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, 2004
[ ] 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)
69 Mall Drive Commack, New York 11725
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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 an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES [ ] NO [X]
As of the close of business on February 11, 2005, there were 24,967,202 shares
of the Registrant's $.01 par value per share Common Stock outstanding.
INTERPHARM HOLDINGS, INC.
TABLE OF CONTENTS
PART I Financial Information Page
Item 1. Financial Statements & Notes .................................1-14
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations................15-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk......20
Item 4. Controls and Procedures.........................................20
PART II Other Information Required in Report
Items 1 through 6.........................................................21-22
Forward Looking Statements and Associated Risks..............................23
Signatures Page..............................................................24
Exhibits/Certifications...................................................25-28
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
2004 2004
----------- -----------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 598,122 $ 2,884,639
Marketable securities, at fair market value -- 36,791
Accounts receivable, net 5,842,486 6,849,778
Inventories, net 7,276,029 5,530,161
Prepaid expenses and other current assets 669,446 453,157
Deferred tax assets -- 1,280,000
----------- -----------
Total Current Assets 14,386,083 17,034,526
Land, building and equipment, net 17,591,780 15,007,132
Deferred tax assets 3,599,000 2,902,000
Deposits 799,829 224,287
----------- -----------
TOTAL ASSETS $36,376,692 $35,167,945
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
2004 2004
------------ ------------
(Unaudited)
CURRENT LIABILITIES
Current maturities of bank debt payable $ 1,870,000 $ 764,014
Accounts payable, accrued expenses, and other liabilities 3,987,897 4,560,313
------------ ------------
Total Current Liabilities 5,857,897 5,324,327
OTHER LIABILITIES
Bank debt, less current maturities 6,875,833 7,060,833
------------ ------------
TOTAL LIABILITIES 12,733,730 12,385,160
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued and outstanding -
6,901,166 and 6,902,963, respectively; aggregate
liquidation preference of $5,485,095 and $5,494,080, respectively 346,245 348,042
Common stock, $.01 par value, 70,000,000 shares
authorized; shares issued - 25,591,347 and 25,591,311, respectively 255,913 255,913
Additional paid-in capital 19,186,088 19,184,291
Accumulated other comprehensive loss -- (92)
Retained earnings 4,652,584 3,792,499
Treasury stock at cost, 624,145 shares (797,868) (797,868)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,642,962 22,782,785
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 36,376,692 $ 35,167,945
============ ============
See Notes To Condensed Consolidated Financial Statements.
2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------------- --------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
SALES, Net $8,838,067 $11,706,231 $17,891,199 $18,581,579
COST OF SALES (including related party
rent expense of $102,000 and $204,000
for the three and six months ended
December 31, 2004 and 2003, respectively) 6,244,565 9,087,956 13,357,593 14,531,474
----------- ----------- ----------- -----------
GROSS PROFIT 2,593,502 2,618,275 4,533,606 4,050,105
----------- ----------- ----------- -----------
OPERATING EXPENSES
Selling, general and administrative expenses 1,226,339 860,060 2,313,012 1,893,835
Related party rent expense 18,000 18,000 36,000 36,000
Research and development 363,527 154,035 538,986 189,035
----------- ----------- ----------- -----------
TOTAL OPERATING EXPENSES 1,607,866 1,032,095 2,887,998 2,118,870
----------- ----------- ----------- -----------
OPERATING INCOME 985,636 1,586,180 1,645,608 1,931,235
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities 8,943 -- 8,943 --
Interest expense (342) (4,852) (3,520)
(10,999)
Interest income -- 2,446 -- 5,205
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 8,601 (2,406) 5,423 (5,794)
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 994,237 1,583,774 1,651,031 1,925,441
(Forward)
See Notes To Condensed Consolidated Financial Statements.
3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- ------------------------
2004 2003 2004 2003
---------- ---------- ---------- -----------
(Forward)
PROVISION FOR INCOME TAXES 368,705 559,677 612,227 673,905
---------- ---------- ---------- -----------
NET INCOME $ 625,532 $1,024,097 $1,038,804 $ 1,251,536
========== ========== ========== ===========
EARNINGS PER SHARE
Basic earnings per share $ 0.02 $ 0.05 $ 0.04 $ 0.06
========== ========== ========== ===========
Diluted earnings per share $ 0.01 $ 0.01 $ 0.01 $ 0.02
========== ========== ========== ===========
Basic weighted average shares outstanding 24,967,190 17,395,546 24,967,178 16,861,779
========== ========== ========== ===========
Diluted weighted average shares and
equivalent shares outstanding 67,981,462 68,139,385 67,978,433 68,376,030
========== ========== ========== ===========
See Notes To Condensed Consolidated Financial Statements.
