land, building and equipment consist of the following: (in thousands)
Estimated
December 31, June 30, Useful
2005 2005 Lives
------------ ------------ ----------
(Unaudited)
Land $ 4,924 $ 4,924
Building, equipment and construction in progress (a) 14,081 9,314 7-20 Years
Machinery and equipment 8,686 8,289 5-7 Years
Furniture and fixtures 703 435 5 Years
Leasehold improvements 2,970 2,950 5-15 Years
------------ ------------
31,364 25,912
Less: accumulated depreciation and amortization 4,732 4,040
------------ ------------
Land, Building and Equipment, net $ 26,632 $ 21,872
============ ============
(a) Not yet been placed into service and no depreciation expense has yet been
recorded
NOTE 5 -Debt
A summary of the outstanding long-term debt is as follows: (in thousands)
December 31, June 30,
2005 2005
------------ ------------
(Unaudited)
Advised credit facility $ 13,600 $ 9,970
Mortgage note payable 6,876 7,061
Capital lease 117 --
------------ ------------
20,593 17,031
Less: amount representing interest on capital lease 3 --
------------ ------------
Total long-term debt 20,590 17,031
Less: current maturities 6,561 10,340
------------ ------------
Long-term debt, less current maturities $ 14,029 $ 6,691
============ ============
12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 5- Debt, continued
Bank Debt
In March, 2004, the Company obtained a $21 million credit facility
consisting of (i) a $7.4 million mortgage loan for the purchase of the
Company's second manufacturing plant in Brookhaven, NY; (ii) $8.6 million
of credit lines primarily to acquire new equipment and for renovations,
and (iii) a $5 million general line of credit. Details of the facility
were as follows:
o The $7.4 million mortgage loan was to be repaid with 119 monthly
principal installments of $31,000 commencing on August 1, 2004 with
the balance due June 1, 2014.
o Two advised secured credit lines aggregating $6.6 million primarily
for acquisitions of equipment and for renovations of the Company's
new Brookhaven, NY plant. The balance of the funds accessed through
these credit lines would convert into fully amortizing 60 month term
loans.
o A $2.0 million advised non-revolving secured facility for equipment
purchases. Each advance could not exceed 90% of the invoice amount
of the new equipment and was convertible into fully amortizing 60
month term loans.
o The $5.0 million advised secured line of credit was primarily for
working capital and general corporate purposes.
During fiscal 2005, the Company and the Bank informally agreed to
consolidate the four credit lines into one advised credit line totaling
$13.6 million. As a result, the $13.6 million of advances have not been
allocated to each individual credit line. Since the Company and the Bank
did not determine the amount of loans that were available to be converted
into 60 month term loans, the $13.6 million of advances were classified as
current.
This credit facility was collateralized by substantially all assets of the
Company. At the option of the Company, interest was calculated at (i)
LIBOR plus 1.5% for 3 to 36 month periods, or at (ii) the Bank's then
fixed prime rate. As of December 31, 2005, the annual interest rates on
the advised credit lines which aggregated $13.6 million range from 5.47%
to 5.95%. Interest on the mortgage loan was 5.94% per annum. The Bank
reviews the new credit facility annually. The credit lines are terminable
by the Bank at any time as to undrawn amounts. In addition, the Company is
required to comply with certain financial covenants, and as of December
31, 2005, was in default of these financial covenants.
On February 9, 2006, the Company entered into a new four-year financing
arrangement with Wells Fargo Business Credit ("WFBC"). This financing
agreement provides for a total credit facitlity of $41.5 million comprised
of:
o $22.5 million revolving credit facility
o $12.0 million real estate term loan
o $3.5 million machinery and equipment (`M&E") term loan
o $3.5 million additional / future capital expenditure facility
The revolving credit facility borrowing base will be calculated as (i) 85%
of the Company's eligible accounts receivable plus the lessor of 50% of
cost or 85% of the net orderly liquidation value of its eligible
inventory. The advances pertaining to inventory shall be capped at the
lesser of 100% of the advance from accounts receivable or $9.0 million.
The $12.0 million loan pertaining to the real estate in Brookhaven, NY
shall be amortized over 180 months. The $3.5 million M&E term loan shall
be amortized over 60 months. With respect to additional capital
expenditures, the Company will be permitted to borrow 90% of the cost of
new equipment purchased to a maximum of $3.5million in borrowings
amortized over 60 months.
13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 5 - Debt, continued
The WFBC credit facility is collateralized by substantially all of the
assets of the Company. In addition, the Company will be required to comply
with certain financial covenants, as defined. The term of the credit
facility shall be four years. The revolving credit facility and term loans
will be repaid applying an interest factor of the prime rate less 0.5% or,
at the Company's option, LIBOR plus 250 basis points. As relates to the
real estate term loan, the Company has elected to fix the rate at 7.56%
per annum by purchasing an interest rate SWAP contract. The agreement
requires a lock-box arrangement. Additionally, the Company will incur a
fee of 25 basis points per annum on any unused amounts of this credit
facility.
Under the terms of the WFBC agreement, three stockholders, all related to
the Company's Chairman of the Board of Directors; one of whom is our Chief
Operating Officer; have provided limited personal guarantees, and have
pledged securities with a minimum aggregate value of $7.5 million as
collateral to the credit facility. Further, the Company is required to
raise a minimum of $7.0 million through the sale of equity or subordinated
debt by June 30, 2006. The sharelolders pledges of marketable securities
will be released by WFBC upon the Company achieving certain milestones.
The funds made available through this facility paid down, in its entirety,
the $21 million owed to the previous bank.
In accordance with SFAS 6, "Classification of Short-Term Obligations
Expected to Be Refinanced," the Company reclassified at December 31, 2005,
certain current maturities of long -term debt owed to its previous lender
as long-term based on ther terms of its new credit facility with WFBC.
Capital Lease
The Company has acquired equipment under a capital lease with annual
interest at 3.26% that expires in April 2007. The asset and liability
under the capital lease is recorded at the fair value of the asset. The
cost of the asset included in machinery and equipment is $0.13 million for
the six month period ended December 31, 2005. The asset is depreciated
over its estimated useful life.
