SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (IRS. 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
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Securities registered pursuant to Section 12(b) of the Act: Common Stock $.01
par value
Securities registered pursuant to Section 12(g) of the Act: Series A Preferred
Stock $.01 par value
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 requirement for the past 90 days.
YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filer pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES [ ] NO [X]
i
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act.
YES [ ] NO [X]
On December 31, 2004, the aggregate market value of the voting common
equity of Interpharm Holdings, Inc., held by non-affiliates of the Registrant
was $14,812,796 based on the closing price of $2.45 for such common stock on
said date as reported by the American Stock Exchange.
On September 27, 2005, we had 32,338,607 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain information required by Part III (Items 10, 11, 12, and 14) is
incorporated by reference to the Registrant's definitive proxy statement (the
"2005 Proxy Statement") in connection with its 2005 annual meeting of
stockholders, which is to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A of the Securities Exchange Act of 1934.
ii
INTERPHARM HOLDINGS, INC.
Form 10-K
Fiscal Year Ended June 30, 2005
Table of Contents
PART I Page
Item 1. Business..........................................................1
Item 2. Properties.......................................................16
Item 3. Legal Proceedings................................................18
Item 4. Submission of Matters to a Vote of
Security Holders...............................................18
PART II
Item 5. Market for Common Stock
and Related Stockholder Matters................................19
Item 6. Selected Financial Data..........................................23
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................24
Item 7A. Quantitative and Qualitative Disclosure
About Market Risk..............................................47
Item 8. Financial Statements and Supplementary Data......................47
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosures..........................................47
Item 9A. Controls and Procedures..........................................47
PART III
Item 10. Directors and Executive Officers
of the Registrant..............................................49
Item 11. Executive Compensation...........................................49
Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters............................................49
Item 13. Certain Relationships and Related
Transactions...................................................49
Item 14. Principal Accounting Fees and Services...........................50
Item 15. Exhibits, Financial Statement Schedules
and Reports on Form 8-K........................................50
Signatures....................................................................53
Financial Statements.........................................................F-1
iii
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.
PART I
ITEM 1. BUSINESS
Company History
Interpharm Holdings, Inc., (the "Company" or "Interpharm"), through its
operating wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and
collectively with Interpharm, "we" or "us") is engaged in the business of
developing, manufacturing and marketing generic prescription strength and
over-the-counter pharmaceutical products. On May 30, 2003, Interpharm, Inc. was
acquired by ATEC Group, Inc. ("ATEC") which then changed its name to Interpharm
Holdings, Inc. In that transaction, ATEC acquired all of the issued and
outstanding shares of Interpharm, Inc. in exchange for both ATEC common and
preferred stock. Concurrently with the acquisition of Interpharm, Inc., ATEC
sold its then existing computer/systems integration business to certain members
of ATEC management who simultaneously resigned from ATEC. These transactions
were approved by our shareholders on May 29, 2003 and are fully described in
ATEC's definitive proxy statement, filed with the Securities and Exchange
Commission on May 2, 2003.
We currently make sales both under our own label and to wholesalers,
distributors, repackagers, and other manufacturers which sell our products under
their labels. We currently manufacture and market 23 generic drug products,
which represent various oral dosage strengths for 13 unique products. Of these,
we hold seven Abbreviated New Drug Applications ("ANDA") for fourteen of these
products. The remaining products are manufactured under an over-the-counter
monogram or are drugs which do not otherwise require ANDAs. We also manufacture
fourteen generic products which are various dosage strengths of four unique
products for United Research Laboratories, Inc. and Mutual Pharmaceutical
Company, Inc.
Our Business and Expansion Plan
Our focus in the past has been primarily on cost-effective manufacturing
of a limited number of products. As part of our ongoing expansion plan, we are
in the process of transforming the Company into a full service generic products
provider. To that end, over the past year, we have focused primarily on
improving the infrastructure throughout our organization. First, we have added a
number of key personnel, which includes the appointment of Cameron Reid as Chief
Executive Officer, Jeffrey Weiss as an Executive Vice President, who runs our
new Sales and Marketing Division, Kenneth Cappel as Senior Vice President of
Intellectual Property, as well as a Vice President of Operations and a Director
of Logistics. We also continued to hire qualified supervisors, managers and
regulatory compliance personnel to improve efficiency of operations and ensure
regulatory compliance. We believe that these improvements in our infrastructure
development will allow us to increase capacity at our current manufacturing
facility, thereby allowing us to pursue new customers for our existing product
line. We have also focused a significant amount of our resources over the past
year to accelerate our new product development. In addition, we have also begun
the process of shifting our strategy in sales and marketing to a direct sales
mode whereby we will independently market our products to a broad base of
customers including, major chains, wholesalers, distributors, managed care
entities and government agencies without relying on outside parties. We continue
to take advantage of our ability to source raw materials and purchase equipment
at advantageous prices. Finally, we have almost completed all the necessary
renovations at our location in Yaphank, New York, and, subsequent to year end we
have begun the process to secure land to build a research and development
facility in Ahmedabad, India.
1
In order to finance our expansion plan, we have been utilizing our $21
million advised line of credit obtained from HSBC Bank. While we will continue
to rely on this advised credit line, continuing with our expansion plan will be
dependent on our ability to raise additional capital through either additional
debt financing or through an equity investment, the availability of which cannot
be assured. If we are unable to obtain sufficient funds, we will have to either
delay or scale back on our expansion plan. However, we do not believe our
existing business would be materially adversely affected.
Research and Development
We currently anticipate filing over 25 ANDAs over the next 24 months. We
believe that this is a significant increase from our past filings of
approximately one per year. In order to achieve our objectives, we have already
taken significant steps to improve the infrastructure of the Company. First, we
have entered into strategic development partnerships with third parties to
supplement and accelerate our research and development efforts. In fact, our
previously announced contracts with Tris Pharma, Inc. ("Tris"), which are
addressed in detail below, not only accelerate our product development efforts
in liquids, softgels and drugs that exhibit certain special release
characteristics, but they also allow the use by our own research and development
team of the technology for those drugs for other products.
We intend to move a majority of our research and development efforts to
our new facility in Yaphank, New York before the end of this calendar year. This
move will increase nearly five fold our physical facilities devoted to research
and development in the United States. In addition, we have begun the process to
secure land in Ahmedabad, India on which we plan to build a 40,000 square foot
facility, which will be used primarily for research and development. This
facility is also anticipated to be used for the processing of bulk active
pharmaceutical ingredients ("API") in preparation for finished goods
manufacturing in the United States. However, there can be no assurance that we
will be successful in constructing this planned facility.
We believe that once our facility in India is operational, we should be
able to capitalize on the availability of highly qualified scientific and other
research and development personnel at significant cost savings, thereby
supplementing our continuing research and development activities in the United
States. Regulatory compliance, manufacturing of product for use in bio
equivalency studies, and filing of ANDAs will all continue to be done at our
research and development facility in the United States. We believe our planned
India facility will reduce our reliance on third parties for the development of
our product line, thereby reducing the risk that we will either not be able to
develop certain products or that we will not be able to develop such products in
a timely manner. We will, however, continue to evaluate opportunities with
outside companies on certain products such as those requiring specialized
technologies.
2
In order to execute our business plan, we will have to spend a significant
amount of money on research and development. During the fiscal year ended June
30, 2004, we spent approximately $538,000 on research and development. During
the six-month period ended December 31, 2004, we spent approximately $539,000 on
research and development. As we began to implement our plan during the first six
months of this calendar year, we spent approximately $3,464,000 on research and
development. In order to implement our business plan, we will have to continue
to spend on research and development at an even more accelerated pace over the
next two years. However, there can be no assurance that our increased research
and development expenditures will result in successful products or increased
revenues or profits or that we will have sufficient funds to do so.
During the fiscal year ended June 30, 2005, our research and development
efforts were limited to solid oral dosage products. The research and development
of oral solid dosage products requires studies and FDA review and approval which
have historically taken approximately two to three years. However, the length of
time necessary to bring a product to market can vary significantly and can
depend on, among other things, availability of funding, problems relating to
formulation, safety or efficacy, patent issues associated with the product or
barriers to market entry from brand-name product manufacturers.
We contract with outside laboratories to conduct biostudies, which, in the
case of oral solids, generally are required for FDA approval. Historically, the
vast majority of our research and development expenditures have been on
biostudies. While we believe that the companies contracted to perform the
biostudies are reliable, there can be no assurance that they will use the proper
due diligence or that their work will otherwise be accurate.
The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed and approved despite the amount spent on
research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
Our Product Pipeline
Our new product development is currently focused in the following six
areas:
1. Female Hormone Products
As previously reported in July, 2005, we have already entered into an
agreement with Centrix Pharmaceutical, Inc. ("Centrix") for the sale of our
first female hormone product. That agreement commenced upon the first shipment
of the product to Centrix in August, 2005 and has a ten year term but, under
certain circumstances, may be terminated by Centrix at any time after the first
year of the agreement's term. Pursuant to the terms of the agreement, Centrix is
required to purchase a minimum $11.5 million of the product during the first
year of the agreement's term. There are also additional annual minimum purchase
requirements after the first year of the agreement's term for so long as the
agreement remains in effect. In the event that the Agreement is terminated at
any time, or for any reason, we maintain the right to market the product alone
or with a third party.
3
The manufacturing of the female hormone products requires a dedicated
facility and equipment with special air handling that is segregated from the
rest of our facility. These specialized requirements create significant barriers
to entry to the female hormone product market because many companies do not
invest the capital resources to develop such a facility and ensure that there is
no "cross contamination" with the manufacturing area for the other products that
they manufacture. We already have the necessary facility and equipment in place
and therefore, our product development strategy includes expanding this product
line to include a full line of oral contraceptives.
