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 March 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
- --------------------------------------------------------------------------------
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 an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES |_| NO |X|
As of the close of business on May 13, 2005, there were 26,063,832 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 1-18
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations 19-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
PART II Other Information Required in Report
- ------- ------------------------------------
Items 1 through 6 27
Forward Looking Statements and Associated Risks 28
Signatures Page 29
Exhibits/Certifications 29-33
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
------
March 31, June 30,
2005 2004
-----------------------------------
(Unaudited)
CURRENT ASSETS
Cash and cash equivalents $ 2,627,650 $ 2,884,639
Marketable securities, at fair market value -- 36,791
Accounts receivable, net 6,512,372 6,849,778
Inventories, net 8,594,687 5,530,161
Prepaid expenses and other current assets 584,291 453,157
Deferred tax assets -- 1,280,000
--------------- ---------------
Total Current Assets 18,319,000 17,034,526
Land, building and equipment, net 19,942,927 15,007,132
Deferred tax assets 3,972,000 2,902,000
Investment in APR, LLC 772,500 --
Deposits 320,557 224,287
--------------- ---------------
TOTAL ASSETS $ 43,326,984 $ 35,167,945
=============== ===============
See Notes To Condensed Consolidated Financial Statements.
1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
March 31, 2005 June 30, 2004
---------------------------------------------
(Unaudited)
CURRENT LIABILITIES
Current maturities of bank debt payable $6,340,000 $ 764,014
Accounts payable, accrued expenses, and other liabilities 7,194,271 4,560,313
---------- ------------
Total Current Liabilities 13,534,271 5,324,327
OTHER LIABILITIES
Bank debt, less current maturities 6,783,333 7,060,833
--------- ---------
TOTAL LIABILITIES 20,317,604 12,385,160
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued and
outstanding - 6,901,146 and 6,902,963, respectively; aggregate
liquidation preference of $5,483,095 and $5,494,080, respectively 346,244 348,042
Common stock, $.01 par value, 70,000,000 shares
authorized; shares issued - 24,967,202 and 25,591,311, respectively 249,672 255,913
Additional paid-in capital 18,394,454 19,184,291
Accumulated other comprehensive loss -- (92)
Retained earnings 4,019,010 3,792,499
Treasury stock at cost, 624,145 shares in 2004 -- (797,868)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 23,009,380 22,782,785
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $43,326,984 $35,167,945
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31, Nine Months Ended March31,
------------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------
SALES, Net $ 10,669,660 $ 11,307,974 $ 28,560,858 $ 29,889,553
COST OF SALES (including related party rent expense of
$102,000 and $306,000 for the three and nine months ended
March 31, 2005 and 2004, respectively)
8,397,880 8,492,823 21,755,473 23,024,297
------------ ------------ ------------ ----------
GROSS PROFIT 2,271,780 2,815,151 6,805,385 6,865,256
------------ ------------ ------------ ----------
OPERATING EXPENSES
Selling, general and administrative expenses 1,579,724 1,165,945 3,892,734 3,059,780
Related party rent expense 18,000 18,000 54,000 54,000
Research and development 1,658,975 80,535 2,197,961 269,570
------------ ------------ ------------ ----------
TOTAL OPERATING EXPENSES 3,256,699 1,264,480 6,144,695 3,383,350
------------ ------------ ------------ ----------
OPERATING (LOSS) INCOME (984,919) 1,550,671 660,690 3,481,906
------------ ------------ ------------ ----------
OTHER INCOME (EXPENSE)
Gain on sale of marketable securities -- -- 8,943 --
Gain on sale of property and equipment -- 2,554 -- 2,554
Interest expense (21,655) (5,483) (25,175) (16,482)
Interest income -- 11,208 -- 16,413
------------ ------------ ------------ ----------
TOTAL OTHER INCOME (EXPENSE) (21,655) 8,279 (16,232) 2,485
------------ ------------ ------------ ----------
(LOSS) INCOME BEFORE INCOME TAXES (1,006,574) 1,558,950 644,458 3,484,391
(Forward)
See Notes To Condensed Consolidated Financial Statements.
3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- -------------------------------------------------------------------------------
Three Months Ended March 31, Nine Months Ended March 31,
-----------------------------------------------------------------------
2005 2004 2005 2004
-----------------------------------------------------------------------
(Forward)
(BENEFIT FROM) PROVISION FOR INCOME TAXES (373,000) 575,420 239,228 1,249,325
---------- ---------- ---------- -----------
NET (LOSS) INCOME $ (633,574) $ 983,530 $ 405,230 $ 2,235,066
========== ========== ========== ===========
EARNINGS PER SHARE
Basic earnings per share $ (0.03) $ 0.05 $ 0.01 $ 0.11
========== ========== ========== ===========
Diluted earnings per share $ (0.03) $ 0.01 $ 0.00 $ 0.03
========== ========== ========== ===========
Basic weighted average shares outstanding 24,967,202 18,457,790 24,967,196 17,389,913
========== ========== ========== ===========
Diluted weighted average shares and
equivalent shares outstanding 24,967,202 69,336,012 67,701,862 68,692,068
========== ========== ========== ===========
See Notes To Condensed Consolidated Financial Statements.