NOTE 6- Income Taxes
At December 31, 2005, the Company has remaining Federal net operating loss
carryforwards ("NOLs") of approximately $12.3 million and State NOLs of
approximately $11.8 million both expiring at various times through 2025.
Pursuant to Section 382 of the Internal Revenue Code regarding substantial
changes in Company ownership, utilization of these NOLs is limited to
approximately $6.10 million of these NOL's in fiscal 2006, and utilization
of $6.20 million of these NOL's is limited and becomes available after
fiscal 2006. The limitations lapse at the rate of $2.7 million per year,
through fiscal 2009. As of December 31, 2005, the Company has determined
that it is more likely than not, that the Company will utilize all of the
Federal NOLs in the future. The Company recorded a valuation allowance for
approximately 30% of the State NOLs which the Company does not anticipate
utilizing due to State limitations.
In calculating its tax provision for the six month period ended December
31, 2005, the Company applied an aggregate effective tax rate of
approximately 37% thereby creating an approximate $0.10 million income tax
expense and reduced its deferred tax asset by a like amount.
14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 7- Earnings Per Share
The calculations of basic and diluted EPS are as follows: (in thousands,
except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------
Numerator:
Net income $ 609 $ 625 $ 162 $ 1,039
Less: Preferred stock dividends 41 41 83 83
Less: Net income attributable to Series K preferred
stockholders 26 38 7 63
------------ ------------ ------------ ------------
Numerator for basic EPS 542 546 72 893
Effect of dilutive securities:
Net income attributable to Series K preferred
Stockholders 26 38 7 63
------------ ------------ ------------ ------------
Numerator for diluted EPS $ 568 $ 584 $ 79 $ 956
============ ============ ============ ============
Denominator:
Denominator for basic EPS weighted average
shares outstanding 32,463,607 24,967,190 32,463,607 24,967,178
Effect of dilutive securities:
Convertible Series K preferred stock 31,373,875 37,648,650 31,373,875 37,648,650
Convertible Series A, B, C and J preferred stocks 7,398 7,402 7,398 7,402
Stock options 3,709,591 5,358,220 3,555,870 5,355,203
------------ ------------ ------------ ------------
Denominator for diluted EPS 67,554,471 67,981,462 67,400,750 67,978,433
============ ============ ============ ============
Basic EPS $ 0.02 $ 0.02 $ 0.00 $ 0.04
============ ============ ============ ============
Diluted EPS $ 0.01 $ 0.01 $ 0.00 $ 0.01
============ ============ ============ ============
As of December 31, 2005, the total number of common shares outstanding and
the number of common shares potentially issuable upon exercise of all
outstanding stock options and conversion of preferred stocks (including
contingent conversions) is as follows:
Common stock outstanding - December 31, 2005 32,463,607
Stock options and Warrants outstanding 12,566,870
Common stock issuable upon conversion of preferred stocks:
Series A 1,522
Series A-1 (maximum contingent conversion) - (a) 4,855,389
Series B 292
Series C 5,584
Series K - (b) 31,373,875
------------
Total - (c) 81,267,139
============
15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 7- Earnings Per Share, continued
(a) The Series A-1 shares are convertible only if the Company reaches
$150 million in annual sales or upon a merger, consolidation, sale
of assets or similar transaction.
(b) On June 4, 2006 and on each anniversary date thereon, through June
4, 2010, 292,913 Series K shares will automatically convert into
6,274,775 shares of the Company's common stock.
(c) Assuming no further issuance of equity instruments, or changes to
the equity structure of the Company, this total represents the
maximum number of shares of common stock that could be outstanding
through December 31, 2011 (the end of the current vesting and
conversion periods).
NOTE 8 - Equity Securities
Common Stock and Stock Options
On July 1, 2005, the Company entered into a common stock subscription
agreement to sell 125,000 shares of the Company's common stock to an
employee at a purchase price of $1.07 per share of common stock.
In December, 2005, the Company issued, to an employee, 100,000 options, of
which 50,000 are performance-based, and have an exercise price of $1.25.
The options vest 20% June 30, 2006 and each subsequent June 30th through
June 30, 2010.
Preferred Stock
In August 2005, the Board of Directors, declared a dividend of $41,381, in
accordance with the terms set forth in the Series A-1 Cumulative
Convertible Preferred Stock ("A-1 shares"). The A-1 shares have a
cumulative annual dividend of $0.0341 per share. The declared dividend was
cumulative through June 30, 2005. As of December 31, 2005 the Company's
Board of Directors had not declared any dividend on the A-1 shares for the
period July 1, 2005 through December 31, 2005. Such undeclared dividends
amounted to approximately $82,000.
NOTE 9 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the three and
six month periods ended December 31, 2005 and 2004:
Sales - Percent of Revenue
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------------------------------------------------
2005 2004 2005 2004
---------------------------------------------------------------------
Customer "A" 17% * * *
Customer "B" 15% * 14% *
Customer "C" 13% * 13% *
Customer "D" 10% 23% 10% 16%
Customer "E" * 23% * 19%
Customer "F" * 21% * 27%
* Sales to customer were less than 10%
16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 9 - Economic Dependency, continued
Accounts Receivable (in thousands)
December 31, 2005
-----------------
Customer "A" $1,566
Customer "B" 1,213
Customer "C" 1,123
Customer "D" 2,356
The Company complies with its supply agreement to sell various strengths
of Ibuprofen, and commencing October 2005, various strengths of Naproxen,
to the Department of Veteran Affairs through two intermediary wholesale
prime vendors whose data are combined and reflected in Customer "D" above.
Major Suppliers
For the three and six months ended December 31, 2005, the Company
purchased materials from three suppliers totaling approximately 74% and
73% of purchases, respectively. For the three and six months ended
December 31, 2004, the Company purchased materials from two suppliers
totaling approximately 74% and 72% of purchases, respectively. At December
31, 2005 and 2004, aggregate amounts due to these suppliers included in
accounts payable, were approximately $4.4 million and $2.1 million,
respectively.