2. Scheduled Narcotics
"Scheduled" narcotics are narcotic drugs with the potential for abuse as
designated pursuant to the Controlled Substances Act (CSA), 21 U.S.C. ss. 801
et. seq. These drugs require special handling, tracking and record keeping, as
well as strict adherence to other Drug Enforcement Agency ("DEA") regulations,
and stringent oversight and inspection by the DEA. Pursuant to a previously
announced agreement with Watson Pharmaceuticals, Inc. ("Watson"), we are
distributing Hydrocodone Bitartrate and Ibuprofen Tablets, 5 mg/200 mg, our own
branded generic drug which is sold under the name Reprexain(R), for which we
received an approval for our ANDA from the U.S. Food and Drug Administration
("FDA") on May 18, 2004. We are also currently producing, and have received an
ANDA for, Hydrocodone Bitartrate and Ibuprofen Tablets, 7.5 mg/200 mg, which is
a generic version of the branded drug Vicoprofen(R) under a separate agreement
with Watson.
The regulatory requirements with respect to the handling, storage,
segregation, filing and record keeping required for scheduled narcotics, and the
inherent DEA oversight that accompanies it, create significant barriers to entry
to the market for these products. We are already in compliance with these
regulatory requirements. Therefore, as part of our expansion plan, we have begun
development of a number of additional products in this area with the objective
of expanding to a full line of scheduled narcotics.
3. Liquid Products
Our agreement with Tris is for the development and licensing to us of up
to 25 liquid products. The production of these products requires dedicated
equipment, and competition in this area has historically been limited.
4. Special Release Characteristics
Subsequent to year end, we amended the second agreement with Tris to
increase the number of solid oral dosage products for certain drugs which have
special release characteristics such as delayed release technology being
developed to eight. Products such as these are often difficult to formulate,
which results in limited competition and, therefore, creates an opportunity to
derive greater profits. We believe that we will be able to capitalize on the
technology that we will receive from Tris in that we should be able to use such
technology to develop similar products in the future using our internal research
and development team.
4
5. Softgels
Our second agreement with Tris, as amended, also provides for the
development of two softgel products. Like liquid products, softgel products
require dedicated equipment in a segregated area. As such, competition for
softgel products is limited since many companies do not devote the capital
resources to develop the infrastructure to develop these products.
6. Off-Patent Products
Over the next several years there are a large number of successful
patented brand drugs for which the patents are due to expire. We have targeted a
number of these drugs for development, manufacturing and sale.
For most of these products, the ability to derive and maintain market
share is contingent on being able to commercially launch the product at the time
of expiration of relevant patents and any exclusivity periods. Therefore, it is
important that we meet our product development schedule so as to ensure our
ability to commercially launch on the relevant date. In order to accomplish this
goal, we have outsourced the research and development of certain of these
products where doing so will allow us to file in a timely manner. In addition,
as previously discussed, we are devoting many of our resources to increasing our
internal product development capabilities to limit the risk that we will be late
to market with these products.
We are confident that we have targeted product areas and specific products
in those areas that will enable us to move away from the commodity type products
that we have historically manufactured. We have not only targeted products with
a view towards revenue potential and our ability to achieve market share, but we
have also been mindful of increasing the diversity of products in our pipeline,
and in certain product areas, a full line of products within that area. We
believe that the diversity of our pipeline will, as we launch the products, be a
significant factor which should increase our ability to attract customers and
achieve market share.
Recent Product Launches
We have had two product launches since June 30, 2005. First, in August,
2005, we launched our first female hormone product. Second, in September, 2005,
we launched Sulfamethoxazole and Trimethoprim ("SMT") single and double strength
tablets, which are sold under the name Bactrim(R). SMT is a widely used
antibiotic used to treat infections such as urinary tract infections,
bronchitis, ear infections (otitis), traveler's diarrhea, and Pneumocystis
carinii pneumonia. We have already entered into a number of sales contracts for
SMT and shipments have commenced.
5
Personnel
Previously, our business principally relied upon a small number of
individuals who performed multiple tasks without specialization in particular
areas. As part of the effort to become a full service generic company, it was
necessary to add new high level management, as well as various other employees
in key and specialized positions. We believe that our new management, along with
our other key employees, will improve our efficiency, productivity and
profitability in our existing and base businesses, which already produced
approximately 4 billion tablets during the fiscal year ended June 30, 2005.
As previously reported, in January, 2005, we appointed Cameron Reid as our
Chief Executive Officer. From 1992 through March 2004, Mr. Reid was the
President of Dr. Reddy's Laboratories, Inc. Prior to joining Dr. Reddy's, Mr.
Reid was an Executive Vice President of, and headed Roussel Corp., a division of
Roussel UCLAF, a pharmaceutical company based in Montvale, New Jersey. Mr. Reid
has helped us to formulate our business plan and is currently actively involved
in its execution.
In order to generate new sales opportunities, assist in product selection
and product development strategy and support new product launches, Jeffrey Weiss
has been appointed as an Executive Vice President. Mr. Weiss has over 17 years
of industry experience, most recently serving as Chief Executive Officer of
Glenmark Pharmaceuticals Inc., USA and Vice President of Sales for Dr. Reddy's
Laboratories, Inc.
In order to evaluate intellectual property issues internally and to assist
in our product development strategy, we hired Kenneth Cappel, Esq. as our Senior
Vice President of Intellectual Property. Mr. Cappel has over 16 years of
experience with a number of companies including Dr. Reddy's Laboratories, Inc.,
Schering-Plough Research Institute and Budd-Larner, P.C.
In addition to hiring several key high level employees, we have
strengthened the infrastructure of our operations at the supervisor levels and
manager levels, as well as hiring a Vice President of Operations and a Director
of Logistics, each of whom has extensive experience. We believe that these
individuals will increase efficiency at our current facility in Hauppauge, New
York which will enable us to increase capacity at that facility and increase
sales on our existing product line.
Facilities
In order to support our expansion plan, we have, during the fiscal year
ended June 30, 2005, upgraded our physical infrastructure, and have taken steps
for future upgrades.
On June 29, 2004, we closed the acquisition of a 92,000 square foot
facility on thirty seven acres of land, located in Yaphank, New York. The new
facility, which is located in Suffolk County, New York's Brookhaven Empire Zone,
includes an additional 16,000 square feet of mezzanine space which will be used
for our research and development efforts. Interpharm now has two facilities with
a combined size of over 200,000 square feet. We are currently in the process of
renovating the new facility and anticipate that we will be able to commence
research and development activity there by December, 2005. In addition, we are
continuing our efforts to prepare the facility for manufacturing and anticipate
that it will be ready for FDA inspection during the first quarter of calendar
2006.
6
As set forth above, during the fiscal year ended June 30, 2005, we began
the process to acquire land in India for a planned approximately 40,000 square
foot facility in Ahmedabad, India, which, when acquired, will be used for
research and development as well as processing of bulk API in preparation for
finished goods manufacturing in the United States. As set forth above, we
believe that having a facility in India can allow us to capitalize on the
availability of qualified scientific and other research and development
personnel at significant cost savings, and could also supplement our continuing
research and development activities in the United States.
Strategic Alliances:
Tris Pharma, Inc.
On February 24, 2005 Interpharm, Inc., our subsidiary, entered into two
agreements with Tris for the development and licensing of up to twenty-five
immediate release liquid generic products and seven solid oral dosage generic
pharmaceutical products (the "Solids Contract"). In addition, we amended the
Solids Contract to include an additional solid oral dosage product and two soft
gel products. In the event that Tris delivers twenty-five products under the
liquids agreement, of which there can be no assurance, Tris is to receive
approximately $2.9 million in development fees from us and, in addition, Tris is
to receive a royalty of between 10% and 12% of net profits resulting from the
sales of each product. We are entitled to offset the royalty payable to Tris
each year, at an agreed upon rate, to recoup the development fees paid to Tris
under the liquids agreement.
Pursuant to the terms of the Solids Agreement, as amended, we and Tris are
to collaborate on the development, manufacture and marketing of eight solid oral
dosage generic products and two soft gel products, some of which may require us
to challenge the patents for the equivalent branded products. The Solids
Agreement, as amended provides for payments of an aggregate of $4.5 million to
Tris. The Solids Agreement, as amended, also provides for an equal sharing of
net profits for all but one product that is successfully sold and marketed,
after the deduction and reimbursement to us of all costs incurred by us in the
development and marketing of the solid products, including the amounts paid to
Tris under the contract. The other product provides for a profit split of 60%
for us and 40% for Tris.
As we develop our research and development capabilities, the Tris
agreements have allowed us to bring in-house several specialized technologies
which would otherwise not be available to us, and which can allow us to
manufacture and sell more higher margin and profitable products.
Centrix Pharmaceutical, Inc.
As previously reported, effective in August, 2005, we commenced shipments
pursuant to an agreement with Centrix whereby Centrix will have exclusive
distribution rights in the United States to a female hormone product that is
manufactured and supplied by Interpharm. Pursuant to its terms, the agreement
became effective in August, 2005 when Interpharm commenced shipment of the
product to Centrix.
7
The agreement has a ten year term but , under certain circumstances, may
be terminated by Centrix at any time after the first year of the agreement's
term is completed. Pursuant to the terms of the agreement, Centrix is required
to purchase at least $11.5 million of the product during the first year of the
agreement's term. There are also additional annual minimum purchase requirements
after the first year of the agreement's term for so long as the agreement
remains in effect. In the event that the Agreement is terminated at any time, or
for any reason, the Company maintains the right to market the product alone or
with a third party.