4
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
- -------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-In
Shares Amount Shares Amount Capital
--------------------------------------------------------------------------------
BALANCE - July 1, 2004 6,902,963 $ 348,042 25,591,311 $ 255,913 $ 19,184,291
Unrealized gain on marketable
securities, net -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE -
September 30, 2004 6,902,963 348,042 25,591,311 255,913 19,184,291
Unrealized loss on marketable
securities, net -- -- -- -- --
Conversion of Series C
convertible preferred stock
common stock (1,797) (1,797) 36 -- 1,797
Dividends declared -
Series A-1 -- -- -- -- --
Net income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE -
December 31, 2004 6,901,166 346,245 25,591,347 255,913 19,186,088
Retirement of Treasury Shares -- -- (624,145) (6,241) (791,627)
Redemption of Series A
convertible preferred stock (20) (1) -- -- (7)
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
BALANCE - March 31, 2005 6,901,146 $ 346,244 24,967,202 $ 249,672 $ 18,394,454
============ ============ ============ ============ ============
Accumulated
Other Total
Comprehensive Retained Treasury Stock Stockholders'
Income Earnings Shares Amount Equity
--------------------------------------------------------------------------------
BALANCE - July 1, 2004 $ (92) $ 3,792,499 (624,145) $ (797,868) $ 22,782,785
Unrealized gain on marketable
securities, net 3,194 -- -- -- 3,194
Net income -- 413,272 -- -- 413,272
------------ ------------ ------------ ------------ ------------
BALANCE -
September 30, 2004 3,102 4,205,771 (624,145) (797,868) 23,199,251
Unrealized loss on marketable
securities, net (3,102) -- -- -- (3,102)
Conversion of Series C
convertible preferred stock
common stock -- -- -- -- --
Dividends declared -
Series A-1 -- (178,719) -- -- (178,719)
Net income -- 625,532 -- -- 625,532
------------ ------------ ------------ ------------ ------------
BALANCE -
December 31, 2004 -- 4,652,584 (624,145) (797,868) 23,642,962
Retirement of Treasury Shares -- -- 624,145 797,868 --
Redemption of Series A
convertible preferred stock -- -- -- -- (8)
Net loss -- (633,574) -- -- (633,574)
------------ ------------ ------------ ------------ ------------
BALANCE - March 31, 2005 $ -- $ 4,019,010 -- $ -- $ 23,009,380
============ ============ ============ ============ ============
See Notes To Condensed Consolidated Financial Statements.
5
For The Nine Months Ended March 31, 2005
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHSENSIVE (LOSS) INCOME
(UNAUDITED)
- -------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
--------------------- ---------------------------------
2005 2004 2005 2004
---------- ---------- ---------- -----------
NET (LOSS) INCOME $ (633,574) $ 983,530 $ 405,230 $2,235,066
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized (loss) gain on marketable
securities, net -- (10,811) -- 1,926
---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE (LOSS)
INCOME $ (633,574) $ 972,719 $ 405,230 $2,236,992
========== ========== ========== ==========
See Notes To Condensed Consolidated Financial Statements.
6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
(UNAUDITED)
- -------------------------------------------------------------------------------
Nine Months Ended
March 31,
2005 2004
------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 405,230 $ 2,235,066
--------------- ---------------
Adjustment to reconcile net income to net
cash provided by (used in) operating activities
Gain on sale of marketable securities (8,943) --
Gain on sales of property and equipment -- (2,554)
Depreciation and amortization 908,101 643,273
Deferred tax expense 210,000 --
Tax expense in connection with exercise of employee
stock options credited to additional paid-in-capital -- 1,219,000
Changes in operating assets and liabilities
Accounts receivable 337,406 (2,979,204)
Inventories (3,064,526) (1,478,370)
Prepaid expenses and other current assets (85,308) (177,416)
Deposits -- (98,406)
Accounts payable, accrued expenses and other liabilities 2,633,958 183,001
--------------- ---------------
TOTAL ADJUSTMENTS 930,688 (2,690,676)
--------------- ---------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,335,918 (455,610)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from notes receivable -- 1,524,092
Purchases of building and equipment (5,843,896) (2,198,531)
Proceeds from sales of property and equipment -- 19,000
Investment in APR, LLC (772,500) --
Deposits (96,270) (925,000)
--------------- ---------------
NET CASH USED IN INVESTING ACTIVITIES (6,712,666) (1,580,439)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of bank line of credit (424,847) (1,639,946)
Borrowings from new bank lines of credit 5,970,000 --
Repayments of bank mortgage and notes payable (246,667) (461,762)
Payment of Series A-1 preferred stock dividend (178,719)
---------------
Redemption of Series A convertible preferred stock (8) --
Cash received in reverse merger transaction -- 64,029
Proceeds from options and warrants exercised -- 3,508,175
--------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES $ 5,119,759 $ 1,470,496
--------------- ---------------
See Notes To Condensed Consolidated Financial Statements.