NOTE 10 - Related Party Transactions
Rents
The Company leases its business premises located in Hauppauge, New York,
("Premises") from an entity owned directly by one officer and indirectly
by another officer of the Company under a noncancelable lease expiring in
October 2019, and is obligated to pay minimum annual rent of $480,000,
plus property taxes, insurance, maintenance and other expenses related to
the Premises. The Company believes that the aggregate lease costs for the
premises are less than those for comparable facilities in the area.
Upon a change in control of the Company, as defined, and every three years
thereafter, the annual rent will be adjusted to fair market value, as
determined by an independent third party.
Investment in APR, LLC.
In February and April 2005, the Company purchased 5 Class A membership
interests ("Interests") from each of Cameron Reid ("Reid"), the Company's
Chief Executive Officer, and John Lomans ("Lomans"), who has no
affiliation with the Company, for an aggregate purchase price of
$1,022,500 (including costs of $22,500) of APR, LLC, a Delaware limited
liability company primarily engaged in the development of complex bulk
pharmaceutical products ("APR"). The purchases were made pursuant to
separate Class A Membership Interest Purchase Agreements dated February
16, 2005 between the Company and Reid and Lomans (the "Purchase
Agreements"). At the time of the purchases, Reid and Lomans owned all of
the outstanding Class A membership interests of APR, which had,
outstanding, 100 Class A membership interests and 100 Class B membership
interests. As a result, the Company owns 10 of the 100 Class A membership
Interests outstanding. The two classes of membership interests have
different economic and voting rights, and the Class A members have the
right to make most operational decisions. The Class B interests are held
by one of the Company's major customers and suppliers.
17
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
In accordance with the terms of the Purchase Agreements, the Company has
granted to Reid and Lomans each a proxy to vote 5 of the Interests owned
by the Company on all matters on which the holders of Interests may vote.
NOTE 10 - Related Party Transactions, continued
The Board of Directors approved the purchases of Interests at a meeting
held on February 15, 2005, based on an analysis and advice from an
independent investment banking firm. Reid did not participate during the
Company's deliberations on this matter. The Company is accounting for its
investment in APR pursuant to the cost method of accounting.
NOTE 11 - Contingencies
Litigation
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management, it
is not anticipated that the settlement or resolution of any such matters
will have a material adverse impact on the Company's financial condition,
liquidity or results of operations.
The testing, manufacturing and marketing of pharmaceutical products
subject us to the risk of product liability claims. The Company believes
that it maintains an adequate amount of product liability insurance, but
no assurance can be given that such insurance will cover all existing and
future claims or that it will be able to maintain existing coverage or
obtain additional coverage at reasonable rates.
Significant Contracts
Tris Pharmaceuticals, Inc
The Company entered into two agreements with Tris Pharma, Inc. ("Tris").
One of the agreements is for the development and licensing of twenty-five
liquid generic products. According to the terms of the agreement for the
liquid products, Tris is to develop and deliver the properties,
specifications and formulations ("Technical Packages") necessary to
effectuate a technology transfer to the Company for the twenty-five
generic liquid pharmaceutical products. The Company will then utilize this
information to obtain all necessary approvals and manufacture and market
the products. Further, this agreement provides the Company with a
perpetual license of all technology and components of the Technical
Packages necessary to produce the liquid products that are the subject of
the agreement. It also allows the Company the use of the technology for
other products in exchange for an additional fee. In the event that Tris
delivers twenty-five successful Technical Packages, of which there can be
no assurance, the Company will pay Tris approximately $3,000,000. In
accordance with the terms of this agreement, the Company will make
payments as various milestones are achieved. In addition, Tris is to
receive a royalty of between 10% and 12% of net profits resulting from the
sales of each product. The Company is entitled to offset the royalty
payable to Tris each year, at an agreed upon rate, to recoup the
development fees paid to Tris under the Liquids Agreement.
According to the terms of the second agreement, as amended, for the solid
dosage products ("solids"), the Company will collaborate with Tris on the
development, manufacture and marketing of eight solid oral dosage generic
products. The amendment to this agreement requires Tris to deliver
Technical Packages for two softgel products. Further, the terms of this
amendment will require the Company to pay to Tris $750,000, based upon
various Tris milestone achievements. Some of products included in this
agreement, as amended, may require the Company to challenge the patents
for the equivalent branded products. This agreement, as amended, provides
for payments of an aggregate of $4,500,000 to Tris, whether or not
regulatory approval is obtained for any of the solids products. The
agreement for solids also provides for an equal sharing of net profits for
each product, except for one product, that is successfully sold and
marketed, after the deduction and reimbursement of all litigation-related
and certain other costs. The excluded product provides for a profit split
of 60% for the Company and 40% for Tris. Further, this agreement provides
the Company with a perpetual royalty-free license to use all technology
necessary for the solid products in the United States, its territories and
possessions. So long as Tris continues to provide evidence of its effort
to develop the eight solid generic pharmaceutical products the Company is
obligated to remit payments
18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 11 - Contingencies, continued
aggregating $3,750,000. Under this agreement, the Company has received two
complete technical packages and two partial packages.
For the three and six month periods ended December 31, 2005, the Company
recorded as a research and development expense approximately $0.53 and
$1.19 million, respectively, in connection with these agreements.
Further, since inception, we have incurred approximately $2.59 million of
research and development costs associated with the TRIS agreements.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Interpharm Holdings, Inc., (the "Company" or "Interpharm"), through its
operating wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and
collectively with Interpharm, "we" or "us") is engaged in the business of
developing, manufacturing and marketing generic prescription strength and
over-the-counter pharmaceutical products.
We currently make sales both under our own label and to wholesalers,
distributors, repackagers, and other manufacturers which sell our products under
their labels. We currently manufacture and market 23 generic drug products,
which represent various oral dosage strengths for 13 unique products. Of these,
we hold seven Abbreviated New Drug Applications ("ANDA") for fourteen of these
products. The remaining products are manufactured under an over-the-counter
monogram or are drugs which do not otherwise require ANDAs.