Industry
The Generic Drug Market and Necessary Approvals
Pharmaceutical products in the United States are generally marketed as
either "brand-name" or "generic" drugs. Brand-name products are drugs generally
sold by the holder of the drug's patent or through an exclusive marketing
arrangement. A company that receives approval for a new drug application ("NDA")
from the U.S. Food and Drug Administration ("FDA"), usually the patent holder,
has the exclusive right to produce and sell the drug for about 20 years from the
date of filing of the patent application. This market exclusivity generally
provides brand-name products the opportunity to build up physician and customer
loyalties.
Once a patent on a drug expires, a manufacturer can obtain FDA approval to
market a "generic" version. A generic drug is therefore usually marketed after
the patent on a brand drug expires and is comparable to a brand-name drug. In
fact, the FDA requires that generic drugs have the same quality, strength,
purity, identity and efficacy as brand-name drugs. While comparable to
brand-name drugs, generic drugs are usually far less costly than brand-name
drugs, resulting in substantial savings to consumers, healthcare providers and
hospitals. These cost savings have resulted in sustained growth of the generic
pharmaceutical industry in the United States. According to a Congressional
Budget Office study, "How Increased Competition from Generic Drugs has Affected
Prices and Returns in the Pharmaceutical Industry," (available at
HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0) in 1984, 19% of
prescription drugs sold in the United States were generic. According to a
Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to
Patent Expiration," (available at
HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF) that figure reached more
than 47%.
Much of the growth of the generic pharmaceutical industry has been
attributed to The Drug Price Competition and Patent Term Restoration Act of 1984
(the "Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Now, there is an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that the generic product is
bioequivalent to the brand-name product through the filing of an abbreviated new
drug application ("ANDA"). The ANDA may rely on information from the brand-name
drug's application with the FDA.
8
On June 12, 2003, the FDA announced new regulations and procedures to
improve implementation of the Waxman-Hatch Act. The new regulations and
procedures are aimed at reducing the time it takes to bring generic drugs to the
market and expanding educational programs to assist health care practitioners
and consumers to get accurate information about the availability of generic
drugs. The FDA has estimated that the new regulations and procedures will reduce
the typical time for generic drug approvals by three months or more over the
next three to five years and will save consumers approximately $35 billion over
10 years.
Government Regulation
FDA approval is required before any generic drug can be marketed through
an ANDA. While the FDA has significantly streamlined the process of obtaining
ANDA approval for generic drugs, it is difficult to predict how long the process
will take for any specific drug. In fact, the length of time necessary to bring
a product to market can vary significantly and can depend on, among other
things, availability of funding, problems relating to formulation, safety or
efficacy, patent issues associated with the product or barriers to market entry
from brand-name product manufacturers. Therefore, there is always the risk that
the introduction of new products can be delayed.
The ANDA process requires that a company's manufacturing procedures and
operations conform to FDA requirements and guidelines, generally referred to as
current Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in such
areas as production and quality control to ensure full technical compliance. The
evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to comply with regulatory
requirements.
The ANDA process also requires bioequivalency studies to show that the
generic drug is bioequivalent to the approved drug. Bioequivalence compares the
boavailability of one drug product with that of another formulation containing
the same active ingredient. When established, bioequivalency confirms that the
rate of absorption and levels of concentration in the bloodstream of a
formulation of the approved drug and the generic drug are equivalent.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the same
therapeutic effect.
We contract with outside laboratories to conduct biostudies. Historically,
the vast majority of our research and development expenditures have been on
biostudies. While we believe that the companies contracted to perform the
biostudies are reliable, there can be no assurance that they will use the proper
due diligence or that their work will otherwise be accurate.
9
Supplemental ANDAs are required for approval of various types of changes
to an approved application, and these supplements may be under review for six
months or more. In addition, certain types of changes may only be approved once
new bioequivalency studies are conducted or other requirements are satisfied.
The scientific process of developing new products and obtaining FDA
approval is complex, costly and time consuming and there can be no assurance
that any products will be developed and approved despite the amount spent on
research and development. The development of products may be curtailed in the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
Even if an ANDA is approved, brand-name companies can impose substantial
barriers to market entry which may include: filing new patents on drugs whose
original patent protection is about to expire, developing patented
controlled-release products or other product improvements, developing and
marketing, as over-the-counter products, brand-name products that will soon face
generic competition, and commencement of marketing initiatives, regulatory
activities and litigation. While none of these actions have been taken against
us to date, there can be no assurance that they will not be taken in the future,
particularly as we significantly expand our product development efforts.
In addition to the Federal government, individual states have laws
regulating the manufacture and distribution of pharmaceuticals, as well as
regulations pertaining to the substitution of generic drugs for brand-name
drugs. Our operations are subject to regulation, licensing requirements and
inspection by the states in which we are located or conduct business.
We must also comply with federal, state and local laws of general
applicability, such as laws regulating working conditions and equal opportunity
employment. Additionally, we are subject, as are all manufacturers, to various
federal, state and local environmental protection laws and regulations,
including those governing the discharge of materials into the environment.
Historically, the costs of complying with such environmental provisions
have not had a material adverse effect on our earnings, cash requirements or
competitive position, and we do not expect such costs to have any such material
adverse effect in the foreseeable future. However, if changes to such
environmental provisions are made that require significant changes in our
operations or the expenditure of significant funds, such changes could have a
material adverse effect on our earnings, cash requirements or competitive
position.
As a public company, we are subject to the Sarbanes-Oxley Act of 2002 (the
"SOX Act"). The SOX Act contains a variety of provisions affecting public
companies, including the relationship with its auditors, prohibiting loans to
executive officers and requiring an evaluation of its disclosure controls and
procedures and internal controls.
The federal government made significant changes to Medicaid drug
reimbursement as part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA").
Generally, OBRA provides that a generic drug manufacturer must offer the states
an 11% rebate on drugs dispensed under the Medicaid program and must enter into
a formal drug rebate agreement with the Federal Health Care Financing
Administration. Although not required under OBRA, we have also entered into
similar agreements with various states.
10
Continuing studies of the proper utilization, safety and efficacy of
pharmaceutical products are being conducted by the pharmaceutical industry,
government agencies and others. Such studies, which increasingly employ
sophisticated methods and techniques, can call into question the utilization,
safety and efficacy of previously marketed products. There can be no assurances
that these studies will not, in the future, result in the discontinuance of
product marketing.
We currently hold 7 ANDAs and, as set forth above, plan to file
approximately 25 ANDAs during the two year period following the date of this
report. There can be no assurances, however, that the FDA will ultimately
approve the drugs that are under development or that ANDAs will be issued.
Raw Materials
Most of the raw materials that we use in the manufacturing of our products
consist of pharmaceutical chemicals in various forms, which are available from
various sources. FDA approval is required in connection with the process of
selecting active ingredient suppliers. In selecting a supplier, we consider not
only their status as an FDA approved supplier, but consistency of their
products, timeliness of delivery, and price.
Marketing Strategy
During the fiscal year ended June 30, 2005, approximately 45% of our sales
were made under our own label. The remaining 55% were manufactured and delivered
to our wholesalers and distributors which sell our products under their own
labels. In addition, during this period, two of our customers collectively
accounted for approximately 45% of our total sales. For the same period in 2004,
two of our customers accounted for approximately 55% of our total sales. Except
as described below, we do not have contracts with any of these customers. During
the fiscal year ended June 30, 2005, we had a contract with the Department of
Veterans Affairs for the supply of Ibuprofen through a prime vendor, which
accounted for 11% of our total sales, as compared to 10% for the fiscal year
ended June 30, 2004. The loss of any of our largest customers could have a
material adverse effect on our business. As is the case with our largest
customers, most of our other sales for the fiscal year ended June 30, 2005 were
not made pursuant to contracts, but pursuant to individual purchase orders.
Therefore, although we have very strong relationships with our customers, there
is nothing requiring many of them to continue to purchase our products and there
can be no guarantee that they will continue to do so.
Our marketing strategy has undergone significant changes as a result of
the implementation of our expansion plan. Our current marketing strategy focuses
on obtaining a broader customer base and making more direct sales. With a
broader customer base, we believe that we will be able to have a stable sales
and production cycle for our products, as well as an easily accessible market
for our new products. By making more direct sales, we believe that we can
maximize value and profits by eliminating intermediaries as well as offer better
customer service and improve and strengthen our customer relationships. We have
begun to realize the benefits of this marketing strategy through the two recent
launches of our female hormone product, as well as SMT where, in each case, we
will realize significantly higher gross margins than we have historically
achieved. In addition, with our launch of SMT, we have been able to make sales
to national accounts as well as expand our customer base. This strategy has also
provided us with benefits to our existing product line in that we have been able
to sell both Ibuprofen and Naproxen to some of these new accounts.
11
Consistent with industry practice, we have a returned goods policy.
Pursuant to our policy, any unopened item in its original packaging may be
returned if accompanied by (i) an authorization form obtained from Interpharm,
and a "Returned Goods Authorization Number" with a proof of purchase.
Transportation charges for returns are paid by the customer. If the foregoing
procedures are followed, we will return the customer's original purchase price
or the current market price, whichever is lower.