7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED), Continued
- -------------------------------------------------------------------------------
Nine Months Ended
March31,
2005 2004
--------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (256,989) $ (565,553)
CASH AND CASH EQUIVALENTS - Beginning 2,884,639 2,336,203
--------------- ---------------
CASH AND CASH EQUIVALENTS - Ending $ 2,627,650 $ 1,770,650
=============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 200,985 $ 16,482
=============== ===============
Income taxes $ 31,148 $ 99,054
=============== ===============
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 --
=============== ===============
Retirement of Treasury Stock $ 797,868 --
=============== ===============
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 nine months
ended March 31, 2005 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 (loss) 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 net (loss) 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 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
9
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 2 - Summary of Significant Accounting Policies, continued
be depreciated over the useful lives of the assets. The Company
capitalized approximately $271,000 during the nine month period ended
March 31, 2005 in connection with its capital improvements to the
Brookhaven, NY facility.
Stock Based Compensation
At March 31, 2005, 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 (loss) income and net (loss)
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 Nine Months Ended
March 31, March 31,
---------------------------------------------------------------------------
2005 2004 2005 2004
---------------- --------------- --------------- ----------------
Net (loss) income, as reported $ (633,574) $ 983,530 $ 405,230 $ 2,235,066
Less: Stock-based employee
compensation expense
determined under fair value-based
method for all awards, net of income tax 9,270,345 212,550 10,583,286 545,977
--------------- --------------- --------------- ---------------
Pro forma net (loss) income $ (9,903,919) $ 770,980 $ (10,178,056) $ 1,689,089
=============== =============== =============== ===============
Basic net (loss) income per share
As reported $ (0.03) $ 0.05 $ 0.01 $ 0.11
=============== =============== =============== ===============
Pro forma $ (0.40) $ 0.04 $ (0.44) $ 0.08
=============== =============== =============== ===============
Diluted net (loss) income per share
As reported $ (0.03) $ 0.01 $ 0.00 $ 0.03
=============== =============== =============== ===============
Pro forma $ (0.40) $ 0.01 $ (0.44) $ 0.02
=============== =============== =============== ===============
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 2005 period includes the
pro-forma effects of accelerating options valued at $4.2 million, as discussed
below.
In an effort to reduce the expected 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
10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 2 - Summary of Significant Accounting Policies, continued
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.
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 ranging from
106% to 131% in 2005 and 124% in 2004, respectively (2) risk-free interest
rate ranging from 4.25% to 5.58% in 2005 and 3.4% for 2004, respectively
and (3) expected average lives of 10 years for 2005 and 2004,
respectively.
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 (loss) 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.
On March 3, 2005 the FASB issued FASB Staff Position FIN 46 (R)-5, which
addresses whether a reporting enterprise should consider whether it holds
an implicit variable interest in a variable interest entity ("VIE") or a
potential VIE when specific conditions exist. The guidance shall be
applied to the first reporting period beginning after March 3, 2005, but
early application is permitted for periods in which financial statements
have not yet been issued.
The Company leases its premises from Sutaria Realty Family Trust. Sutaria
Realty Family Trust is owned directly or indirectly by officers of the
Company. Management is evaluating the relationship between the Company and
Sutaria Realty Family Trust to determine if Sutaria Realty Family Trust is
an implicit variable interest entity and the impact on the condensed
consolidated financial statements.
11
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 3 - Inventories
Inventories consist of the following:
March 31, June 30,
2005 2004
--------------------------------------
Finished goods $ 222,509 $ 534,175
Work in process 4,874,591 2,710,270
Raw materials 3,033,464 1,932,971
Packaging materials 464,123 352,745
------------ ------------
Total $ 8,594,687 $ 5,530,161
============ ============
NOTE 4 - Land, Building and Equipment
Land, building and equipment consists of the following:
March 31, June 30, Estimated
--------------------- ------------------- Useful
2005 2004 Lives
--------------------- ----------------- ----------------
Land $ 4,924,000 $ 4,924,000
Building, improvements and construction in progress (a) 6,880,466 4,475,482 20 Years
Machinery and equipment 8,698,393 5,457,395 5-7 Years
Furniture and fixtures 360,144 319,762 5 Years
Leasehold improvements 2,780,735 2,623,203 5-15 Years
--------------- ---------------
23,643,738 17,799,842
Less: accumulated
depreciation and amortization 3,700,811 2,792,710
--------------- ---------------
Land, Building and Equipment, net $ 19,942,927 $ 15,007,132
=============== ===============
(a) Not yet been placed into service and no depreciation expense has yet been
recorded
NOTE 5 - Bank Debt
At March 31, 2005, the Company had $5,970,000 outstanding under advised
lines of credit, with $7,630,000 available for future borrowings. Interest
rates applied to these borrowings are calculated at ninety day LIBOR plus
150 basis points and range from 4.12% to 4.46%. At the end of each term
the Company has the option to extend the borrowings at LIBOR plus 150
basis points for terms ranging from 3 to 36 months or at the Bank's then
fixed prime rate. In addition, the Company will be required to comply with
certain financial covenants. The credit lines are terminable by the Bank
at any time as to undrawn amounts.
Additionally, the Company has a mortgage note payable of $7,153,333 of
which $6,783,333 is accounted for as long term and $370,000 is accounted
for as current. At March 31, 2005 the interest rate was 4.46% and will be
recalculated on July 1, 2005.
During the nine month period ended March 31, 2005 the Company repaid
approximately $425,000 of various bank lines of credit, as well as
$247,000 of the mortgage note payable.