4
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31, 2004
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Capital Income
-------------- ------------ --------------- -------------- ----------------- ------------------
BALANCE - July 1, 2004 6,902,963 $ 348,042 25,591,311 $ 255,913 $ 19,184,291 $ (92)
Unrealized gain on marketable
securities, net -- -- -- -- -- 3,194
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE -
September 30, 2004 6,902,963 348,042 25,591,311 255,913 19,184,291 3,102
Unrealized loss on marketable --
securities, net -- -- -- -- -- (3,102)
Conversion of Series C
convertible preferred stock to
common stock (1,797) (1,797) 36 -- 1,797 --
Dividends declared -- -- -- -- -- --
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE -
December 31, 2004 6,901,166 $ 346,245 25,591,347 $ 255,913 $ 19,186,088 $ --
============ ============ ============ ============ ============ ============
Total
Retained Treasury Stock Stockholders'
Earnings Shares Amount Equity
-------------- ----------- --------------- ----------------
BALANCE - July 1, 2004 $ 3,792,499 624,145 $ (797,868) $ 22,782,785
Unrealized gain on marketable
securities, net -- -- -- 3,194
Net income 413,272 -- -- 413,272
------------ ------------ ------------ ------------
BALANCE -
September 30, 2004 4,205,771 624,145 (797,868) 23,199,251
Unrealized loss on marketable
securities, net -- -- -- (3,102)
Conversion of Series C
convertible preferred stock to
common stock -- -- -- --
Dividends declared (178,719) -- -- (178,719)
Net income 625,532 -- -- 625,532
------------ ------------ ------------ ------------
BALANCE -
December 31, 2004 $ 4,652,584 624,145 $ (797,868) $ 23,642,962
============ ============ ============ ============
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
See Notes To Condensed Consolidated Financial Statements.
5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET INCOME $ 625,532 $1,024,097 $1,038,804 $1,251,536
OTHER COMPREHENSIVE INCOME
Unrealized (loss)/gain on marketable
securities, net (3,102) 11,557 92 12,737
---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME $ 622,430 $1,035,654 $1,038,896 $1,264,273
========== ========== ========== ==========
See Notes To Condensed Consolidated Financial Statements.
6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
December 31,
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,038,804 $ 1,251,536
----------- -----------
Adjustment to reconcile net income to net
cash provided by (used in) operating activities
Gain on sale of marketable securities (8,943) --
Depreciation and amortization 557,397 408,931
Deferred tax expense 583,000 --
Tax expense in connection with exercise of employee
stock options credited to additional paid-in-capital -- 665,000
Changes in operating assets and liabilities
Accounts receivable 1,007,292 (2,102,462)
Inventories (1,745,868) (1,344,426)
Prepaid expenses and other current assets (170,463) (294,946)
Deposits -- 9,494
Accounts payable, accrued expenses and other liabilities (751,136) 1,228,458
----------- -----------
TOTAL ADJUSTMENTS (528,721) (1,429,951)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 510,083 (178,415)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from notes receivable -- 1,524,092
Purchases of building and equipment (3,142,044) (1,914,029)
Deposits (575,542) (925,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,717,586) (1,314,937)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank line of credit (424,847) (1,639,946)
Borrowings from new bank lines of credit 1,500,000 --
Repayments of bank mortgage and notes payable (154,167) (461,762)
Cash received in reverse merger transaction -- 64,029
Proceeds from options and warrants exercised -- 2,698,764
----------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES $ 920,986 $ 661,085
----------- -----------
See Notes To Condensed Consolidated Financial Statements.
7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED), Continued
Six Months Ended
December 31,
2004 2003
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $(2,286,517) $ (832,267)
CASH AND CASH EQUIVALENTS - Beginning 2,884,639 2,336,203
----------- -----------
CASH AND CASH EQUIVALENTS - Ending $ 598,122 $ 1,503,936
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 105,098 $ 10,999
=========== ===========
Income taxes $ 31,148 $ 84,456
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Non-cash investing and financing activities:
Conversion of Series J preferred stock to common stock $ -- $ 1,050
=========== ===========
Conversion of Series C preferred stock to common stock $ 1,797 --
=========== ===========
Declaration of preferred dividend $ 178,719 --
=========== ===========
Valuation Adjustment related to reverse merger $ -- $ 50,000
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 1 - Condensed Consolidated Financial Statements
The accompanying interim unaudited 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, 2004 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2005. 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,
2004.
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 available to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted EPS
reflects the amount of earnings 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.
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.
10
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 $109,000 during the six month period ended
December 31, 2004 in connection with its capital improvements to the
Brookhaven, NY facility.