Pursuant to our return policy, we will not accept any of the following for
return: (i) short-dated products (14 months or less remaining on the expiration
date), (ii) expired products, products which have been opened, tampered with or
which have a broken seal, (iii) products which have stickers or other price
markings, (iv) products which have been damaged by improper handling, fire,
flood or other catastrophes, (v) products stored under conditions other than as
specified on the label, (vi) products returned by someone other than the direct
purchaser, or (vii) products without proof of purchase.
We have not experienced returns of material quantities of any of the
products we sell and therefore, do not believe that we are subject to material
risk of inventory buildup attributable to returns.
Products:
Interpharm's Product Line
Below is a list of the drugs that we manufacture, including the drugs that
we are currently manufacturing pursuant to our agreement with URL/Mutual. The
names of all of the drugs under the caption "Brand-Name Drug" are registered
trademarks. The holders of the registered trademarks are non-affiliated
pharmaceutical manufacturers.
12
Product Name BRAND-NAME DRUG
------------ ---------------
1. Acetaminophen, 500 mg White Tablets Tylenol(R)
2. Acetaminophen, 500 mg White Caplets Tylenol(R)
3. Acetaminophen, 325 mg White Tablets Tylenol(R)
4. Allopurinol, 100 mg White Tablets* Zyloprim (R)
5. Allopurinol, 300 mg White Tablets* Zyloprim (R)
6. Atenolol, 25 mg White Tablets* Tenormin (R)
7. Atenolol, 50 mg White Tablets* Tenormin (R)
8. Atenolol, 100 mg White Tablets* Tenormin (R)
9. Clorpheniramine Maleate, 4mg Yellow Tablets Chlortrimetron(R)
10. Ibuprofen, 200mg White Tablets Advil(R)
11. Ibuprofen, 200mg Brown Tablets Advil(R)
12. Ibuprofen, 200mg Orange Tablets Motrin(R)
13. Ibuprofen, 200mg White Caplets Advil(R)
14. Ibuprofen, 200mg Brown Caplets Advil(R)
15. Ibuprofen, 200mg Orange Caplets Motrin(R)
16. Ibuprofen, 400mg White Tablets Motrin(R)
17. Ibuprofen, 600mg White Tablets Motrin(R)
18. Ibuprofen, 800mg White Tablets Motrin(R)
19. Isometheptene Mucate, Dichloralphenazone,
Acetaminophen, Red/Red Capsule, 65mg/100mg/325mg Midrane(R)
20. Naproxen, 250mg White Tablets Naprosyn(R)
21. Naproxen, 375mg White Tablets Naprosyn(R)
22. Naproxen, 500mg White Tablets Naprosyn(R)
23. Pseudoephedrine HCl, 60mg White Tablets Sudafed(R)
24. Pseudoephedrine HCl, Triprolidine HCl White
Tablets, 60mg/2.5mg Actifed(R)
25. Amitriptyline HCl Tablets, 10mg* Endep(R) and Elavil(R)
13
26. Amitriptyline HCl Tablets, 25mg* Endep(R) and Elavil(R)
27. Amitriptyline HCl Tablets, 50mg* Endep(R) and Elavil(R)
28. Amitriptyline HCl Tablets, 75mg* Endep(R) and Elavil(R)
29. Amitriptyline HCl Tablets, 100mg* Endep(R) and Elavil(R)
30. Amitriptyline HCl Tablets, 150mg* Endep(R) and Elavil(R)
31. Prednisone, 5mg* Deltasone(R)
32. Prednisone, 10mg* Deltasone(R)
33. Prednisone, 20 mg* Deltasone(R)
34. Aspirin, 81mg Ecotrin(R)
35. Acetaminophen and Diphenhydramine Tylenol PM(R)
HCl Tablets, 500 mg / 25 mg
36. Hydrocodone Bitartrate and Vicoprofen(R)
Ibuprofen Tablets, 7.5 mg / 200 mg
37. Hydrocodone Bitartrate and Reprexain(R)
Ibuprofen Tablets,and 5 mg / 200 mg
* Manufactured, on a contract basis, for URL/Mutual, which holds the ANDA
for the product.
COMPETITION
The generic pharmaceutical industry is intensely competitive. The primary
means of competition involve manufacturing capabilities and efficiencies,
innovation and development, timely FDA approval, product quality, marketing,
reputation, level of service, including the maintenance of sufficient inventory
levels to assure timely delivery of products, product appearance and price.
Often, price is the key factors in the generic pharmaceutical business.
Therefore, to compete effectively and remain profitable, a generic drug
manufacturer must manufacture its products in a cost effective manner. We
believe that we maintain adequate levels of inventories to meet customer demand
and have them readily available. In addition, the modernization of our facility,
hiring of experienced staff, and implementation of quality control programs have
improved our competitive position in recent years.
During the past several years the number of chain drug stores and
wholesaler customers have declined due to industry consolidation. In addition,
the remaining chain drug stores and wholesaler customers have instituted buying
programs that have caused them to buy more products from fewer suppliers. At the
same time, mail-order prescription services and managed care organizations have
grown in importance and they also limit the number of vendors. The reduction in
the number of our customers and limitation on the number of vendors by the
remaining customers has increased competition among generic drug marketers.
However, these pressures have not had a material adverse impact on our business
and we believe that we have good relationships with our key customers.
14
In addition to generic manufacturers, we have also experienced competition
from brand-name companies that have purchased generic companies or license their
products to generic companies prior to, or as relevant patents expire. No
further regulatory approvals are required for a brand-name manufacturer to sell
its pharmaceutical products directly or through a third party to the generic
market, nor do such manufacturers face any other significant barriers for entry
into such market.
As is the case with many generic pharmaceutical manufacturers, many of our
competitors have longer operating histories and greater financial resources than
us. Consequently, some of these competitors may have larger production
capabilities, may be able to develop products at a significantly faster pace at
a reduced cost, and may be able to devote far greater resources to marketing
their product lines.
Certain manufacturers of brand-name drugs and/or their affiliates have
been introducing generic pharmaceutical products equivalent to such brand-name
drugs at relatively low prices. Such pricing, with its attendant diminished
profit margins, could have the effect of inhibiting us and other manufacturers
of generic pharmaceutical products from developing and introducing generic
pharmaceutical products comparable to certain brand-name drugs. Also,
consolidation among wholesalers, distributors, and repackagers, and
technological advances in the industry and pricing pressures from large buying
groups, may create pricing pressure, which could reduce our profit margins on
our product lines.
In addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products being
reintroduced into the market, has led to an increase in demands by customers for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on our earnings.
Brand-name companies also pursue other strategies to prevent or delay
generic competition. These strategies may include: seeking to establish
regulatory and legal obstacles that would make it more difficult to demonstrate
bioequivalence, initiating legislative efforts in various states to limit the
substitution of generic versions of certain types of brand-name pharmaceuticals,
instituting legal action that automatically delays approval of generic products,
the approval of which requires certifications that the brand-name drug's patents
are invalid or unenforceable, or introducing "second generation" products prior
to the expiration of market exclusivity for the reference product, obtaining
extensions of market exclusivity by conducting trials of brand-name drugs,
persuading the FDA to withdraw the approval of brand-name drugs, for which the
patents are about to expire, thus allowing the brand-name company to obtain new
patented products serving as substitutes for the products withdrawn, or seeking
to obtain new patents on drugs for which patent protection is about to expire.
15
The ability of brand-name companies to successfully delay generic
competition in any of our targeted new product lines may adversely affect our
ability to enter into the desired product line or may impact our ability to
attain our desired market share for that product.
The Food and Drug Modernization Act of 1997 includes a pediatric
exclusivity provision that may provide an additional six months of market
exclusivity for indications of new or currently marketed drugs if certain agreed
upon pediatric studies are completed by the applicant. Brand-name companies are
utilizing this provision to extend periods of market exclusivity.
BACKLOG
We do not have a significant backlog, as we normally deliver products
purchased by our customers within a short time of the date of order.
PATENTS AND TRADEMARKS
We do not have any Patents or Trademarks that are currently used in our
business.
EMPLOYEES
As of June 30, 2005, we had 485 full time employees. We believe we have a
strong relationship with our employees. None of our employees are represented by
a union.
ITEM 2. PROPERTIES
Description of Property
We lease an entire building in Hauppauge, New York, pursuant to a
non-cancellable lease expiring in October, 2019, which houses our manufacturing,
warehousing and some of our executive offices. The leased building is
approximately 100,000 square feet and is located in an industrial/office park.
The current annual lease payments to the landlord, Sutaria Family Realty, LLC,
are $480,000. Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria
and Raj Sutaria, who collectively own 14,683,802 shares of our common stock,
456,562 shares of our Series A-1 Preferred Stock and 1,464,567 shares of our
Series K Preferred Stock and are the children of Dr. Maganlal K. Sutaria, the
Chairman of our Board of Directors, and the niece and nephews of Bhupatlal K.
Sutaria, our President. Mona Rametra is also the wife of our General Counsel and
Secretary, Munish K. Rametra. In addition, Raj Sutaria is an officer of
Interpharm, Inc. Upon a change in ownership of the Company, and every three
years thereafter, the annual base rent will be adjusted to fair market value, as
determined by an independent appraisal. There are no tenants in the building
other than us.
16
We also leased approximately 23,175 square feet of office space at 69 Mall
Drive in Commack, New York. The lease for this office space expired in May,
2005. The annual lease payments approximated $179,000. During the eleven months
ended May, 2005, we sublet approximately18,500 square feet for approximately
$138,000. We have sublet office space at 85 Adams Avenue in Hauppauge through
January 31, 2006 at a cost of $8,750 per month. Thereafter we intend to move
these employees to our facility in Yaphank, New York.