12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 5 - Bank Debt, continued
A summary of the outstanding balances is as follows:
March 31,2005 June 30, 2004
------------- ------------
Lines of credit $ 5,970,000 $ 394,014
Mortgage note payable 7,153,333 7,430,833
------------- ------------
13,123,333 7,824,847
Less current maturities 6,340,000 764,014
------------ -------------
Bank debt, less current maturities $ 6,783,333 $ 7,060,833
============ ============
NOTE 6- Income Taxes
At March 31, 2005 the Company has remaining Federal net operating loss
carryforwards ("NOLs") of approximately $11,500,000 and State NOLs of
approximately $10,900,000 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 March 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 three and nine month periods
ended March 31, 2005, the Company applied an aggregate effective tax rate
of approximately 37% thereby creating a deferred income tax benefit of
$373,000 and an deferred income tax expense of $210,000, respectively, and
adjusted its deferred tax asset by like amounts.
NOTE 7- Earning Per Share
The calculations of basic and diluted EPS are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------------------------------------
2005 2004 2005 2004
------------------------------------------------------------------------
Numerator:
Net (loss) income $ (633,574) $ 983,530 $ 405,230 $ 2,235,066
Less: Preferred stock dividends 41,392 41,392 124,176 124,176
Less: Net (loss) income attributable to Series K
preferred stockholders N/A 93,264 18,483 208,960
---------------- --------------- --------------- ---------------
Numerator for basic EPS (674,966) 848,874 262,571 1,901,930
Effect of dilutive securities:
Net (loss) income attributable to Series K
preferred stockholders N/A 93,264 18,483 208,960
Numerator for diluted EPS $ (674,966) $ 942,138 $ 281,054 $ 2,110,889
=============== =============== =============== ===============
13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 7- Earning Per Share, continued
Denominator:
Denominator for basic EPS weighted average
shares outstanding 24,967,202 18,457,790 24,967,196 17,389,913
Effect of dilutive securities:
Convertible Series K preferred stock N/A 43,779,647 37,648,650 43,102,897
Convertible Series A, B, C and J preferred stocks N/A 7,438 7,401 12,783
Stock options N/A 7,091,137 5,078,615 8,186,475
------------- ------------- ------------- -------------
Denominator for diluted EPS 24,967,202 69,336,012 67,701,862 68,692,068
============= ============= ============= =============
Basic EPS $ (0.03) $ 0.05 $ 0.01 $ 0.11
============= ============= ============= =============
Diluted EPS $ (0.03) $ 0.01 $ 0.00 $ 0.03
============= ============= ============= =============
As of March 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 - March 31, 2005 24,967,202
Stock options and Warrants outstanding 12,917,500
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) 37,648,650
----------
Total - (c) 80,396,139
==========
(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).
14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 8 - Equity Securities
Common Stock and Stock Options
During the three month period ended March 31, 2005, the Company issued
2,382,500 options to purchase its common stock as follows:
o As part of an employment agreement 2,000,000 vested options were
issued to the Company's Chief Executive Officer, Cameron Reid having
an exercise price of $2.24, which was the closing price of the
Company's common stock on the date of the grant.
o 25,000 vested options were granted to the Company's Chief Financial
Officer, having an exercise price of $2.24, which was the closing
price of the Company's common stock on the date of the grant.
o 50,000 vested options were granted to the Company's director of
business development, having an exercise price of $2.24, which was
the closing price of the Company's common stock on the date of the
grant.
o 150,000 options were granted to the Company's VP of sales and
marketing, having an exercise price of $2.24, which was the closing
price of the Company's common stock on the date of the grant. 20% of
the options shall vest on June 30, 2006, and 20% on each of the next
four anniversaries thereof.
o 150,000 options were granted to the Company's VP of intellectual
property, having an exercise price of $1.94, which was the closing
price of the Company's common stock on the date of the grant. 40,000
of the options are fully vested on the grant date; the balance shall
vest at 20% on February 28, 2006, and 20% on each of the next four
anniversaries thereof.
o 7,500 options were granted to a non-executive employee. The options
vest at March 31, 2006 and have an exercise price of $1.64, which
was the closing price of the Company's common stock on the date of
the grant.
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.
Preferred Stock
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 was cumulative through June 30,
2004, and was paid March 10, 2005. As of March 31, 2005 the Company's Board of
Directors had not yet declared any dividend on the A-1 shares for the period
July 1, 2004 thru March 31, 2005. Such undeclared dividends amounted to
approximately $124,000 (Note 14).
Treasury Stock
In January, 2005 the Company retired 624,145 shares of its treasury stock,
valued at approximately $798,000. This was accounted for as a reduction of the
Company's Additional Paid-in Capital.
15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the three and
nine month periods ended March 31, 2005 and 2004:
Sales - Percent of Revenue
Three Months Ended March 31, Nine Months Ended March 31,
---------------------------------- ----------------------------------
2005 2004 2005 2004
---------------- ----------------- ---------------- -----------------
Customer "A" 29% 24% 23% 29%
Customer "B" 18 35 24 29
Customer "C" 11 8 14 10
Accounts Receivable
March 31, 2005
--------------
Customer "A" $ 1,918,000
Customer "B" 1,595,000
Customer "C" 841,000
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 nine month periods ended March 31, 2005, the Company
purchased materials from three suppliers totaling approximately 75% and
73% of purchases, respectively. For the three and nine month periods ended
March 31, 2004, the Company purchased materials from three suppliers
totaling approximately and 73% and 85%, respectively. At March 31, 2005
and 2004, aggregate amounts due to these suppliers included in accounts
payable, were approximately $3,832,000 and $3,095,000 respectively.