NOTE 2 - Summary of Significant Accounting Policies, continued
Stock Based Compensation
At December 31, 2004, the Company had two stock-based employee plans. As
permitted under Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue to follow the intrinsic
value method in accounting for its 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 Standards Board ("FASB")
Interpretation ("FIN") 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 have 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:
Three Months Ended Six Months Ended
December 31, December 31,
------------ ------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income, as reported $ 625,532 $ 1,024,097 $ 1,038,804 $ 1,251,536
Less: Stock-based employee
compensation expense
determined under fair value-based
method for all awards, net of income tax
656,470 166,714 1,312,941 333,428
------------- ------------- ------------- -------------
Pro forma net income (loss) $ (30,938) $ 857,383 $ (274,137) $ 918,108
============= ============= ============= =============
Basic net income (loss) per share
As reported $ 0.02 $ 0.05 $ 0.04 $ 0.06
============= ============= ============= =============
Pro forma $ -- $ 0.05 $ (0.01) $ 0.05
============= ============= ============= =============
Diluted net income (loss) per share
As reported $ 0.01 $ 0.01 $ 0.01 $ 0.02
============= ============= ============= =============
Pro forma $ -- $ 0.01 $ (0.01) 0.01
============= ============= ============= =============
11
In December 2004, the FASB finalized SFAS No. 123R "Share-Based Payment"
which will require the Company to expense stock options based on grant
date fair value in its financial statements. The effect of expensing stock
options on the Company's results of operations using a Black-Scholes
option-pricing model is presented in the preceding pro forma table.
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% and
124% for 2004 and 2003, respectively (2) risk-free interest rate of 4.25%
and 3.4% for 2004 and 2003, respectively and (3) expected average lives of
10 and 5 years for 2004 and 2003, respectively.
NOTE 2 - Summary of Significant Accounting Policies, continued
Reclassifications
Certain reclassifications have been made to the 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
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". SFAS 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 151 are
effective for the Company's fiscal year 2006. The Company is currently
evaluating the provisions of SFAS 151 and does not expect adoption will
have a material impact on its financial position, results of operations,
or cash flows.
In December 2004, the FASB finalized SFAS 123R amending SFAS No. 123,
effective beginning the first quarter of fiscal 2006. SFAS 123R will
require the Company to expense stock options based on grant date fair
value in its financial statements. Further, the adoption of SFAS 123R will
require 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 123R will have no
effect on the Company's cash flows, but is expected to have a material
adverse impact on its results of operations.
In an effort to reduce the expected material adverse impact to be incurred
in future periods as a result of adopting SFAS 123R, the Company has
chosen to accelerate the vesting provisions of 1,192,000 options, which
represents the total unvested options granted after May 30, 2003 through
December 31, 2004. An aggregate of 1,000,000 such options were granted to
executives of the Company. Since options granted on or prior to May 30,
2003 are not fully vested, the Company expects to record stock options
expense commencing the first quarter of fiscal 2006.
12
NOTE 3 - Inventories
Inventories consist of the following:
December 31, June 30,
2004 2004
---------- ----------
Finished goods $ 193,778 $ 534,175
Work in process 4,196,348 2,710,270
Raw materials 2,478,984 1,932,971
Packaging materials 406,919 352,745
---------- ----------
Total $7,276,029 $5,530,161
========== ==========
NOTE 4 - Land, Building and Equipment
Land, building and equipment consists of the following:
Estimated
December 31, June 30, Useful
2004 2004 Lives
----------- ----------- -----------
Land $ 4,924,000 $ 4,924,000
Building, improvements and construction in progress (a) 5,897,281 4,475,482 20 Years
Machinery and equipment 7,049,004 5,457,395 5-7 Years
Furniture and fixtures 341,781 319,762 5 Years
Leasehold improvements 2,729,820 2,623,203 5-15 Years
----------- -----------
20,941,886 17,799,842
Less: accumulated
depreciation and amortization 3,350,106 2,792,710
----------- -----------
Land, Building and Equipment, net $17,591,780 $15,007,132
=========== ===========
(a) Not yet been placed into service and no depreciation expense has yet been
recorded
13
NOTE 5 - Bank Debt
At December 31, 2004, the Company has $1,500,000 outstanding under advised
lines of credit. During the six month period ended December 31, 2004 the
Company repaid approximately $425,000 of various bank lines of credit, as
well as $154,000 of the mortgage note payable.
NOTE 6- Income Taxes
At December 31, 2004 the Company has remaining Federal net operating loss
carryforwards ("NOLs") of approximately $10,500,000 and State NOLs of
approximately $9,950,000 expiring through 2024. Pursuant to Section 382 of
the Internal Revenue Code regarding substantial changes in Company
ownership, utilization of these NOLs is limited to approximately
$2,690,000 per year, plus any prior years' amount not utilized, if any. As
of December 31, 2004, 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 reserved 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, 2004, the Company applied an aggregate effective tax rate of
approximately 37% thereby creating an approximate $583,000 income tax
expense and reduced its current deferred tax asset by a like amount.
Additionally, the Company has reclassified the remaining balance of its
current deferred tax asset to long term deferred tax asset.