As part of our ongoing expansion plan, we are in the process of transforming the
Company into a full service generic products provider. During the six months
ended December 31, 2005, we have made tremendous improvements in our
infrastructure which we anticipate will have significant impact on our ability
to implement our business plan. We recently began research and development
operations at our new location in Brookhaven, New York and expect to begin
manufacturing at the location in the summer of 2006. As a result, our physical
facilities devoted to research and development in the United States has
increased nearly five-fold. We have also invested significantly in research and
development through the hiring of new personnel and capital expenditures. We are
confident that we now have the proper infrastructure to achieve our objective of
filing for a minimum of twenty five ANDAs from the period July 1, 2005 through
June 30, 2007.
Our product development initiatives are focused primarily in the following six
areas: female hormone products, scheduled narcotics, products requiring special
release characteristics, liquid products, softgel products and products coming
off patent. We have chosen some of these product areas because we possess
existing core competencies, and because management believes that competition in
these areas will be limited due to significant barriers to entry that we have
previously overcome. For example, female hormone products require a dedicated
and segregated facility with separate air handling and other equipment to avoid
cross contamination. We have already built such a facility, have the necessary
equipment and regulatory approval and are currently producing female hormone
products. Scheduled narcotics require compliance with regulations governing
their handling, storage, segregation, filing and record keeping which create a
significant barrier to entry to the market for these products. We are already in
compliance with these regulations and therefore, our product development
strategy includes expanding this line of products to a full line of scheduled
narcotics. In order for us to maximize our market share and gross margins for
certain of these products, it will be necessary for us to be in a position to
launch such products on the date of patent expiration and any applicable
exclusivity periods. We believe that between our internal developments and those
that we have outsourced to third parties, we will be in position to launch many
of these products on their respective critical dates.
As we began to implement our business plan during the last six months of our
fiscal year which ended June 30, 2005, we spent approximately $3.5 million on
research and development, as compared to $0.50 million during the first half of
such fiscal year and $0.50 million during our entire fiscal year ended June 30,
2004. During the six-month period ended December 31, 2005 we spent approximately
$4.0 million on research and development. Now that we have expanded our
capabilities in research and development to meet the requirements of our
expansion plans, we will be required to spend on research and development at an
even more accelerated pace than we have been spending over the past few
quarters.
On February 9, 2006 we closed on a secured credit facility of up to $41.5
million with Wells Fargo Business Credit. We used approximately $21 million of
the proceeds received from Wells Fargo to pay off our previous credit facility
with our previous Bank. As part of the transaction, three stockholders, all
related to our Chairman of the Board of Directors; one of whom is our Chief
Operating Officer; have provided limited personal guarantees, and have pledged
securities with a minimum aggregate value of $7.5 million as collateral. We
believe the establishment of this new credit facility will enable us to fund our
research and development commitments and help us to achieve our product
development objectives.
20
Our improved sales for the first half of the current fiscal year are the result
of the implementation of our new marketing strategy as part of our expansion
plan. Our current marketing strategy focuses on obtaining a broader customer
base and making more direct sales. With a broad customer base, we believe that
we will be able to have a stable sales and production cycle for our products, as
well as an easily accessible market for our new products. By making more direct
sales, we believe that we can maximize value and profits by eliminating
intermediaries as well as offer better customer service and improve and
strengthen our customer relationships. In addition to creating sales for our new
products, our marketing strategy has enabled us to broaden the customer base for
our existing products thereby increasing revenue for such products. The
combination of our new marketing strategy and our introduction of more
profitable products has enabled us to increase gross margins to approximately
32% for the current quarter as compared to approximately 27% for the three month
period ended September 30, 2005 and approximately 23% for the fiscal year ended
June 30, 2005. We believe that as we continue implementation of our plan, we
will realize higher gross margins than we have historically achieved.
Results of Operations
Summary
Our net sales of $16.2 million for the three month period ended December 31,
2005 were our highest net sales for any quarter in our history, surpassing the
$14.5 million record of the previous quarter. During this fiscal year we began
shipments of our female hormone therapy product which accounted for
approximately $3.9 million of net sales, yielding nearly four times our
historical average in gross profit percentage. Further, during the current
quarter we launched Sulfamethoxazole - Trimethoprim in two strengths 400mg /
80mg commonly referred to as Bactrim(R) and 800mg / 160mg or commonly referred
to as Bactrim-DS(R), ("Bactrim"), which, together, accounted for net sales of
approximately $1.5 million.
As a result of our planned expansion, our overall expense structure during the
three and six months ended December 31, 2005, increased by $2.50 million and
$5.82 million, respectively, compared to the same periods in the prior year,
primarily due to: (i) additional staffing and other costs associated with our
second facility, (ii) increased research and development and (iii) increased
selling, general and administrative expense, resulting in operating income of
$1.08 million and $0.46 million, respectively.
Net sales by product: (in thousands)
Three Months Ended December 31,
--------------------------------------------------------------------------------------------------------------
2005 % of 2004 % of
Sales Sales Sales Sales
---------------------------------------------------------------------------
Ibuprofen $ 8,906 55 $ 5,532 63
Allopurinol & Atenolol 555 3 1,884 21
Naproxen 1,588 10 307 3
Female hormone product 2,119 13 -0- -0-
Bactrim 1,480 9 -0- -0-
All Other Products 1,565 10 1,115 13
--------- ------
Total $16,213 $8,838
========= ======
21
Six Months Ended December 31,
---------------------------------------------------------------------------------------------
2005 % of 2004 % of
Sales Sales Sales Sales
-----------------------------------------------------------
Ibuprofen $16,676 54 $11,703 65
Allopurinol & Atenolol 2,257 7 3,201 18
Naproxen 3,397 11 803 5
Female hormone product 3,902 13 -0- -0-
Bactrim 1,480 5 -0- -0-
All Other Products 3,048 10 2,184 12
------- -------
Total $30,760 $17,891
======= =======
As indicated in the tables above, our net sales increased $7.4 and $12.9 million
when comparing the three and six month periods ended December 31, 2005 and 2004.