On June 29, 2004, pursuant to a contract entered into on November 14,
2003, and through our wholly owned subsidiary, Interpharm Realty, LLC, we
purchased a 92,000 square foot facility on thirty seven acres of land, located
at 50 Horseblock Road in Brookhaven, New York. The purchase price for the
building and land was approximately $9.4 million. The facility is located in
Suffolk County, New York's Brookhaven Empire Zone. As part of the on going
renovations, we are constructing a 16,000 square foot research and development
laboratory within the facility. Through June 30, 2005 we have spent an
additional $4.8 million in building renovations and equipment. We anticipate the
research and development portion to be operational sometime during the first
fiscal quarter of fiscal 2006.
17
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are involved in legal proceedings relating to our
business. Since the date of our last report on Form 10-Q for the fiscal quarter
ended March 31, 2005, we are unaware of any material pending or threatened legal
action or proceeding against us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the
fiscal quarter ended June 30, 2005.
18
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK
Our common stock is currently traded on the American Stock Exchange under
the symbol "IPA." The following table sets forth the high and low sale prices
for our common stock for the periods indicated as reported by the American Stock
Exchange. Such prices reflect inter-dealer prices, without retail mark-up,
markdown or commissions and may not necessarily represent actual transactions.
It should be noted that prior to May 30, 2003, the Company was in the
computer/systems integration business. On May 30, 2003, that business was sold
and Interpharm, Inc. was acquired. Accordingly, historical stock prices prior to
May 30, 2003 are not representative of our current business. On June 2, 2003,
our stock symbol changed from "TEC" to "IPA."
High Low
---- ---
2002
Quarter ended 9/30..................................... $ 0.44 $ 0.26
Quarter ended 12/31.................................... 0.85 0.26
2003
Quarter ended 3/31..................................... 0.72 0.54
Quarter ended 6/30..................................... 2.93 0.62
Quarter ended 9/30..................................... 8.90 3.30
Quarter ended 12/31.................................... 5.47 4.00
2004
Quarter ended 3/31..................................... 5.87 4.30
Quarter ended 6/30..................................... 4.80 2.45
Quarter ended 9/30..................................... 3.98 2.25
Quarter ended 12/31.................................... 3.49 2.20
2005
Quarter ended 3/31..................................... 2.58 1.50
Quarter ended 6/30..................................... 1.65 1.23
As of September 27, 2005, there were approximately 266 holders of record
of our common stock, 19 holders of record of Series A preferred shares, 290
holders of record of Series C preferred shares, 4 holders of record of Series K
Preferred Stock and 2 holders of record of Series A-1 Preferred Stock.
We do not currently pay dividends on our common stock. It is our current
intention not to declare or pay dividends on our common stock, but to retain
earnings for the operation and expansion of our business.
19
The holders of our Series A and Series A-1 preferred shares are entitled
to certain dividend payments upon declaration by the Board of Directors. The
Series A preferred shares are entitled to a cumulative dividend of 10% of par
value ($0.10 per share), when and as declared by our Board of Directors. The
Series B preferred shares are entitled to a non-cumulative dividend of $1.00 per
share. The Series A-1 preferred shares are entitled to a cumulative annual
dividend of $0.0341 per share when and as declared by our Board of Directors
(See "Series K and Series A-1 Preferred Stock" below).
SECURITIES AUTHORIZED FOR ISSUANCE UNDER
EQUITY COMPENSATION PLANS
The following table gives information about our common stock that may be
issued upon the exercise of options, warrants and rights under all of our equity
compensation plans as of June 30, 2005. The table includes the following plans:
1997 Stock Option Plan and 2000 Flexible Stock Plan.
Number of Number of securities
Securities to be remaining available
issued upon Weighted-average for future issuance
exercise of exercise price of under equity
outstanding outstanding compensation plans
options, warrants options, warrants (excluding securities
Plan Category and rights and rights reflected in column (a))
=================================================== ======================= ================= ============================
======================= ================= ============================
Equity compensation plans approved by security holders:
1997 Stock Option Plan 1,436,370 $ 1.97 -0-
2000 Flexible Stock Plan(1) 11,217,500 $ 0.89 5,211,938
=========== ========= ============
Total 12,653,870 $ 1.01 5,211,938
=========== ========= ============
================================================================================
(1) Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 20 million shares.
20
RECENT SALES OF UNREGISTERED SECURITIES
During the fiscal quarter ended June 30, 2005, we have made the following
sales of restricted securities:
On April 4, 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 cash of approximately $627,000 during the quarter. The shares were
issued in reliance upon Section 4(2) of the Securities Act.
SERIES K AND A-1 PREFERRED STOCK
The following is a summary of the designations, preferences and rights of
our Series K and Series A-1 preferred stocks, which is qualified, in its
entirety, by the certificate of designations, preferences and rights for the
Series K and A-1 preferred stocks (the "Certificates").
Series K
- Title. $.01 par value per share Series K Convertible Preferred
Stock.
- Voting. The Series K Stock is entitled to one vote per share, voting
together as a class with the holders of our Common Stock.
- Liquidation Preference. None.
- Dividend Rights. Same as Common Stock.
- Redemption Provisions. None.
- Amount Authorized. 3 million shares.
- Amount Outstanding. 1,464,567
- Conversion. The Series K Stock began converting into shares of our
Common Stock on June 4, 2004. On that date, 292,913 shares of Series
K Stock converted into 6,274,775 shares of Common Stock.
Additionally, on June 4, 2005, 292,913 shares of Series K Stock
converted into 6,274,775 shares of Common Stock. Assuming that the
accelerated vesting provisions of the Series K Stock Certificate
described below will not apply, the Series K shares will
automatically convert into a like amount on each June 4, 2006
through 2010, for an aggregate of an additional 31,373,875 shares of
common stock.
Under the terms of the accelerated vesting provisions of the Series K
Stock Certificate, and a separate agreement with the Series K holders in which
they agreed to forego certain rights they possessed pursuant to the terms of the
Series K Stock Certificate, in the event that (i) (a) any person or group other
than the holders of the Series K acquires 50% or more of Interpharm's common
stock or (b) if following a tender offer or proxy contest, the persons who were
previously Interpharm's directors do not constitute a majority of the Board of
Directors, and (ii) the Series K holders own less than 51% of Interpharm's
Common Stock, additional shares of Series K may convert at the request of the
Series K holders such that they own, in the aggregate, at least 51% of
Interpharm's Common Stock.
21
While the holders of the Series K have demand registration rights with
respect to the Common Stock to be issued upon conversion of the Series K, they
have not exercised that right as of the date of this Report. Therefore, all
common stock issued pursuant to Series K conversions aggregating 12,549,550 are
restricted.
Series A-1
- Title. $.01 par value per share Series A-1 Convertible Cumulative
Preferred Stock.
- Voting. No voting rights.
- Liquidation Preference. $0.682 per share.
- Dividend Rights. $0.0341 per share, per year, when and as declared
by our Board of Directors.
- Redemption Provisions. None.
- Amount Authorized. 5 million shares.
- Amount Issued. 4,855,389
- Conversion. Converts on a 1:1 basis into common stock upon:
i. the Company reaching $150 million in revenues;
ii. a merger, consolidation, sale of assets or similar
transaction; or
iii. a "Change in Control" which occurs if (a) any person, or any
two or more persons acting as a group, and all affiliates of
such person or persons, shall, acquire and own, beneficially,
50% or more of the common stock outstanding, or (b) if
following (i) a tender or exchange offer for voting securities
of the Company, or (ii) a proxy contest for the election of
directors of the Company, the persons who were directors of
the Company immediately before the initiation of such event
cease to constitute a majority of the Board of Directors of
the Company upon the completion of such tender or exchange
offer or proxy contest or within one year after such
completion.
22
ITEM 6. SELECTED FINANCIAL DATA
The following table presents summary financial data for the years ended
June 30, 2005 and 2004, the six-months ended June 30, 2003 and June 30, 2002 and
the three previous years ended December 31, 2002, 2001 and 2000. The summary
financial data set forth below with respect to our statements of operations for
the years ended December 31, 2001 and 2000 and the balance sheet data as at June
30, 2004 and 2003 and December 31, 2002, 2001 and 2000 was derived from our
consolidated financial statements which are not included in this Report. The
following summary financial data should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
Report.
Year Ended Year Ended Six Months Six Months Year ended Year ended Year ended
June 30, June 30, Ended June 30, Ended June December December 31, December 31,
2005 2004 2003 30, 2002 (1) 31, 2002 2001 2000
---- ---- ---- ------------ -------- ---- ----
Net Sales $39,910,970 $41,099,728 $14,953,438 $11,743,440 $24,312,245 $18,435,446 $11,391,326
Net (loss) income (149,432) 3,122,821 723,645 610,802 1,050,419 514,565 337,764
(Loss) Income per
common share:
Basic (0.01) 0.16 0.08 0.07 0.13 0.06 0.04
Diluted (0.01) 0.04 0.02 0.02 0.03 0.01 0.01
Balance Sheet Data
Total Assets 46,389,660 35,167,945 20,338,795 10,904,362 11,198,347 9,645,807 7,390,015
Long-term obligations 6,706,167 7,075,801 267,056 3,460,959 3,335,754 3,591,480 3,289,118
Cash dividend per
common share 0 0 0 0 0 0 0
(1) Unaudited.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Interpharm Holdings, Inc., (the "Company" or "Interpharm"), through its
operating wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and
collectively with Interpharm, "we" or "us") is engaged in the business of
developing, manufacturing and marketing generic prescription strength and
over-the-counter pharmaceutical products.