NOTE 7- Earning Per Share
The calculations of basic and diluted EPS are as follows:
Three Months Ended Six Months Ended
December 31, December 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerator:
Net income $ 625,532 $ 1,024,097 $ 1,038,804 $ 1,251,536
Less: Preferred stock dividends 41,392 41,392 82,784 82,784
Less: Net income attributable to Series K preferred
stockholders 38,414 103,600 62,870 123,213
----------- ----------- ----------- -----------
Numerator for basic EPS 545,726 879,105 893,150 1,045,539
Effect of dilutive securities:
Net income attributable to Series K preferred
Stockholders 38,414 103,600 62,870 123,213
----------- ----------- ----------- -----------
Numerator for diluted EPS $ 584,140 $ 982,705 $ 956,020 $ 1,168,752
=========== =========== =========== ===========
Denominator:
Denominator for basic EPS weighted average
shares outstanding 24,967,190 17,395,546 24,967,178 16,861,779
Effect of dilutive securities:
Convertible Series K preferred stock 37,648,650 42,844,356 37,648,650 42,764,522
Convertible Series A, B, C and J preferred stocks 7,402 7,474 7,402 15,463
Stock options 5,358,220 7,892,009 5,355,203 8,734,266
Denominator for diluted EPS 67,981,462 68,139,385 67,978,433 68,376,030
Basic EPS $ 0.02 $ 0.05 $ 0.04 $ 0.06
=========== =========== =========== ===========
Diluted EPS $ 0.01 $ 0.01 $ 0.01 $ 0.02
=========== =========== =========== ===========
14
NOTE 7 - Earning Per Share - Continued
As of December 31, 2004, 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, 2004 24,967,202
Stock options and Warrants outstanding 10,535,000
Common stock issuable upon conversion of preferred stocks:
Series A 1,526
Series A-1 (maximum contingent conversion) - (a) 4,855,389
Series B 292
Series C 5,584
Series K - (b) 37,648,650
Total - (c) 78,013,643
(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, 2004 one seventh of the 2,050,393 Series K shares, or
292,913 shares, converted into 6,274,775 of the Company's common
stock. On June 4, 2005 and on each anniversary date thereof, 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).
15
NOTE 8 - Equity Securities
Common Stock and Stock Options No Common Stock Options were granted during
the three month period ending December 31, 2004. During the three month
period ending September 30, 2004, 75,000 options were granted to a non
executive new employee to purchase a like amount of the Company's common
shares. These options are exercisable at a price of $2.73 per share.
In November, 2004, the Board of Directors, declared a dividend of
$178,719, 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
is cumulative through June 30, 2004, has not yet been paid and is included
in Accounts payable, accrued expenses, and other liabilities as at
December 31, 2004.
NOTE 9 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the three and
six month periods ended December 31, 2004 and 2003:
Sales - Percent of Revenue
Three Months Six Months
Ended December 31, Ended December 31,
------------------ ------------------
2004 2003 2004 2003
---- ---- ---- ----
Customer "A" 23% 35% 19% 33%
Customer "B" 21 23 27 25
Customer "C" 23 10 16 11
Accounts Receivable
December 31, 2004
-----------------
Customer "A" $ 1,781,000
Customer "B" 1,546,000
Customer "C" 950,000
The Company complies with its supply agreement to sell various strengths
of Ibuprofen to the Department of Veteran Affairs through two intermediary
wholesale prime vendors whose data are combined and reflected in Customer
"C" above.
Major Suppliers
For the three and six month periods ended December 31, 2004, the Company
purchased materials from three suppliers totaling approximately 74% and
72% of purchases, respectively. For the three and six month periods ended
December 31, 2003, the Company purchased materials from three suppliers
totaling approximately and 95% and 90%, respectively. At December 31, 2004
and 2003, aggregate amounts due to these suppliers included in accounts
payable, were approximately $2,051,000 and $4,350,000 respectively.
NOTE 10 - Related Party Lease
The Company leases its business premises located in Hauppauge, New York,
("Premises") from an entity controlled by three stockholders 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, as defined, of the Company, and every three
years thereafter, the annual rent will be adjusted to fair market value,
as determined by an independent third party.
17
NOTE 11 - Contingencies
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.
NOTE 12 - Subsequent Events
As described in Note 2 above, in January, 2005, the Board of Directors of
the Company approved the decision to accelerate the vesting of all options
granted after May 30, 2003 with exercise prices of greater than $2.24 per
option.
In January, 2005, the Board of Directors granted an aggregate 2,350,000
options to purchase shares of the Company's common stock, of which
2,075,000 are vested, 150,000 options vest 20 % on each June 30, 2006
through 2010 and 125,000 options will vest at conditions set forth by the
Board of Directors in the future. All options, other than those which will
have their vesting determined in the future, have an exercise price of
$2.24, which was the closing price of the Company's common stock on the
date of the grant.
2,000,000 of the options were issued to the Company's Chief Executive
Officer, Cameron Reid. Mr. Reid has agreed to a three year term of
employment with the Company for a base salary of $200,000 per year, which
may be increased at the discretion of the Compensation Committee of the
Company's Board of Directors
25,000 of the vested options were granted to the Company's Chief Financial
Officer.