Significant second quarter sales components include:
o For the three and six month periods ended December 31, 2005, net sales of
Ibuprofen increased $3.37 million and $4.97 million, respectively, or
61.0% and 42.5%, respectively, due, in part to an expanded customer base,
as well as improvements in production and packaging which enabled us to
ship nearly all backorders. We believe sales of Ibuprofen should remain at
approximately the current level for the balance of this fiscal year,
however, there can be no assurance that this will occur.
o Both Allopurinol and Atenolol are manufactured for and shipped to one
customer based on quantities ordered by that customer. When comparing net
sales for three and six month periods ended December 31, 2005 and 2004
there was a decrease of $1.3 million and $0.94 million, respectively. As
part of our plan to reduce dependency on sales from contract manufacturing
arrangements, we anticipate revenue from these two products to diminish
during the remainder of the current fiscal year. The manufacturing
capacity gained from the planned reduction of these two products is being
used for other products. Additionally, with respect to our agreements with
United Research Laboratories, Inc. and Mutual Pharmaceutical Company,
Inc., we manufacture two other products which have nominal sales.
o As discussed in previous filings, through our marketing efforts, we have
been successful in obtaining new customers for our products. As a result
of these efforts, we were awarded a U.S. Government contract to supply
Naproxen to various governmental agencies. The contract is for
approximately $3.9 million for the twelve month period beginning September
22, 2005. As a result, our sales for Naproxen increased by $1.3 million in
the current quarter compared to same quarter of the prior year and $2.59
million when comparing the six months ended December 31, 2005, to the same
period last year. We believe that future net sales of Naproxen should
remain at current sales level for the balance of the fiscal year, however
there can be no assurance that this will occur.
o In accordance with the terms of a multi-year agreement to sell our female
hormone therapy product, we recognized revenue of approximately $2.1 and
$3.9 million during the three and six month periods ended December 31,
2005. Our customer has committed to purchase a minimum of $11.5 million
during the first twelve months of the agreement, beginning August, 2005.
This product generates a higher gross margin compared to our other
products.
o During the three month period ended December 31, 2005, we made our initial
shipments of Sulfamethoxozole -Trimethoprim, commonly known as Bactrim.
o Included in the caption, "all other products", for the six months ended
December 31, 2005 and 2004, is $1.7 million and $0.67 million,
respectively, of Hydrocodone-7.5 mg/Ibuprofen-200 mg, our generic version
of Vicoprofen. We launched these products during the three month period
ended December 31, 2004. As this product, and Reprexain(R), Hydrocodone -
5.0 mg/Ibuprofen-200, are sold to, and marketed by, Watson
Pharmaceuticals, Inc., it is difficult to project future sales. The
results for the period reported include additional revenue derived from a
profit sharing arrangement for these products.
22
Cost of Sales / Gross Profit
During the three and six month periods ended December 31, 2005, prices for raw
materials remained relatively constant when compared to the prior year. While no
assurance can be given, we believe that our raw material costs should continue
at the present rates for the next several months. However, costs associated with
packaging components have increased and are likely to continue at their present
level for the foreseeable future. The remaining components of our cost of sales,
primarily direct labor and overhead have, as a percentage of net sales,
decreased during the three and six months ended December 31, 2005. However, we
have increased costs associated with increased production and supervisory
salaries, as well as hiring and training staff for our second facility, which we
anticipate will be operational sometime in the summer of 2006. Additionally, we
experienced increases in general overhead costs such as product liability
insurance and utilities. We believe these higher costs will likely continue for
the near future.
Our total gross profit percentage for the three months ended December 31, 2005
was 31.9%, an increase of 2.6 percentage points compared to 29.3% for the three
months ended December 31, 2004. Our total gross profit percentage for the six
months ended December 31, 2005 was 29.8%, an increase of 4.5 percentage points
compared to 25.3% for the six months ended December 31, 2004. This increase is
primarily the result of our two new products which we began shipping during this
quarter, both of which generate higher gross profits than our traditional
product line. As volume increases for these products throughout the year, we
anticipate that our overall gross margin should increase, however, there can be
no assurance that sales will increase or cost of sales will not increase
disproportionately.
Research and Development Expenses
As described above, as part of our plan, during the three and six month periods
ended December 31, 2005, we continued to take significant steps to expand our
product line. For the three and six month periods ended December 31, 2005, we
incurred research and development expenses of approximately $1.89 million and
$4.03 million, respectively, as compared to approximately $0.36 million and
$0.54 million, respectively for the same periods in the prior year.
Research and development expenses were primarily for materials, wages and
bioequivalence studies for new drugs currently in development. We believe that
research and development expenses, as a percentage of our net sales, will be
substantially higher in the future as we seek to expand our product line.
In February 2005, we entered into two agreements with Tris Pharma, Inc. ("Tris")
for the development and licensing of up to twenty-five immediate release liquid
generic products (the "Liquids Agreement") and eight solid oral dosage generic
pharmaceutical products (the "Solids Agreement"). In the event that Tris
delivers twenty-five products under the Liquids Agreement, of which there can be
no assurance, Tris is to receive approximately $3.0 million in development fees
from us and, in addition, Tris is to receive a royalty of between 10% and 12% of
net profits resulting from the sales of each product. We are entitled to offset
the royalty payable to Tris each year, at an agreed upon rate, to recoup the
development fees paid to Tris under the Liquids Agreement.
Pursuant to the terms of the Solids Agreement, as amended, we and Tris are to
collaborate on the development, manufacture and marketing of eight solid oral
dosage generic products and two soft gel products, some of which may require us
to challenge the patents for the equivalent branded products. The Solids
Agreement, as amended provides for payments of an aggregate of $ 4.5 million to
Tris. The Solids Agreement, as amended, also provides for an equal sharing of
net profits for all but one product that is successfully sold and marketed,
after the deduction and reimbursement to us of all costs incurred by us in the
development and marketing of the solid products, including the amounts paid to
Tris under the contract. The other product provides for a profit split of 60%
for us and 40% for Tris.
23
The Tris agreements will allow us to bring in-house several specialized
technologies which would otherwise not be available to us, and which can allow
us to manufacture and sell more higher-margin and profitable products. During
the three and six month periods ended December 31, 2005, we recorded as a
research and development expense $0.53 million and $1.19 million, respectively,
in connection with these agreements.