NOTE 10 - Related Party Transactions
Rents
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.
16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
Investment in APR, LLC.
On February 16, 2005 the Company purchased 5.0 and 2.5 Class A membership
interests ("Interests") from Cameron Reid ("Reid"), our Chief Executive
Officer, and John Lomans ("Lomans"),who has no affiliation with the
Company, for purchase prices of $500,000 and $250,000, respectively, 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 75 Class A membership interests and 100 Class B membership
interests. 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.
In connection with the purchases made by the Company on February 16, 2005,
the Company had an agreement to purchase up to an additional 2.5 Interests
from Lomans. On April 11, 2005 the Company purchased an additional 2.5
Interests from Lomans for a purchase price of $250,000. As such, the
Company currently owns 10 Interests out of the 100 Interests now
outstanding.
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.
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
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 - Significant New Contracts
As previously announced, in February, 2005, 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 addition, Tris is to receive a royalty of
between 10% and 12% of net profits resulting from the sales of each
product. As of March 31, 2005, the Company paid $250,000 to Tris. In
accordance with the terms in the agreement, the Company will pay the
remaining portion as various milestone deliveries are presented.
17
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 12 - Significant New Contracts, continued
The other agreement is for development and licensing of seven solid
generic pharmaceutical products, some of which require specialized
technology. According to the terms of the agreement for the solid dosage
products, the Company will collaborate with Tris on the development,
manufacture and marketing of seven solid oral dosage generic products,
some of which may require the Company to challenge the patents for the
equivalent branded products. This agreement provides for payments of an
aggregate of $3,750,000 to Tris, whether or not regulatory approval is
obtained for any of the products. The agreement for solids also provides
for an equal sharing of net profits for each product that is successfully
sold and marketed, after the deduction and reimbursement of all
litigation-related and certain other costs. 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. As of March 31, 2005, the Company paid
$750,000, with the balance to be paid essentially over the next seven
quarters.
NOTE 13 - Product Sales Analysis
An analysis of the Company's net sales by product for the three and nine
month periods ended March 31, 2005 and March 31, 2004 is present below.
Three Months Nine Months
Ended March 31 Ended March 31,
2005 2004 2005 2004
Sales Sales Sales Sales
----------- ------------ ----------- -----------
Ibuprofen 6,188 6,454 $ 17,891 $ 16,774
Allopurinol & Atenolol 2,388 2,089 5,589 7,952
Naproxen 517 1,936 1,320 3,471
All Other Products 1,577 829 3,761 1,693
Total $ 10,670 $ 11,308 $ 28,561 $ 29,890
=========== =========== =========== ===========
NOTE 14 - Subsequent events
The Company's board of directors, at a meeting held May 12, 2005, declared
a dividend payable amounting to $124,177 for the Series A-1 cumulative
convertible preferred stock for cumulative dividends earned through March
31, 2005.
Subsequent to March 31, 2005, the Company issued 1,096,630 shares of its
common stock as a result of an employee exercising a like amount of
options. The Company received a cash deposit of approximately $627,000
during the quarter, in advance of the exercise of said stock options,
included in Accounts payable, accrued expenses and other liabilities as at
March 31, 2005.
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, distributors, repackagers, and other manufacturers
which sell our products under their labels. Sales are recognized when the
product is shipped and appropriate provisions are made for returns and charge
backs.
Cameron Reid, with over 25 years experience in the pharmaceutical industry,
joined our Board of Directors in May, 2004, to assist us in the creation of our
internal business plan. Under Mr. Reid's direction, we have created a business
plan which capitalizes on our core competencies in the selection of new products
as well as diversifies our product development into new areas. In order to
implement our plan, Mr. Reid was appointed Chief Executive Officer of Interpharm
in January, 2005. Simultaneously with his appointment, Mr. Reid resigned his
position on our Board of Directors to focus solely on his duties as Chief
Executive Officer.
In order to accelerate our new product development, we have, since February
2005, entered into arrangements with three companies for the development of new
products. We spent approximately $1,659,000 on research and development during
the quarter ended March 31, 2005 as compared to approximately $81,000 during the
same period last year. In order to successfully implement our plan, we will
continue to increase our research and development expenditures. However, there
can be no assurance that our increased expenditures will result in successful
products or increased revenues or profits. In order to capitalize on the
availability of qualified scientific and other research and development
personnel at significant cost savings, we have begun planning for a research and
development facility in Ahmnebad, India. In addition to supplementing our
continuing research and development activities in the United States, the planned
facility in India, if and when completed, will reduce our reliance on third
parties for new product development. However, as we expand our internal research
and development capabilities, we will continue to seek strategic alliances with
third parties, such as our previously announced agreement with Tris Pharma Inc.,
for the development of products requiring specialized technologies.