We currently make sales both under our own label and to wholesalers,
distributors, repackagers, and other manufacturers which sell our products under
their labels. We currently manufacture and market 23 generic drug products,
which represent various oral dosage strengths for 13 unique products. Of these,
we hold seven Abbreviated New Drug Applications ("ANDA") for fourteen of these
products. The remaining products are manufactured under an over-the-counter
monogram or are drugs which do not otherwise require ANDAs. We also manufacture
fourteen generic products which are various dosage strengths of four unique
products for United Research Laboratories, Inc. and Mutual Pharmaceutical
Company, Inc.
Our focus in the past has been primarily on cost-effective manufacturing
of a limited number of products. As part of our ongoing expansion plan, we are
in the process of transforming the Company into a full service generic products
provider. To that end, over the past year, we have focused primarily on
improving the infrastructure throughout our organization. First, we have added a
number of key personnel, which includes the appointment of Cameron Reid as Chief
Executive Officer, Jeffrey Weiss as an Executive Vice President in charge of
sales and marketing, Kenneth Cappel as Senior Vice President of Intellectual
Property, a Vice President of Operations and a Director of Logistics. These
individuals have over 75 years of combined experience in the pharmaceutical
industry. We also continued to hire qualified supervisors, managers and
regulatory compliance personnel to improve efficiency of operations and ensure
regulatory compliance. We believe that the addition of such key personnel, as
well as our continued commitment to improvements in our infrastructure through
capital expenditure on new equipment and upgrading current manufacturing
facility, will allow us to increase capacity at that facility, thereby allowing
us to pursue new customers for our existing product line. We have also focused a
significant amount of our resources over the past year to accelerate our new
product development.
Our marketing strategy has undergone significant changes as a result of
the implementation of our expansion plan. Our current marketing strategy focuses
on obtaining a broader customer base and making more direct sales. With a
broader customer base, we believe that we will be able to have a stable sales
and production cycle for our products, as well as an easily accessible market
for our new products. By making more direct sales, we believe that we can
maximize value and profits by eliminating intermediaries as well as offer better
customer service and improve and strengthen our customer relationships. We have
begun to realize the benefits of this marketing strategy through the two recent
launches of our female hormone product, as well as Sulfamethoxazole and
Trimethoprim ("SMT") where, in each case, we will realize significantly higher
gross margins than we have historically achieved. In addition, with our launch
of SMT, we have been able to make sales to national accounts as well as expand
our customer base. This strategy has also provided us with benefits to our
existing product line in that we have been able to sell both Ibuprofen and
Naproxen to some of these new accounts.
24
During the fiscal year ended June 30, 2004, we spent approximately
$538,000 on research and development. During the six-month period ended December
31, 2004, we spent approximately $539,000 on research and development. As we
begun to implement our business plan during the first six months of this
calendar year, we spent approximately $3,464,000 on research and development. We
will continue to spend on research and development at an even more accelerated
pace over the next two years.
We currently anticipate filing over 25 ANDAs over the next 24 months. In
an effort to help accelerate our product development, we have entered into
strategic development partnerships with third parties to supplement our internal
research and development efforts. In fact, our previously announced contracts
with Tris, not only accelerate our product development efforts in both liquids,
softgels and drugs that exhibit certain special release characteristics, but
they also allow our own research and development team to use the technology for
those drugs for other products.
Our new product pipeline pursuant to our expansion plan is focused in six
areas: female hormone products, scheduled narcotics, products requiring special
release characteristics, liquid products, softgel products and products coming
off patent. We have chosen some of these product areas because we possess
existing core competencies, and because management believes that competition in
these areas should be limited due to barriers to entry that we have overcome.
For example, female hormone products require a dedicated and segregated facility
with separate air handling and other equipment to avoid cross contamination. We
have already built such a facility, have the necessary equipment and are
producing female hormone products under our agreement with Centrix
Pharmaceuticals, Inc. Scheduled narcotics require compliance with regulations
governing their handling, storage, segregation, filing and record keeping which
create a significant barrier to entry to the market for these products. We are
already in compliance with these regulations and therefore, our product
development strategy includes expanding this line of products to a full line of
scheduled narcotics.
We have also entered into two agreements with Tris Pharma, Inc. ("Tris")
for the development of up to 25 immediate release liquid generic products, eight
solid oral dosage generic pharmaceutical products, and two softgel products.
Liquid and softgel products require dedicated equipment in a segregated area. We
are in the process of building liquid and softgel areas in our facilities. The
eight solid oral dosage products contain special release characteristics which
makes the formulation and further development of these products more difficult
than most generic products. We believe this creates a barrier to entry and
limits competition for such products. As part of our arrangement with Tris, we
will bring certain specialized technology in-house, and may be able to use such
technology for future product developments. We have also contracted with other
third parties to develop certain products that will be coming off patent in the
next few years. In order for us to maximize our market share and gross margins
for these products, it will be necessary for us to be in a position to launch
such products on the date of patent expiration and any applicable exclusivity
periods. We believe that between our internal developments and those that we
have outsourced to third parties, we can be in a good position to launch most of
these products on the critical dates.
25
We intend to move a majority of our research and development efforts to
our new facility in Yaphank, New York before the end of this calendar year. This
move will increase nearly five fold our physical facilities devoted to research
and development in the United States. In addition, we have begun the process to
secure land in Ahmedabad, India on which we plan to build a 40,000 square foot
facility, which will be used primarily for research and development. This
facility is also expected to be used for the processing of bulk active
pharmaceutical ingredients ("API") in preparation for finished goods
manufacturing in the United States. However, there can be no assurance that we
will be successful in constructing this planned facility.
We believe that once our facility in India is operational, we will be able
to capitalize on the availability of highly qualified scientific and other
research and development personnel at significant cost savings, thereby
supplementing our continuing research and development activities in the United
States. Regulatory compliance, manufacturing of product for use in bio
equivalency studies, and filing of ANDAs will all continue to be done at our
research and development facility in the United States. We believe our planned
India facility will reduce our reliance on third parties for the development of
our product line, thereby reducing the risk that we will either not be able to
develop certain products or that we will not be able to develop such products in
a timely manner. We will, however, continue to evaluate opportunities with
outside companies on certain products such as those requiring specialized
technologies.
In order to finance our expansion plan, we have been utilizing our $21
million advised line of credit obtained from HSBC Bank. We will have to spend a
significant amount of money on research and development to continue our
expansion plan and have already begun to do so.
While we will continue to rely on this advised credit line, continuing
with our expansion plan will be dependent on our ability to raise additional
capital through either additional debt financing or through an equity
investment, the availability of which cannot be assured. If we are unable to
obtain sufficient funds, we will have to either delay or scale back on our
expansion plan. However, we do not believe our existing business would be
materially adversely affected by such delay or scaling back of our expansion
plans.
Fiscal Year Ended
----------------------------------------------------------------------------------------------------------------------
June 30, 2005 June 30, 2004
Revenue Decreased 3% $39,910,970 $41,099,728
Gross Profit Decreased 7% $9,072,232 $9,794,835
Operating (Loss) Income Decreased 102% $(95,012) $5,060,375
Net (Loss) Income Decreased 105% $(149,432) $3,122,821
26
Fiscal Year Ended June 30, 2005 compared to Fiscal Year Ended June 30, 2004
For the Twelve For the Twelve
Months Ended Months Ended
June 30, 2005 June 30, 2004
------------ ------------
SALES, Net $ 39,910,970 $ 41,099,728
COST OF SALES 30,838,738 31,304,893
------------ ------------
GROSS PROFIT 9,072,232 9,794,835
------------ ------------
Gross Profit Percentage 22.73% 23.83%
OPERATING EXPENSES
Selling, general and administrative expenses 5,092,270 4,124,261
Related party rent expense 72,000 72,000
Research and development 4,002,974 538,199
------------ ------------
TOTAL OPERATING EXPENSES 9,167,244 4,734,460
------------ ------------
OPERATING (LOSS) INCOME (95,012) 5,060,375
------------ ------------
OTHER INCOME (EXPENSES)
Gain on sale of marketable securities 8,943 --
Interest expense (136,035) (21,367)
Interest and other income -- 69,451
------------ ------------
TOTAL OTHER (EXPENSES) INCOME (127,092) 48,084
------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (222,104) 5,108,459
(BENEFIT FROM) PROVISION FOR INCOME TAXES (72,672) 1,985,638
------------ ------------
NET (LOSS) INCOME $ (149,432) $ 3,122,821
============ ============
Net Sales
Net sales for the fiscal year ended June 30, 2005 were $39.9 million
compared to $41.1 million for fiscal year ended June 30, 2004, a decrease of
$1.2 million, or 2.9%. Significant components aggregating to this decrease are:
(i) a decrease in sales of Allopurinol and Atenolol of $2.70 million to $7.07
million for the year ended June 30, 2005 compared to sales of $9.77 million
during the year ended June 30, 2004; (ii) partially offset by increases in sales
of Hydrocodone Bitartrate with Ibuprofen, and Prednisone aggregating $3.20
million; and (iii) revenue from the sale of Naproxen decreased by approximately
$2.35 million on a year over year basis. Revenue for the products discussed in
(i) and (ii) above are generated through a manufacturing and supply agreement
with a significant customer. As such we are unable to control the revenue for
these products. The fluctuations in revenue by product were not attributable to
any changes in pricing which, for our entire product line, remained relatively
stable.
27
During the fiscal year ended June 30, 2005, two key customers, in the
aggregate, accounted for approximately 45% of total sales. The same two
customers accounted for approximately 55% for the fiscal year ended June 30,
2004.