We currently anticipate filing over 25 ANDAs through June 30, 2007. If we are
successful in our efforts we believe we could see sales from new products during
fiscal 2006, however, there can be no assurance that these products or our
second facility will obtain timely U.S. Food and Drug Administration ("FDA")
approval.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries and related costs,
commissions, travel, administrative facilities, communications costs and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead.
Selling, general and administrative expenses increased approximately $0.98
million to approximately $2.20 million, or 13.6% of net sales during the three
months ended December 31, 2005, from approximately $1.23 million or 13.9% of net
sales, during the same period in 2004. The significant components of this
increase are: salaries, including payroll taxes and benefits of $0.51 million,
(primarily as a result of recently hired executive staffing and management, wage
adjustments and related payroll taxes); commissions and freight costs of $0.11
million and $0.07 million, respectively, primarily due to increased sales. In
accordance with SFAS 123 (R), we reported a non-cash expense of $0.20 million
during the three month period ended December 31, 2005. Adoption of SFAS 123 (R)
requires us to report a non-cash expense for the ratable portion of the fair
value of employee stock option awards of unvested stock options over the
remaining vesting period. Previously we elected to follow the intrinsic value
method in accounting for our stock-based employee compensation arrangements as
defined by Accounting Principles Board Opinion ("APB") No. 25, "Accounting for
Stock Issued to Employees," and related interpretations including Financial
Accounting. We believe this level of selling, general and administrative
expenses will remain throughout the fiscal year.
Selling, general and administrative expenses increased approximately $2.33
million to approximately $4.64 million, or 15.1% of net sales during the six
months ended December 31, 2005, from approximately $2.31 million, or 12.9% of
net sales, during the same period in 2004. The significant components of this
increase are: salaries, including payroll taxes and benefits of $0.99 million;
commissions and freight costs of $0.23 million and $0.13 million, respectively,
legal, accounting and professional fees of $0.26 million and a non-cash expense
of $0.42 million as a result of adoption of SFAS 123 (R).
Income Taxes
For the three and six month periods ended December 31, 2005 and 2004 we applied
an effective tax rate of approximately 37%.
Liquidity and Capital Resources
We currently finance our operations and capital expenditures through cash flows
from operations and bank loans. Net cash provided by operating activities for
the six months ended December 31, 2005, was $7.27 million, compared to $0.69
million for the six months ended December 31, 2004. Significant factors
comprising the cash provided in operating activities include: net income of
$0.16 million, increases in accounts payable and accrued expenses payable of
$4.37 million, an increase in deferred revenue of $1.64 million, a decrease of
$0.61 million in accounts receivable, offset by increases in inventories and
prepaid expenses and other current assets of $0.40 million and $0.32 million,
respectively. The increase in accounts payable and accrued expenses payable are
primarily attributable to increases in purchases due to greater sales volume as
well as increased research and development costs. At December 31, 2005, we had
$6.39 million in cash and cash equivalents, compared to $0.54 million at June
30, 2005. Additionally, we reported depreciation and amortization of $0.69
million. We also recognized a non cash charge of $0.42 million as a result of
adoption of SFAS 123 (R). Other items affecting our net cash provided by
operating activities aggregated $0.10 million.
24
Net cash provided by financing activities of $3.29 million for the six months
ended December 31, 2005, was a result of drawing from the available lines of
credit offset by the pay down of long term debt of $0.2 million. A component of
our current plan is the completion of renovations to our second facility along
with the installation of additional equipment for manufacturing, packaging and
research and development. Accordingly, during the six month period ended
December 31, 2005, our net cash used in investing activities of $4.70 million,
net, was for new equipment and improvements.
It should be noted that as part of our business plan, during the three and six
month periods ended December 31, 2005, we incurred $1.89 million and $4.03
million of research and development costs. We believe that , according to our
business plan, our research and development costs will likely exceed this our
current rate, for the forseeable future.
In addition, we have entered in a purchase agreement for land in Ahmedabad,
India on which we plan to build a facility, which will be used primarily for
research and development. This facility is also expected to be used for the
processing of bulk active pharmaceutical ingredients ("API") in preparation for
finished goods manufacturing in the United States. However, there can be no
assurance that we will be successful in constructing this planned facility.
Bank Financing
On February 9, 2006, the Company entered into a new four-year financing
arrangement with Wells Fargo Business Credit ("WFBC"). This new credit facility
$41.5 million credt facility is comprised of:
o $22.5 million revolving credit facility
o $12.0 million real estate term loan
o $3.5 million machinery and equipment (M&E) term loan
o $3.5 million additional / future capital expenditure facility
The revolving credit facility borrowing base will be calculated as (i) 85% of
our eligible accounts receivable plus the lessor of 50% of cost or 85% of the
net orderly liquidation value of its eligible inventory. The advances pertaining
to inventory shall be capped at the lesser of 100% of the advance from accounts
receivable or $9.0 million. The $12.0 million loan pertaining to the real estate
in Brookhaven, NY shall be amortized over 180 months. The $3.5 million M&E term
loan shall be amortized over 60 months. With respect to additional capital
expenditures, we will be permitted to borrow 90% of the cost of new equipment
purchased to a maximum of $3.5 million in borrowings amortized over 60 months.
The WFBC credit facility is collateralized by substantially all of our assets.
In addition, we will be required to comply with certain financial covenants, as
defined. The term of the credit facility shall be four years. The revolving
credit facility and term loans will be repaid applying an interest factor of the
prime rate less 0.5% or, at our option, LIBOR plus 250 basis points. As relates
to the real estate term loan, we have elected to fix the rate at 7.56% per annum
by purchasing an interest rate SWAP contract. The agreement requires a lock-box
arrangement. Additionally, we will incur a fee of 25 basis points per annum on
any unused amounts of this credit facility.
Certain shareholders were required to pledge marketable securities aggregating
$7.5 million. Further, the Company is required to raise a minimum of $7.0
million through the sale of equity or subordinated debt by June 30, 2006. The
pledges of marketable securities will be released by WFBC upon us achieving
certain milestones.
The funds made available through this facility paid down, in its entirety, the
$21 million owed to the previous bank.