Results of Operations
Summary
Our loss before income taxes for the quarter ended March 31, 2005 of $1,007,000
represents a decrease in income of $2,566,000 when compared to income before
taxes of $1,559,000 for the same period last year. The decrease is the result of
the increase in research and development expenses of approximately $1,578,000
(62% of the decrease), an increase in selling, general, and administrative
expenses of approximately $414,000 (16%) and a decrease in gross profit of
approximately $543,000 (21%). During the period ended March 31, 2005, our
increase in research and development expenses was attributable to the
commencement of the implementation of our business plan. The increase in
selling, general and administrative expenses was to retain key management
personnel that were not employed by us a year ago and the reduction in gross
profit is primarily attributable to a decrease in net sales and a 3.6% decrease
in gross profit percentage. We will continue to incur increasing research and
development expenses in the future and believe that these expenditures, combined
with the hiring of additional personnel, are critical to the successful
implementation of our business plan.
19
Net sales by product (in thousands of dollars):
Three Months Ended March 31,
----------------------------
2005 % of 2004 % of
Sales Sales Sales sales Variance $
----- ----- ----- ----- ----------
Ibuprofen $ 6,188 58 $ 6,454 58 $ (266)
Allopurinol & Atenolol 2,388 22 2,089 18 299
Naproxen 517 5 1,936 17 (1,419)
All Other Products 1,577 15 829 7 748
Total $ 10,670 $ 11,308 $ (638)
========== ========== ==========
Nine Months Ended March 31,
---------------------------
2005 % of 2004 % of
Sales Sales Sales sales Variance $
----- ----- ----- ----- ----------
Ibuprofen $ 17,891 62 $ 16,774 56 $ 1,117
Allopurinol & Atenolol 5,589 20 7,952 27 (2,363)
Naproxen 1,320 5 3,471 12 (2,151)
All Other Products 3,761 13 1,693 6 2,068
Total $ 28,561 $ 29,890 $ (1,329)
========== ========== ==========
As indicated in the tables above, our net revenues decreased. Significant
components include:
o Net sales of Ibuprofen for the nine month period ended March 31,
2005 increased $1,117,000 or 6.7% when compared to the nine month
period ended March 31, 2004. However, during the quarter ended March
31, 2005 there was a 4.1% 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,
however, there can be no assurance that this will occur.
o Both Allopurinol and Atenolol are manufactured for one customer
based on quantities ordered by the customer. Net sales for these two
products during the three month period ended March 31, 2005 were
slightly higher than the same three month period in the prior year.
However, when examining the results for the nine months ended March
31st, we determined that orders of Allopurinol and Atenolol were
above normal quantities during the nine month period ended March 31,
2004, resulting in a decrease of approximately $2,363,000 or more
than one-third of the 2004 year to date results. As revenue
attributable for these two products are from one customer, it is
difficult to forecast, however, at present we believe future
quarterly net sales through the end of the calendar year 2005, for
Allopurinol and Atenolol should approximate the quarterly average
recognized during the nine month period ended March 31, 2005,
however, there can be no assurance that this will occur.
o As compared to the three month period ended March 31, 2004, our net
sales of Naproxen decreased $1,419,000. Net sales of Naproxen during
the three month period ended March 31, 2004 included shipments of
more than $1,400,000, to one customer, an amount nearly equal to the
six month period ended December 31, 2003 of $1,535,000. This
customer has placed minimal re-orders since that time. We believe we
have identified new customers for Naproxen and therefore, believe
that future net sales of Naproxen may begin to increase during our
fiscal 2006 year. However than can be no assurance that this will
occur.
o Since we began shipping Hydrocodone-7.5 mg/Ibuprofen-200 mg, our
generic version of Vicoprofen, in October, 2004, we have recognized
revenue of $1,242,000. While it is still too early to accurately
forecast future net sales for this product, wedo not believe future
orders will be as high because the results for the year to date
period included initial shipments, which tend to be greater than
future replenishment orders. The results for the periods reported
include additional revenue derived from our profit sharing
arrangement for this product.
20
Cost of Sales / Gross Profit
During the three and nine month periods ended March 31, 2005, with respect to
our primary products, raw material prices have remained relatively constant when
compared to prior year. 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 during
the three months ended March 31, 2005, primarily as a result of costs associated
to training production staff for the second facility, which we anticipate will
be operational sometime in 2005. Additionally, we witnessed increases in general
overhead costs such as product liability and utilities. We believe these higher
costs we likely continue for the near future.
As a result of the issues outlined above, our total gross profit percentage for
the three months ended March 31, 2005 was 21.3%, a decrease of 3.6 percentage
points compared to 24.9% for the three months ended March 31, 2004. Our total
gross profit percentage for the nine months ended March 31, 2005 was 23.8%, an
increase of 0.8 percentage points compared to 23.0% for the nine months ended
March 31, 2004. During the nine-month period ended March 31, 2005, we shipped
approximately $670,000 of inventory that had not been previously capitalized.
Without such sale our gross profit percentage for the nine months ended March
31, 2005 would have been 21.5%, a decrease of 1.5 percentage points compared to
23.0% for the nine months ended March 31, 2004.