18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Interpharm Holdings, Inc. ("Interpharm," "we," or "us"), through its
wholly-owned subsidiary, Interpharm, Inc., is engaged in the business of
developing, manufacturing and marketing generic over-the-counter and
prescription strength pharmaceutical products. We make sales both under our own
label and to wholesalers and distributors which sell our products under their
labels.
We market our products primarily to wholesalers, drug distributors, repackagers,
and other manufacturers through our internal sales staff as well as independent
sales representatives. Some of our wholesalers and distributors purchase
products that are warehoused for drug chains, independent pharmacies, state and
federal governmental agencies and managed healthcare organizations. Sales are
recognized when the product is shipped and appropriate provisions are made for
returns and charge backs.
RECENT DEVELOPMENTS
As further detailed in a Form 8-K filed with the Securities and Exchange
Commission on January 31, 2005, Cameron Reid was appointed as our Chief
Executive Officer. Mr. Reid, who had been serving on our Board of Directors
since May, 2004, resigned his position on our Board to focus on his
responsibilities as Chief Executive Officer. Mr. Reid has over twenty-five years
of experience in the pharmaceutical business. From 1992 through March, 2004, Mr
Reid served as President of Dr. Reddy's Laboratories, Inc. Mr. Reid was
responsible for, and oversaw the building of its North American business,
including all aspects of strategic planning and new product development.
Since joining our Board of Directors, Mr. Reid has conducted an evaluation of
our business, and developed a business plan which includes capitalizing on our
core competencies in the selection of new products as well as diversifying our
product development into new areas. Under Mr. Reid's guidance, we were
particularly active in planning for our future during the quarter ended December
31, 2004. During this period, we also focused on preparing for our future
expansion and new product line development by acquiring new equipment and
implementing infrastructure improvements and adding inventory control systems.
As Mr. Reid's strategic plan for our growth developed, we believed it would be
best for him to be actively involved in the execution of the plan. Therefore,
the Company and Mr. Reid agreed that Interpharm would best be in a position to
implement his strategic plan if Mr. Reid were appointed to the position of Chief
Executive Officer. We have already commenced development activities under Mr.
Reid's leadership and believe that we can start marketing certain new products
by the end of fiscal 2005.
19
In an effort to reduce the expected material adverse impact to be incurred in
future periods as a result of adopting SFAS 123R, the Company has chosen to
accelerate the vesting provisions of 1,192,000 options, which represents the
total unvested options granted after May 30, 2003 through December 31, 2004. An
aggregate of 1,000,000 such options were granted to executives of the Company.
Since options granted on or prior to May 30, 2003 are not fully vested, the
Company expects to record stock options expense commencing the first quarter of
fiscal 2006.
RESULTS OF OPERATIONS
NET SALES BY PRODUCT (IN THOUSANDS OF DOLLARS):
Three Months Ended December 31,
-------------------------------
2004 % of 2003 % of
Sales Sales Sales Sales Variance $
------ ----- ------- ---- ----------
Ibuprofen $5,532 63 $ 5,907 51 $ (375)
Allopurinol & Atenolol 1,884 21 4,097 35 (2,213)
Naproxen 307 3 1,111 9 (804)
All Other Products 1,115 13 591 5 524
------ ------- -------
Total $8,838 $11,706 $(2,868)
------ ------- -------
Six Months Ended December 31,
-------------------------------
2004 % of 2003 % of
Sales Sales Sales Sales Variance $
------ ----- ------- ---- ----------
Ibuprofen $11,703 65 $10,320 64 $ 1,383
Allopurinol & Atenolol 3,201 18 5,863 26 (2,662)
Naproxen 803 5 1,535 6 (732)
All Other Products 2,184 12 864 4 1,320
------- ------- -------
Total $17,891 $18,582 $ (691)
======= ======= =======
As indicated in the tables above, we encountered a net decrease in our revenue.
Significant components include:
o Both Allopurinol and Atenolol are manufactured for one customer based on
quantities ordered by the customer. During the six months ended December
31, 2003 orders of Allopurinol and Atenolol were above normal quantities.
We believe future quarterly net sales levels for Allopurinol and Atenolol
will approximate net sales during the three month period ended December,
2004.
o Net sales of Naproxen have been primarily to one customer. This customer
during the three month period ended December 31, 2003 placed orders for
nearly twice the amount ordered during the three month period ended
September 30, 2003. We believe that future net sales of Naproxen should
approximate the December 2004 levels for the quarter ending March 31,
2005.As a result of an expanded customer base for this product we
anticipate that sales could increase during our fiscal fourth quarter of
2005, however than can be no assurances that orders will be received
timely.
o When comparing the six month period ended December 31, 2004 to the six
month period ended December 31, 2003, there was a significant increase
--13.4%-- in sales of Ibuprofen. However, the quarter ended December 31,
2004 witnessed a 6.3% decrease when compared to a year ago. Based upon an
expanded customer base for Ibuprofen, we believe sales of Ibuprofen should
increase during the balance of this fiscal year.
o Since obtaining FDA approval, revenue for Reprexain(R) totaled over
$410,000.
o During the three month period ended December 31, 2004, we shipped
approximately $670,000 of Hydrocodone-7.5 mg / Ibuprofen-200 mg. our
generic version of Vicoprofen. This was our first quarter of shipments of
the product. We do not believe future orders for this product will be as
high because the results for the quarter included initial shipments, which
tend to be greater than future replenishment orders. However, the results
for the quarter ended December 31, 2004 do not include any additional
revenue which may be derived from our profit sharing arrangement for this
product which we anticipate will be included in the revenues for future
periods.