25
As previously disclosed, we entered into agreements with Tris for the
development and delivery of over thirty new Technical Packages. The combined
costs of these agreements could aggregate to $7.5 million of which we have paid
$2.45 million as of December 31, 2005. The balance on one agreement of $2.75
million could be paid within three years. The second agreement has a balance of
$1.8 million and is scheduled to be paid within two years.
We will have to spend a significant amount of money on research and development
to continue our business plan. To obtain a portion of the necessary funds, as
described above we completed the new $41.5 million credit facility. financing
arrangement While we will continue to utilize this new facility the timing of
our expansion plan will be dependent on our ability to raise additional capital
through either new or additional debt financing or through an equity investment.
As such, we have engaged an investment banking firm to assist us. If we are
unable to obtain sufficient funds, we will have to either delay or scale back on
our expansion plan. However, we do not believe our existing business would be
materially adversely affected by such delay or scaling back of our expansion
plan.
Accounts Receivable
Our accounts receivable at December 31, 2005, was $7.05 million compared to
$7.66 million at June 30, 2005. While our net sales increased by approximately
$4.86 million when comparing the three month periods ended December 31, 2005 and
June 30, 2005, our collections improved significantly primarily as a result of
new customer mix, as well as the timing of sales during those quarters.
Inventory
At December 31, 2005, our inventory was $9.34 million, an increase of $0.40
million from $8.94 million at June 30, 2005. The increase is primarily the
result of a deliberate build-up of inventory in certain key products. As such,
we believe the increase to be within acceptable limits of our current operating
plan.
Accounts Payable and Accrued Expenses Payable
The accounts payable, accrued expenses and other liabilities increased by
approximately $4.35 million at December 31, 2005, when compared to June 30,
2005. The increase is primarily attributable to increases in purchases due to
greater sales volume as well as increased research and development costs. It
should be noted that at December 31, 2005, we had $6.39 million in cash and cash
equivalents, compared to $0.54 million at June 30, 2005. Further, the
fluctuation in accounts payable and accrued expenses payable was partially a
result to control overall cash outflows. We do not believe this course of action
will have any material affect on our vendor relationships.
Cash and Cash Equivalents
Cash and cash equivalents increased during the six months ended December 31,
2005, by approximately $5.85 million from $0.54 million at June 30, 2005, to
$6.39 million at December 31, 2005. Thus far this year we funded our business
from bank borrowings and operations: bank borrowings - net $3.43 million; net
cash provided by operations - $7.11 million. These were offset primarily through
the use of cash to acquire new property and equipment and other additions of
$4.70 million.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that we make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, we evaluate judgments and
estimates made, including those related to revenue recognition, inventories,
income taxes and contingencies including litigation. We base our judgments and
estimates on historical experience and on various other factors that it believes
to be reasonable under the circumstances, the results of which form the basis
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
26
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing our
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
Revenue Recognition
Revenue from the sale of our products is recognized upon shipment of the
product. Revenue is recorded net of provisions for rebates, charge-backs,
discounts and returns, which are established at the time of sale. Estimates for
rebates, charge-backs, and discounts are calculated based on actual experience
and also cover chargebacks on sales to intermediary wholesale prime vendors for
the supply of Ibuprofen and Naproxen to the Department of Veterans Affairs.
With respect to certain products, we purchase raw materials from suppliers,
which is then used in the manufacturing of completed goods and sold back to the
suppliers or by direct drop shipment to the supplier's customers. Some raw
materials may be used in the manufacturing of products for other customers. We
also (i) have the general inventory risk by taking title to all of the raw
material purchased, (ii) establish the selling price for the finished product
and, (iii) significantly change the raw materials into the finished product
under our specifications and formulas. These factors among others, qualify us as
the principal under the indicators set forth in EITF 99-19, Reporting Revenue
Gross as a Principal vs. Net as an Agent. If the terms and substance of the
arrangement change, such that we no longer qualify to report these transactions
on a gross reporting basis, our net income and cash flows would not be affected.
However, our sales and cost of sales would both be reduced by a similar amount.
In accordance with the terms of a multi-year agreement to sell our female
hormone therapy product, we recognized revenue of approximately $2.1 and $3.9
million during the three and six month periods ended December 31, 2005. Our
customer has committed to purchase a minimum of $11.5 million during the first
twelve months of the agreement, beginning August, 2005. This agreement contains
a sales volume discount when purchases exceed the guaranteed minimum quantity.
As such, in accordance with EITF 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", we
recognize revenue based upon the average sales price as calculated based upon
the total number of units forecasted from the customer to be purchased under the
agreement, multiplied by the number of units shipped. In periods where the
contract allows us to invoice the customer for amounts in excess of the average
sales price, the excess dollar amount is recorded as deferred revenue. Likewise,
in periods when the contract defines our invoice price to be below the average
sales price, we reduce deferred revenue and recognize income for the difference.
In addition, deferred revenue under this agreement may also be reversed into
income in a period when it becomes evident that the customer will not purchase
the required quantity of product necessary to take advantage of the estimated
incentive.
Inventory
Our inventories are valued at the lower of cost or market determined on a
first-in, first-out basis, and includes the cost of raw materials, labor and
manufacturing overhead. We continually evaluate the carrying value of our
inventories and when factors such as expiration dates and spoilage indicate that
impairment has occurred, either a reserve is established against the
inventories' carrying value or the inventories are disposed of and completely
written off in the period incurred.
27
Issues And Uncertainties
Risk of Product Liability Claims
The testing, manufacturing and marketing of pharmaceutical products subject us
to the risk of product liability claims. We believe that we maintain an adequate
amount of product liability insurance, but no assurance can be given that such
insurance will cover all existing and future claims or that we will be able to
maintain existing coverage or obtain additional coverage at reasonable rates.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
At December 31, 2005, our principal financial instrument was a $21.0 million
credit facility, consisting of an approximately $6.86 million mortgage note
payable and borrowings of $13.6 million under the line of credit was
outstanding. Any obligations created under this credit facility incur interest
calculated at our option at (i) LIBOR plus 1.5% per annum ("PA") for periods
ranging in length from 3 to 36 months, or (ii) at the Bank's then fixed prime
rate. At December 31, 2005, the interest rates on the borrowings ranged from
5.47% PA to 5.95% PA and the interest rate on the mortgage note payable was
5.94% PA.