As previously reported in July, 2005, we have already entered into an
agreement with Centrix Pharmaceutical, Inc. ("Centrix") for the sale of our
first female hormone product. That agreement commenced upon the first shipment
of the product to Centrix in August, 2005 and has a ten year term but, under
certain circumstances, may be terminated by Centrix at any time after the first
year of the agreement's term. Pursuant to the terms of the agreement, Centrix is
required to purchase a minimum $11.5 million of the product during the first
year of the agreement's term. There are also additional annual minimum purchase
requirements after the first year of the agreement's term for so long as the
agreement remains in effect. In the event that the Agreement is terminated at
any time, or for any reason, we maintain the right to market the product alone
or with a third party.
In September, 2005, we launched Sulfamethoxazole and Trimethoprim ("SMT")
single and double strength tablets, which are sold under the name Bactrim(R).
SMT is a widely used antibiotic used to treat infections such as urinary tract
infections, bronchitis, ear infections (otitis), traveler's diarrhea, and
Pneumocystis carinii pneumonia. We have already entered into a number of sales
contracts for SMT and shipments have commenced.
Gross Profit / Cost of Sales
Gross profit for the fiscal year ended June 30, 2005 decreased
approximately $0.7 million, or 7%, to $9.1 million, compared to $9.8 million for
the year ended June 30, 2004. In addition, our gross profit percentage decreased
1.1 percentage points from 23.8% for the year ended June 30, 2004 to 22.7% for
the year ended June 30, 2005.
Cost of sales decreased approximately $0.5 million, or 1.6% to $30.8
million for the year ended June 30, 2005, from $31.3 million for the year ended
June 30, 2004, primarily due to decreased production and sales. However, it
increased as a percentage of net sales primarily as a result of: (i) higher
labor costs resulting from increased staffing, labor rates and payroll taxes and
(ii) increases in insurance, depreciation and factory supplies. During the year
ended June 30, 2005, prices for our raw materials remained relatively constant.
However, as a result of recent weather / economic factors we anticipate that
some of the raw materials and packaging components will likely increase in the
near future.
Research and Development
During the fiscal year ended June 30, 2005, particularly during the period
January, 2005 through June 2005, our research and development efforts increased
significantly. We expensed approximately $0.5 million during the fiscal year
ended June 30, 2004. During the first six months of fiscal 2005 we expensed $0.5
million. However during the six month period ended June 30, 2005 our research
and development efforts expanded approximately seven-fold to $3.5 million or
$4.0 million for the full year ended June 30, 2005. Research and development
expenses were primarily for materials, wages and bioequivalence studies for new
drugs currently in development. We believe that research and development
expenses will represent a substantially larger percentage of our net sales in
the future as we seek to expand our product line.
28
As previously discussed in February 2005 we, entered into two agreements
with Tris for the development and licensing of up to twenty-five immediate
release liquid generic products and seven solid oral dosage generic
pharmaceutical products. In the event that Tris delivers twenty-five products
under the liquids agreement, of which there can be no assurance, Tris is to
receive approximately $2.9 million in development fees from us and, in addition,
Tris is to receive a royalty of between 10% and 12% of net profits resulting
from the sales of each product. We are entitled to offset the royalty payable to
Tris each year, at an agreed upon rate, to recoup the development fees paid to
Tris under the liquids agreement.
Pursuant to the terms of the Solids Agreement, as amended, we and Tris are
to collaborate on the development, manufacture and marketing of eight solid oral
dosage generic products and two soft gel products, some of which may require us
to challenge the patents for the equivalent branded products. The Solids
Agreement, as amended provides for payments of an aggregate of $4.5 million to
Tris. The Solids Agreement, as amended, also provides for an equal sharing of
net profits for all but one product that is successfully sold and marketed,
after the deduction and reimbursement to us of all costs incurred by us in the
development and marketing of the solid products, including the amounts paid to
Tris under the contract. The other product provides for a profit split of 60%
for us and 40% for Tris.
As we develop our research and development capabilities, the Tris
agreements have allowed us to bring in-house several specialized technologies
which would otherwise not be available to us, and which can allow us to
manufacture and sell more higher margin and profitable products.
During the year ended June 30, 2005, we recorded and paid $1.40 million to Tris.
Selling, General and Administrative
Selling, general and administrative expenses were $5.1 million for the
fiscal year end June 30, 2005 or 12.8% of net sales, an increase of $1.0 million
or 2.8 percentage points over the prior year total of $4.1 million, and 10% of
net sales.
29
Major components of our selling, general and administrative expenses for
the fiscal year ended June 30, 2005 included: payroll taxes and benefits $1.98
million, selling commissions $0.38 million, freight expenses $0.43 million,
legal and accounting $0.38 million, insurance expense $0.18 million and
professional fees of $0.25 million. Significant factors contributing to the
increase in selling, general and administrative expenses are: (i)salaries,
including payroll taxes and benefits increased $0.52 million from the
twelve-months ended June 30, 2004 primarily due to additions during the year of
a new Chief Executive Officer, as well as two other senior level executives;
(ii) utilities increased $0.13 million; (iii)investor relations/listing fees
increased $0.13 million and (iv) professional fees, rents and licenses
aggregating $0.18 million.
We believe that general and administrative costs will likely increase
during the next fiscal year as a result of our second facility becoming
operational. Further, it is anticipated that selling expenses, specifically
commissions will increase as a result of the anticipated increases in net sales.
In December 2004, the FASB finalized SFAS No. 123R "Share-Based Payment"
which will require us to expense stock options based on grant date fair value in
its financial statements beginning the first quarter of fiscal 2006. As such, in
future periods we will be reporting the non-cash compensation expense.
Interest Expense
Our interest expense increased approximately $0.11 million primarily as a
result of increased borrowings to fund the Yaphank location renovations and well
as purchase necessary new equipment. It is likely that, as a result of
additional borrowings and higher interest rates, we will incur increases in our
interest expense.
Operating Income
As a result of our increase in research and development efforts described
above from which we believe we will see the benefits from in the future, along
with an increase in selling and general and administrative costs and a modest
decrease in net sales, we incurred an operating loss of $0.95 million for the
year ended June 30, 2005 compared to an operating income of $5.1 million for the
year ended June 30, 2004.
Income Taxes
For the year ended June 30, 2005 we recorded an income tax benefit of
$0.07 million a decrease in income taxes of $2.06 million compared to the year
ended June 30, 2004 income tax expense of $1.99 million.
Liquidity and Capital Resources
We currently finance our operations and capital expenditures through cash
flows from operations and bank loans. As a result of our research and
development efforts, we incurred a net loss for the fiscal year ended June 30,
2005 of approximately $0.15 million. Net cash used in operating activities for
the fiscal year ended June 30, 2005 was $2.4 million, as compared to cash
provided by operations of $2.1 million for the year ended June 30, 2004.
Significant factors comprising the cash used in operating activities include:
increases in inventories, accounts receivable and prepaid expenses and other
current assets of $3.41 million, $0.81 million and $0.70 million, respectively.
The increase in inventories is primarily a result of a new product launches
scheduled for early in fiscal 2006 as well as necessary increases to support our
customers' requirements. Offsetting the above uses of cash are increases in
accounts and accrued expenses payable and depreciation and amortization of $1.56
million and $1.25 million, respectively. Other items affecting our net cash used
in operating activities aggregated $0.29 million.
30
Bank lines of credit
On March 29, 2004, we obtained a new $21 million credit facility from
HSBC. The new credit facility consists of (i) a $7.4 million mortgage loan for
the purchase of our second manufacturing plant in Yaphank, New York (Note 5);
(ii) $8.6 million of credit lines primarily to acquire new equipment and for
renovations, and (iii) a $5 million general line of credit. Details of the new
facility are as follows:
o The $7,400,000 mortgage loan is to be repaid with 119 monthly principal
installments of $30,833 commencing on August 1, 2004 with the balance due
June 1, 2014.
o Two advised secured credit lines aggregating $6,600,000 primarily for
acquisitions of equipment and for renovations of our plant. The balance of
the funds accessed through these credit lines will convert into fully
amortizing 60 month term loans.
o A $2,000,000 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 fully amortizing 60 month term loans.
o The $5,000,000 advised secured line of credit is primarily for working
capital and general corporate purposes.
This new credit facility is collateralized by substantially all assets of
the Company. At our option interest will be calculated at (i) LIBOR plus 1.5%
per annum ("PA") for 3 to 36 month periods, or at (ii) the Bank's then fixed
prime rate. As of June 30, 2005, the interest rates on the working capital lines
range from 4.46% PA to 5.14% PA and interest on the mortgage loan was 4.46% PA.
On July 1, 2005, the mortgage loan interest rate increased to 5.19% PA and will
be recalculated at December 1, 2005. The Bank will review the new credit
facility annually; the next review is scheduled to occur no later than November
30, 2005. The credit lines are terminable by the Bank at any time as to undrawn
amounts. In addition, we are required to comply with certain financial
covenants, and as of June 30, 2005, we were in default of three financial
covenants. We have obtained a waiver from the Bank.
In addition to the outstanding borrowings at June 30, 2005, we had
approximately $0.44 million outstanding under advised letters of credit. As a
result, at June 30, 2005, we had approximately $3.19 million available for
future borrowings. During fiscal 2005, the Company and HSBC informally agreed to
consolidate the four credit lines into one advised credit line totaling $13.6
million. As a result, the $9.97 million of advances have not been allocated to
each individual credit line. Because the Company and the Bank have not
determined the amount of loans that are available to be converted into 60 month
term loans, the entire advised credit facility is classified as current.