20
GROSS PROFITS / COST OF SALES
Our total gross profit percentage for the three months ended December 31, 2004
was 29.3%, an increase of 6.9 percentage points compared to 22.4% for the three
months ended December 31, 2003. This is as a result of the sale in the current
quarter of one of our new products which we manufactured during the three month
period ended March, 2004 for a potential new customer. The customer did not
place an order timely, and we were unable to identify other potential customers.
As such, we did not capitalize it as it became "short dated" inventory. Without
such sale, which totaled approximately $670,000, our gross profit for the three
month period ended December 31, 2004 would have been approximately 21.7%, which
would have been relatively consistent with recent prior periods. Our total gross
profit percentage for the six months ended December 31, 2004 was 25.3%, an
increase of 3.5 percentage points compared to 21.8% for the six months ended
December 31, 2004.
During the six month period ended December 31, 2004, with respect to our primary
products, raw material prices have remained relatively constant when compared to
2003. While no assurance can be given, we believe that our raw material costs
should remain relatively constant to current prices at least through June 30,
2005. The remaining components of our cost of sales, primarily direct labor and
overhead have, as a percentage of net sales, increased slightly during the three
months ended December 31, 2004, primarily as a result of costs associated to
training staff for the second facility which we anticipate will be operational
in mid-2005.
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 $366,000 to
approximately $1,226,000, or 13.9% of net sales during the three months ended
December 31, 2004, from approximately $860,000, or 7.3% of net sales, during the
same period in 2003. The significant components of this increase are: salaries,
including payroll taxes and benefits ($91,000); legal and accounting costs of
($89,000); investor and public relations costs ($79,000); utilities ($15,000);
professional fees ($30,000); travel expenses ($26,000) and telephone, office and
seminars ($20,000).
Selling, general and administrative expenses increased approximately $419,000 to
approximately $2,313,000, or 12.9% of net sales during the six months ended
December 31, 2004, from approximately $1,894,000, or 10.2% of net sales, during
the same period in 2003. The significant components of this increase are:
salaries, including payroll taxes and benefits ($143,000); investor and public
relations costs ($117,000); utilities ($51,000); professional fees ($62,000);
travel ($22,000); freight ($28,000); telephone, office and seminars ($33,000);
offset by reductions in our legal and accounting costs of $44,000.
The increase in salaries, payroll taxes, benefits, professional fees and
utilities are primarily attributable to our continuing overall corporate
expansion. As relates to our investor and public relations costs increasing, we
engaged a public relations firm during the three month period ended March 31,
2004. This action resulted in incurring expenses during the three and six month
periods ended December 31, 2004 with little or no costs incurred during the same
period in 2003. Additionally, during the three months ended December 31, 2004,
we incurred costs associated to our annual meeting of stockholders which was
held in November, 2004, while none the previous year. The increases in legal and
accounting and professional fees witnessed during the three month period ended
December 31, 2004 compared to the same period in the prior year are primarily
attributable to added services which are consistent with our product line
21
growth. However, for the six month period ended December 31, 2004 these costs
are less than the same period in the prior year primarily as a result of
significant legal, accounting and other professional costs incurred during the
first half of the six month period ended December 31, 2003, as a result of the
merger between ATEC Group, Inc. and Interpharm, Inc.
INCOME TAXES The effective tax rate for the three and six month periods ended
December 31, 2004 of approximately 37.1% resulted in aggregate income tax
provisions of approximately $369,000 and $612,000, respectively, compared to
effective aggregate tax rates of 35.3% and 35.0% for the three and six month
periods ended December 31, 2003, respectively, which resulted in provisions for
income taxes of approximately $560,000 and 674,000, respectively. While we
anticipate revenue to increase, we further believe that as a direct result of
accelerating our aggressive product development program, we will likely incur
increased research and development expenses which, in turn will cause us to
delay utilization of the current portion of our deferred tax asset. As such, we
have reclassified the balance of our current deferred tax asset amount of
$697,000 to long term deferred tax asset.
LIQUIDITY AND CAPITAL RESOURCES
We currently finance our operations and capital expenditures through cash flows
from operations and bank borrowings. Net cash provided by operating activities
for the six month period ended December 31, 2004 was $510,000 as compared to
$178,000 net cash used in operating activities for the same period last year.