Research and Development Expenses
As described above, as part of our business plan, during the three month period
ended March 31, 2005, we took significant steps toward expanding our product
line. During the three month period ended March 31, 2005, the Company had
research and development expenses of $1,659,000 as compared to approximately
$81,000 for the same period last year.
As previously announced, in February, 2005, we 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 us for the twenty-five generic liquid
pharmaceutical products. We will then utilize this information to obtain all
necessary approvals and manufacture and market the products. Further, this
agreement provides us 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 us 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,
we will pay Tris approximately $3,000,000. In addition, Tris is to receive a
royalty of between 10% and 12% of net profits resulting from the sales of each
product.
The other agreement is for development and licensing of seven solid generic
pharmaceutical products, some of which require specialized technology. According
to the terms of the agreement for the solid dosage products, we will collaborate
with Tris on the development, manufacture and marketing of seven solid oral
dosage generic products, some of which may require us to challenge the patents
for the equivalent branded products. This agreement provides for payments of an
aggregate of $3,750,000 to Tris, whether or not we obtain regulatory approval
for any of the products. The agreement for solids also provides for an equal
sharing of net profits for each product that is successfully sold and marketed,
after the deduction and reimbursement of all litigation-related and certain
other costs. Further, this agreement provides us with a perpetual royalty-free
license to use all technology necessary for the solid products in the United
States, its territories and possessions.
While we have selected the liquid and solid products we believe can be
successfully developed, manufactured and marketed, there can be no assurance
that the liquid products will be commercially successful, or that Interpharm and
Tris will be able to successfully develop, manufacture and market any of the
solid products.
In connection with the agreements described above, we have, as of March 31,
2005, paid $1,000,000 to Tris. In addition, during the three month period ended
March 31, 2005, we have disbursed an aggregate of approximately $659,000 for
labor, raw materials, bio-equivalency studies and tooling toward other projects.
21
If we are successful in our efforts we believe we could see sales from new
products to our line during fiscal 2006, however, there can be no assurance that
these products or our second facility will obtain timely 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 $414,000 to
approximately $1,580,000, or 14.8% of net sales during the three months ended
March 31, 2005, from approximately $1,166,000, or 10.3% of net sales, during the
same period in 2004. The significant components of this increase are: salaries,
including payroll taxes and benefits ($301,000); legal and accounting costs of
($98,000); and software licenses and fees ($34,000).
Selling, general and administrative expenses increased approximately $833,000 to
approximately $3,893,000, or 13.6% of net sales during the nine months ended
March 31, 2005, from approximately $3,060,000, or 10.2% of net sales, during the
same period in the prior year. The significant components of this increase are:
salaries, including payroll taxes and benefits ($444,000); professional
services; investor relations ($143,000) and public relations ($88,000);
utilities ($62,000); legal and accounting ($54,000) and travel
/auto/entertainment ($50,000).
The increase in salaries, payroll taxes, benefits, professional fees and
utilities are primarily attributable to our continuing overall corporate
expansion. An integral part of our corporate development was to attract and
retain key senior executives who have the capability to effectively manage and
effectuate our current and long term business strategies. To that end, during
the three month period ending March 31, 2005, we retained a new chief executive
officer, and filled openings of the vice president of sales and marketing and
vice president of intellectual property. 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 increased costs
during the three and nine month periods ended March 31, 2005 with little or no
costs incurred during the same period in the prior year. The increases in legal
and accounting and professional fees witnessed during the three month period
ended March 31, 2005 compared to the same period in the prior year are primarily
attributable to added services which are consistent with our product line
growth.
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.
Income Taxes
The effective tax rate for the three and nine month periods ended March 31, 2005
of approximately 37.1%, resulted in an income tax benefit of $373,000 and an
income tax provision of approximately $239,000, respectively, compared to
effective aggregate tax rates of 35.9% and 36% for the three and nine month
periods ended March 31, 2004, respectively, which resulted in provisions for
income taxes of approximately $575,000 and 1,249,000, 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
accelerated 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 to
long term deferred tax asset.
22
Liquidity and Capital Resources
We currently finance our operations and capital expenditures through bank
borrowings and cash flows from operations. Net cash provided by operating
activities for the nine month period ended March 31, 2005 was $1,336,000 as
compared to $456,000 net cash used in operating activities for the same period
in the prior year. Components of the net cash provided from operating activities
for the nine month period ended March 31, 2005 include non-cash operating items
of $1,092,000 plus net income of $405,000 and a decrease in accounts receivable
of $337,000, a increase in accounts payable, accrued expenses and other
liabilities of $2,634,000, offset by increases in inventories and prepaid
expenses and other current assets of $3,065,000 and $85,000, respectively. It
should be noted that during the three month period ended March 31, 2005, we
disbursed approximately $1,659,000 for research and development. We belive this
level of spending will continue to occur for the forseeable future.