If our combined borrowings remained at the same amount as of December 31, 2005,
for the remainder of our fiscal year, for every one percent change, upward or
downward in our borrowing rate, we would incur or save approximately $51,000 per
quarter. Subsequent to December 31, 2005, we entered into a new credit facility
with Wells Fargo Business Credit ("WFBC") which has a maximum borrowing of $41.5
million. A portion of the new facility completely repaid the $21.0 million owed
on the facility which was in place at December 31, 2005. As part of the new
facility, we obtained a $12 million term loan with a fixed annual rate of 7.56%.
The remaining borrowing capacity within the new facility with WFBC will likely
be used for such things as future research and development costs as well as
purchase new equipment for both facilities. Any additional borrowings could
effectively increase our exposure to interest rate market risk. We are required
to comply with certain financial covenants.
As of December 31, 2005 we did not use any derivative financial instruments to
hedge our exposure to adverse fluctuations in interest rates, fluctuations in
commodity prices or other market risks, nor do we invest in speculative
financial instruments. On February 9, 2006, as part of the bank financing
agreement with WFBC, we have elected to fix the rate at 7.56% per annum on the
real estate term loan by purchasing an interest rate SWAP contract.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's ("SEC") rules and forms, and that such
information is accumulated and communicated to our management to allow timely
decisions regarding required disclosure. Management necessarily applied its
judgment in assessing the costs and benefits of such controls and procedures,
which, by their nature, can provide only reasonable assurance regarding
management's control objectives.
At the conclusion of the six month period ended December 31, 2005, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer, Chief Financial Officer and
General Counsel, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chief
Executive Officer, Chief Financial Officer and General Counsel concluded that
our disclosure controls and procedures were effective in alerting them in a
timely manner to information relating to the Company required to be disclosed in
this report.
28
Our independent registered accounting firm Marcum & Kliegman, LLP ("MK"),
informed us and our Audit Committee of the Board of Directors that in connection
with their audit of our financial results for the fiscal year ended June 30,
2005, MK had discovered conditions which they deemed to be significant
deficiencies, (as defined by standards established by the Public Company
Accounting Oversight Board) in our financial statement closing process. The
significant deficiencies related to the performance of processes and procedures
for the period end closing process and its review by internal accounting
personnel. Management has informed MK and the Audit Committee of the Board of
Directors that it will add additional personnel and modify its controls over the
financial statement closing process to prevent reoccurrences of this deficiency
and will continue to monitor the effectiveness of these actions and will make
any other changes or take such additional actions as management determines to be
appropriate.
Management does not believe that the above significant deficiencies materially
affected the results of the fiscal quarter ended June 30, 2005, or any prior
period, nor the current fiscal period ended December 31, 2005.
A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control systems
are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues,
if any, within a company have been detected. Such limitations include the fact
that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures, such as simple errors or
mistakes or intentional circumvention of the established process.
29
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on December 16,
2005 at the offices of the American Stock Exchange. At the annual
meeting, two proposals were voted on by the Company's stockholders:
the election of directors and the ratification of the selection of
the Company's auditors for the fiscal year ending June 30, 2006. The
specific proposals, and results of the voting at the annual meeting
are set forth below.
1. The stockholders of the Company voted to elect six members to the
Board of Directors to serve until their respective successors are
elected. The results of the vote are:
For Against Abstain
--- ------- -------
Dr. Maganlal K. Sutaria 17,688,771 0 79,365
David Reback 17,714,362 0 53,774
Stuart H. Benjamin 17,722,472 0 45,664
Dr. Mark Goodman 17,717,235 0 50,901
Kennith Johnson 17,717,235 0 50,901
2. The stockholders also voted ratify and approve Marcum &
Kliegman, LLP, as our independent public accountants, to audit
our financial statements for the fiscal year ending June 30,
2006. The result of the vote was:
For Against Abstain
--- ------- -------
17,735,509 22,109 10,518
Item 6. Exhibits
Exhibits
21.1 List of Subsidiaries.
31.1 Certification of Chief Executive Officer pursuant to Rules
13a-14(a) as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Rules
13a-14(a) as adopted, pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certifications of the Chief Executive Officer and the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350 as
adopted, pursuant to Section 906 of the Sabanes-Oxley Act of
2002.
30
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by reference
herein, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of FDA approvals; court and FDA decisions on
exclusivity periods; competitor's ability to extend exclusivity periods past
initial patent terms; market and customer acceptance and demand for our
pharmaceutical products; our ability to market our products; the successful
integration of acquired businesses and products into our operations; the use of
estimates in the preparation of our financial statements; the impact of
competitive products and pricing; the ability to develop and launch new products
on a timely basis; the regulatory environment; fluctuations in operating
results, including spending for research and development and sales and marketing
activities; and, other risks detailed from time-to-time in our filings with the
SEC.
The words "believe, expect, anticipate, intend and plan" and similar expressions
identify forward-looking statements. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
31
Signatures
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.
INTERPHARM HOLDINGS, INC.
(Registrant)
Date: February, 14, 2006
By: /s/ George Aronson
------------------
George Aronson,
Chief Financial Officer
(Duly authorized to sign on behalf
of registrant)
32
Exhibits
Number Description
21.1 List of subsidiaries
Name of Subsidiary Jurisdiction Ownership Percentage
----------------------------------------- -------------------- -------------------------
Interpharm, Inc. New York 100%
Micro Computer Store, Inc. New York 100%
Innovative Business Micros, Inc. New York 100%
Logix Solutions, Inc. Colorado 90%
Saturn Chemical, LLC New York 100%
Interpharm Realty, LLC New York 100%
Interpharm Development Private, LTD India 100%
31.1 Certification of Cameron Reid pursuant to Exchange Act Rules 13(a)-14(a)
and 15d-14(a), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002;
31.2 Certification of George Aronson pursuant to Exchange Act Rules 13(a)-14(a)
and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002;
33