Net cash provided in 2004 was a result of non-cash operating items of $1,131,000
added to net income of $1,039,000 and a decrease in accounts receivable of
$1,007,000, offset by a decrease in accounts payable, accrued expenses and other
liabilities of $751,000, and increases in inventories and prepaid expenses and
other current assets of $1,746,000 and $170,000, respectively.
Net cash provided by financing activities of $921,000 for the six months ended
December 31, 2004, was a result of drawing upon $1,500,000 in available lines of
credit offset by the pay down of a mortgage loan of $154,000 and working capital
lines of credit by $425,000.
A component of our current plan is the expansion of the production capacity at
our current facility as well as erecting a second facility. Consistent with our
expansion plans, during the six month period ended December 31, 2004, we
disbursed $3,142,000 for new equipment, furniture and improvements. In addition
to which we have outlaid $576,000 for deposits toward additional assets. As such
in the aggregate we used $3,718,000 in investing activities during the six
months ended December 31, 2004.
As discussed in previous filings, we obtained a $21,000,000 credit facility
which consisted of:
o a $7,400,000 mortgage loan used for the purchase of the second facilty.
The loan is being repaid with 119 monthly installments, based upon an
amortization schedule of twenty years, and a balloon payment due in ten
years for the balance. As of December 31, 2004 the total amount remaining
is $7,245,000
o two advised credit lines aggregating $6,600,000 primarily to acquire new
equipment and for renovations of the Company's new Yaphank, NY plant. The
balance of the funds accessed through these credit lines will convert to
fully amortizing five year term loans.
22
o a $2 million advised non-revolving secured facility for equipment
purchases. Each advance cannot exceed 90% of the invoice amount of the new
equipment and is convertible into separate notes that fully amortize over
60 months.
o a $5,000,000 advised line of credit primarily for working capital and
general corporate purposes. As of December 31, 2004, we have drawn down
$1,500,000. Subsequent to year end and as of the filing date we borrowed
an additional $1,500,000. These subsequent borrowings are principally to
replenish funds for equipment and renovations paid for from cash flows.
Each borrowing is a 90 day loan at LIBOR plus 150 basis points. Interest
rates average 3.94%.
At our option, interest will be 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,
2004, the interest rate on the mortgage note payable ranged from 3.66% to 3.94%.
In addition, we are required to comply with certain financial covenants. As of
December 31, 2004, we were in compliance with all covenants. The Bank reviews
the credit facility annually. The credit lines are terminable by the Bank at any
time as to undrawn amounts. This new credit facility is collateralized by
substantially all assets of the Company.
Working capital decreased $3,182,000 to $8,528,000 from $11,710,000 at June 30,
2004. Significant factors which contributed to the decrease are decreases in
cash and net accounts receivable, utilizing $583,000 of our current deferred tax
asset and reclassifying $697,000 to long term, and borrowing $1,500,000 from our
credit facility, offset by an increase in inventory. As previously discussed, we
disbursed in excess of $3,718,000 for purchases of additional building and
equipment and deposits on equipment. Our inventory levels at December 31, 2004
increased when compared to previous levels. This is primarily as a result of
production for future sales.
Future cash flows could be aided by our Federal net operating loss carryforwards
("NOLs"). At December 31, 2004, we had approximately $10,500,000 NOLs available
to reduce future taxable income, subject to certain limitations. At current
effective tax rates, these NOLs could result in savings of approximately
$3,600,000 in future income tax payments (although there will be no
corresponding benefit on income tax expenses). Further, utilization of these
NOLs is limited to approximately $2,690,000 per year, plus any prior years'
amount not utilized, if any.
We believe the funds we generate from operations along with the financing
arrangements described above should allow us to continue our expansion plans and
be sufficient for us to meet our operating requirements during the next twelve
months. We may nevertheless, choose to raise additional funds or seek other
financing arrangements to facilitate more rapid expansion, to develop new
products at a faster pace, or to acquire or invest in complimentary businesses,
technologies, services or products.
ACCOUNTS RECEIVABLE
Our accounts receivable at December 31, 2004 was $5,842,000 compared to
$6,850,000 at June 30, 2004. This decrease is primarily attributable to a
decrease in sales during the three month period ended December 31, 2004 compared
to the three month period ended June 30, 2004. Our accounts receivable turnover
ratio decreased 1.4 turns to 5.6 turns at December 31, 2004 from 7.0 turns at
June 30, 2004. The quality of our accounts receivable is good, and as such we
have encountered little or no bad debt exposure.
23
INVENTORY
At December 31, 2004, our inventory was $7,276,000, an increase of $1,746,000
from $5,530,000 at June 30, 2004. Our inventory turnover ratio of 4.2 annualized
turns at December 31, 2004 decreased when compared to June 30, 2004 - 6.2
average turns. The drop in turnover ratio to slightly over four turns, is
primarily as a result of two factors: the manufacture of product for which the
company was to receive orders during the three month period ended December 31,
2004, which did not arrive until the first calendar quarter of 2005, and a
planned build-up of inventory in certain key products. As such, we believe the
reduction in annual turns as at December 31, 2004, to be within acceptable
limits of our current operating plan.