Net cash provided by financing activities of $5,120,000 for the nine months
ended March 31, 2005, was a result of drawing $5,970,000 from the available
lines of credit offset by the pay down of a mortgage note of $246,000, payment
of $179,000 in dividends and working capital lines of credit by $425,000. Net
cash provided by financing activities a year ago was $1,470,000. Net cash
in-flows for the nine months were used to finance operations as well as our
expansion. A component of our current plan is the completion of renovations to
our second facility along with the installation of additional production,
packaging and research and development. Additionally, we continue to add to our
capacity at our current facility as well. As such, during the nine month period
ended March 31, 2005, we disbursed $5,844,000 for new equipment, furniture and
improvements. In addition, we have disbursed $96,000 for deposits toward
additional assets. As further detailed in Note 10 to our condensed consolidated
financial statements, based upon information presented by an independent
investment banking firm, the Board of Directors authorized an investment of
$750,000, plus $22,500 of related investment banking fees, into APR, LLC,
("APR"), a company primarily engaged in the development of complex bulk
pharmaceutical products. In April 2005, we made an additional investment of
$250,000. In the aggregate we used $6,713,000 in investing activities during the
nine months ended March 31, 2005.
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. As of March 31, 2005 the total amount remaining is
$7,153,333. The interest rate, as at March 31, 2005 was 4.46%
through July 31, 2005, at which time it will be set according to the
terms setforth below.
o An aggregate of $13,600,000 of advised credit lines primarily to
acquire new equipment and for renovations of the Company's two
locations and working capital. A portion of the funds accessed
through these credit lines are eligible to convert to fully
amortizing five year term loans. As of March 31, 2005, we have drawn
down $5,970,000, all currently on an interest only basis. Each
borrowing is a 90 day loan at LIBOR plus 150 basis points. Interest
rates average 4.34% and range from 4.12% to 4.46%.
o 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. In addition, we are required to comply with certain financial
covenants. As of March 31, 2005, 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 credit facility is collateralized by substantially all assets
of the Company.
During the nine month period ended March 31, 2005, working capital decreased
$6,925,000 to $4,785,000 from $11,710,000 at June 30, 2004. Significant factors
which contributed to this reduction are increases in:
o current portion of bank borrowings of approximately $5,576,000
o accounts and accrued expenses payable of $2,004,000
o inventory of $3,065,000
plus decreases in:
o current portion of deferred tax assets of $1,280,000
23
As discussed earlier, we entered into agreements with Tris Pharma, Inc for the
development and delivery of thirty-two new Technical Packages. The combined
costs of these two agreements will approximate $6,750,000 of which we have paid
$1,000,000 as of March 31, 2005. The balance on one agreement of approximately
$2,750,000 could be paid within three years. The second agreement has a balance
of $3,000,000 and will be paid within two years.
Future cash flows could be aided by utilization of our available Federal net
operating loss carryforwards ("NOLs"). At March 31, 2005, we had approximately
$11,075,000 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 financing arrangements described above along with the funds we
generate from operations should allow us to continue our expansion plans and be
sufficient for us to meet our operating requirements during the next twelve
months. We are, nevertheless, seeking to significantly increase our credit lines
with our banks and are likely to seek other financing arrangements to facilitate
the timely implementation of our business plan. However, there can be no
assurances that we will be able to raise the necessary additional funds, and if
we are unable to raise such funds, we will be required to modify our business
plan for new product developments.
Accounts Receivable
Our accounts receivable at March 31, 2005 was $6,512,000 compared to $6,850,000
at June 30, 2004. This decrease is primarily attributable to net sales in the
current quarter being less than that of the three month period ended June 30,
2004. Our accounts receivable turnover ratio decreased 1.3 turns to 5.7 turns at
March 31, 2005 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.
Inventory
At March 31, 2005, our inventory was $8,595,000, an increase of $3,065,000 from
$5,530,000 at June 30, 2004. Our inventory turnover ratio of 4.1 annualized
turns at March 31, 2005 decreased when compared to June 30, 2004 - 6.2 average
turns. The drop in turnover ratio to slightly over four turns, is primarily the
result of a deliberate build-up of inventory in certain key products. As such,
we believe the reduction in annual turns as at March 31, 2005, to be within
acceptable limits of our current operating plan.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increased by
approximately $2,634,000 during the nine month ended March 31, 2005 as compared
to June 30, 2004. As outlined above, this increase is primarily a result of a
build up of inventory.
Cash and Cash Equivalents
Cash and cash equivalents decreased during the nine months ended March 31, 2005
by approximately $257,000 from $2,885,000 at June 30, 2004 to $2,628,000 at
March 31, 2005. Thus far this year we funded our business from bank borrowings
and operations: bank borrowings - net $5,298,000; net cash provided by
operations - $1,336,000. These were offset primarily through the use of cash to
acquire new property and equipment and other additions of $5,940,000 and our
investment in APR, LLC of $772,500.
24
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.
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 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.
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 our
second facilty,located in Brookhaven, New York, of which approximately
$7,153,333 was outstanding at March 31, 2005. Additionally, as of March 31,
2005, we borrowed an additional $5,970,000 through the advised lines of credit.
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 March 31, 2005, the
interest rates on the mortgage note payable was 4.66%. The average interest rate
for the $5,970,000 borrowings was 4.34%. If our combined borrowings remained at
the same amount as of March 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 $33,000 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 nine month period ended March 31, 2005, 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 nine month
periods ended March 31, 2005.
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
None
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.
27
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.
28
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: May 16, 2005
By: /s/ George Aronson
------------------------
George Aronson,
Chief Financial Officer
(Duly authorized to sign on behalf of registrant)
29
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;
30