ACCOUNTS PAYABLE
The accounts payable, accrued expenses and other liabilities decreased by
approximately $572,000 during the six month ended December 31, 2004 as compared
to June 30, 2004.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased during the six months ended December 31,
2004 by approximately $2,287,000 from $2,885,000 at June 30, 2004 to $598,000 at
December 31, 2004. We funded our business from operations and bank borrowings:
net cash provided by operations - $510,000; bank borrowings - net $921,000.
These were offset by acquisition of new property and equipment and other
additions of $3,718,000.
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 Interpharm
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, Interpharm evaluates
judgments and estimates made, including those related to revenue recognition,
inventories, income taxes and contingencies including litigation. Interpharm
bases its 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.
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 are 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 to the Department of Veterans Affairs.
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. The raw materials are also 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,
24
(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.
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.
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.
25
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal financial instrument currently is a $21.0 million credit facility.
In June 2004 we took a $7,400,000 mortgage note payable for the purchase of its
second facilty,located in Brookhaven, New York, of which approximately
$7,245,000 was outstanding at December 31, 2004. Additionally, as at December
31, 2004, we borrowed $1,500,000. Any obligations created under this credit
facility incur interest calculated at our option at (i) LIBOR plus 1.5% for
periods ranging in length from 3 to 36 months, or (ii) at the Bank's then fixed
prime rate. As of December 31, 2004, the interest rates on the mortgage note
payable was 3.66% and 3.94% the average interest rate for the $1,500,000
borrowings was 3.94%. If our combined borrowings remained at the same amount as
of December 31, 2004, 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 $22,000 per quarter. We anticipate that during the next twelve
months we will likely draw down additional funds from the existing credit
facility primarily to purchase equipment for both facilities, as well as
implement our research and development plan. This likely increase in our
borrowings will increase our exposure to interest rate market risk. We are
required to comply with certain financial covenants. The Bank reviews the credit
facility annually. The credit lines are terminable by the Bank at any time as to
undrawn amounts.
We do 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.
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
SEC's 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 three and six month period ended December 31, 2004, we
carried out an evaluation, under the supervision and with the participation of
our management, including our Chairman and 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 Chairman and 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 but adopted additional disclosure controls and
procedures to improve the quality and timeliness of disclosure during our
transition from a private to a public company.
On September 20, 2004, 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, 2004, MK had discovered a condition which they deemed
to be a material weakness in our internal controls (as defined by standards
established by the Public Company Accounting Oversight Board). MK noted the lack
of adequate internal control / review procedures required to properly and timely
record customer chargebacks. Management has informed MK and the Audit Committee
that it has modified its internal control / review procedures in such a manner
that it believes will prevent reoccurrences of this deficiency. The impact of
the above condition was isolated to the fiscal quarter ended June 30, 2004, and
did not affect the results of any prior period nor the three and six month
period ended December 31, 2004.
26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on
November 18, 2004, at the offices of the American Stock
Exchange.
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 23,463,714 21,079 84,807
David Reback 23,482,393 2,400 84,807
Stuart H. Benjamin 23,480,088 4,705 84,807
Dr. Mark Goodman 23,481,093 3,700 84,807
Cameron Reid 23,478,038 6,755 84,807
Kennith Johnson 23,482,793 2,000 84,807
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,
2005. The result of the vote was:
For Against Abstain
--- ------- -------
23,491,663 47,386 30,551
3. The stockholders voted to approve stock option grants. The
result of the vote was:
For Against Abstain
--- ------- -------
15,030,716 429,398 27,119
27
Item 5. Other Information
None
Item 6. Exhibits
(a) Exhibits
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
2202.
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.
(b) Reports on Form 8-k
1. Form 8-K filed on October 20, 2004 - Item 8.01 - Other Events. On
October 18, 2004, Surinder Rametra, a Company Director and its
Director of Business Development, and James Charles, a Director of
the Company, resigned their directorships. Mr. Rametra resigned his
directorship in order to enable him to focus solely on his
responsibilitiesas Director of Business Development of the Company.
Mr. Charles resigned inorder to pursue other interests. Neither Mr.
Rametra nor Mr. Charles resigned as a result of any disagreement
with the Company on any matter, including any matter related to the
operations, policies or practices of the Company.
2. Form 8-k filed on November 24, 2004 - Item 5.02 Departure of
Directors or Principal Officers; Appointment of Principal Officers.
- Announced the appointment of Raj Sutaria as the Company's Chief
Operating Officer.
28
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 U.S. Food and Drug Administration ("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 Securities and Exchange Commission.
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.
29
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, 2005
By: /s/ George Aronson
George Aronson,
Chief Financial Officer
(Duly authorized to sign on behalf of registrant)
30
EXHIBITS
NUMBER DESCRIPTION
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;