31
As previously disclosed, we entered into agreements with Tris for the
development and delivery of over thirty new Technical Packages. The combined
costs of these two agreements will approximate $6.75 million of which we have
paid $1.4 million as of June 30, 2005. The balance on one agreement of $2.75
million could be paid within three years. The second agreement has a balance of
$2.6 million and is scheduled to be paid within two years.
Future cash flows could be aided by utilization of our available Federal
net operating loss carryforwards ("NOLs"). At June 30, 2005 the Company has
remaining Federal NOLs of approximately $13,000,000 and State NOLs of
approximately $9,290,000 expiring through 2025. Pursuant to Section 382 of the
Internal Revenue Code regarding substantial changes in Company ownership,
utilization of these NOLs is limited. Approximately $6,750,000 of these NOL's
are available in fiscal 2006, and utilization of $6,250,000 of these NOL's is
limited and becomes available after fiscal 2006. The limitations lapse at the
rate of $2,690,000 per year, through fiscal 2009. In order to finance our
expansion plan, we have been utilizing our $21 million advised line of credit
obtained from HSBC Bank. We will have to spend a significant amount of money on
research and development to continue our expansion plan and have already begun
to do so.
While we will continue to rely on this advised credit line, continuing
with our expansion plan will be dependent on our ability to raise additional
capital through either additional debt financing or through an equity
investment, the availability of which cannot be assured. If we are unable to
obtain sufficient funds, we will have to either delay or scale back on our
expansion plan. However, we do not believe our existing business would be
materially adversely affected by such delay or scaling back of our expansion
plans.
Accounts Receivable
Our accounts receivable at June 30, 2005 was $7.66 million as compared to
$6.85 million at June 30, 2004. The average annual turnover ratio of accounts
receivable to net sales for the fiscal years ended June 30, 2005 and 2004 was
5.5 and 6.8 turns, respectively. As our turns are calculated on an annual
average, the decrease is primarily the result of credit terms for new larger
customers as well as when sales are recognized during the periods. Our accounts
receivable continue to have minimal risk with respect to bad debts; however this
trend cannot be assured.
Inventory
At June 30, 2005, our inventory was $8.94 million as compared to $5.53
million at June 30, 2004. We believe the increase in inventory is necessary in
order to maintain our future planned growth and overall customer demands. Our
turnover of inventory for the years ended June 30, 2005 and 2004 was 4.3 and
6.2, respectively. Our inventory is current, there are no reserves for
obsolescence.
32
Accounts Payable
Accounts payable, accrued expenses and other liabilities, in the
aggregate, increased approximately $1.68 million, primarily attributable to the
increase in inventory.
Cash and Cash Equivalents
During the year ended June 30, 2005, cash and cash equivalents decreased
$2.35 million from $2.88 million at June 30, 2004 to $0.54 million at June 30,
2005, primarily, among other factors: (i) net uses of cash for components of
working capital of $3.37million; (iii) cash used for the acquisition of new
machinery, equipment, renovations and enhancements of the facility in Yaphank,
NY, aggregating $8.11 million and (iii) investment in APR, LLC of $1.02 million.
Offset by funds received from: (i) net bank borrowings of $9.21 million; (ii)
proceeds from the exercise of stock options of $0.63 million.
Our Obligations
As of June 30, 2005, our obligations and the periods in which they are
scheduled to become due are set forth in the following table:
Due in less Due Due Due
than 1 in 2-3 in 4-5 after 5
Obligation Total Year Years Years Years
------------------------ ----------- ----------- ----------- ----------- -----------
Lines of credit (1) $ 9,970,000 $ 9,970,000 $ -- $ -- $ --
Bank Mortgage (1) $ 7,060,833 $ 370,000 $ 740,000 $ 740,000 $ 5,210,833
Operating lease and
software license $ 7,314,000 $ 604,000 $ 1,208,000 $ 1,022,000 $ 4,480,000
----------- ----------- ----------- ----------- -----------
Total cash obligations $24,344,833 $10,944,000 $ 1,948,000 $ 1,762,000 $ 9,690,833
=========== =========== =========== =========== ===========
(1) See "Bank Loans and Lines of Credit," below.
The following are financial covenants related to the lines of credit and
bank loans:
|X| Minimum debt service ratio of at least 1.25 : 1.0, on a semi-annual
basis;
|X| Maximum debt to net worth ratio of not more than 1.2 : 1.0, on an
annual basis;
|X| Interest Coverage ratio not less than 3.0 : 1:0;
|X| Current Ratio not less than 1.5 : 1.0
33
All Ratios shall be tested quarterly, and Debt Service Coverage Ratio and
Interest Coverage Ratio shall be on a rolling four-quarter basis.
We received waivers for violating covenants which we were not in
compliance with.
Bank Loans and Lines of Credit
Our advised credit lines and loans are fully described in Note 7 of the
accompanying financial statements.
Leases
We lease an entire building in Hauppauge, New York, pursuant to a
non-cancellable lease expiring in October, 2019, which houses our manufacturing,
warehousing and some executive offices. The leased building is approximately
100,000 square feet and is located in an industrial/office park. The current
annual lease payments to the landlord, Sutaria Family Realty, LLC, are $480,000.
Sutaria Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj
Sutaria. Upon a change in ownership of the Company, and every three years
thereafter, the annual base rent will be adjusted to fair market value, as
determined by an independent appraisal. There are no tenants in the building
other than us.
Fiscal Year Ended June 30, 2004 compared to Twelve-Months Ended June 30, 2003
(All financial information for the twelve months ended June 30, 2003 is
Unaudited)
For the Twelve For the Twelve
Months Ended Months Ended
June 30, 2004 June 30, 2003
Audited Unaudited
------------ -----------
SALES, Net $ 41,099,728 $ 27,522,243
COST OF SALES 31,304,893 22,500,414
------------ -----------
GROSS PROFIT 9,794,835 5,021,829
------------ -----------
Gross Profit Percentage 23.83% 18.25%
OPERATING EXPENSES
Selling, general and administrative expenses 4,124,261 2,485,863
Related party rent expense 72,000 72,000
Research and development 538,199 452,369
------------ -----------
TOTAL OPERATING EXPENSES 4,734,460 3,010,232
------------ -----------
OPERATING INCOME 5,060,375 2,011,597
------------ -----------
OTHER INCOME (EXPENSES)
Related party interest expense -- (163,187)
Interest expense (21,367) (112,860)
Interest and other income 69,451 8,229
------------ -----------
TOTAL OTHER INCOME (EXPENSES) 48,084 (267,818)
------------ -----------
INCOME BEFORE INCOME TAXES 5,108,459 1,743,779
PROVISION FOR INCOME TAXES 1,985,638 580,517
------------ -----------
NET INCOME $ 3,122,821 $ 1,163,262
============ ===========
34
Net Sales and Gross Profit
Net sales for the fiscal year ended June 30, 2004 were $41.1 million
compared to $27.5 million for the twelve-months ended June 30, 2003, an increase
of 49.3% or $13.6 million. Our increase in sales was attributable to increased
sales of Allopurinol, Atenolol and Naproxen which totaled approximately $13.8
million for the fiscal year ended June 30, 2004 compared to approximately $1.8
million for the twelve-month period ended June 30, 2003.
We launched production of Naproxen in December 2001 and have experienced
an increase in sales primarily as the result of customer awareness of our entry
into this market and their willingness to increase orders. We did not sell
Allopurinol during the twelve-months ended June 30, 2003.
The increase in net sales was not attributable to any change in prices
which, for our entire product line, remained stable.
Gross profit for the fiscal year ended June 30, 2004 increased
approximately $4.8 million, or 95%, to $9.8 million, compared to $5.0 million
for the twelve-months ended June 30, 2003. In addition, our gross profit
percentage increased 5.6 percentage points from 18.3% for the twelve-months
ended June 30, 2003 to 23.8% for the fiscal year ended June 30, 2004. Our
increased margins are primarily the result of the diversification of our product
line to higher margin drugs as well as increased manufacturing efficiency.
During the fiscal year ended June 30, 2004, two customers accounted for
approximately 29% and 26% of total sales, respectively.
Cost of Sales
Cost of sales increased $8.8 million to $31.3 million for the fiscal year
ended June 30, 2004, or 39.1% from $22.5 million for the twelve-months ended
June 30, 2003, primarily due to increased production and sales. Significant
factors contributing to the increase are: (i) approximately $4.6 million, or
51.7% is attributable to the cost of raw materials, increased quantities of
which were necessary due to increased production. Raw material prices were
relatively constant during the period; (ii) approximately $2.0 million, or
23.0%, was for increased labor costs, including payroll taxes and benefits, and
(iii) approximately $750,000 or 8.5% is attributable to increased costs of
packaging, lab and factory supplies.
Research and Development
Research and development expenses for the fiscal year ended June 30, 2004
were approximately $538,000 compared to approximately $452,000 for the
twelve-months ended June 30, 2003, an increase of approximately $86,000.
Research and development expenses were primarily for materials, wages and
biostudies for new drugs currently in development. We believe that research and
development expenses will represent a substantially larger percentage of our net
sales in the future as we seek to expand our product line.
35
Selling, General and Administrative
Selling, general and administrative expenses were $4.1 million, in the
fiscal year ended June 30, 2004, or 10.0% of net sales, compared to $2.5
million, or 9.0% of net sales, for the twelve-months ended June 30, 2003.
Selling, general and administrative expenses for the fiscal year ended
June 30, 2004 were primarily made up of salaries, including payroll taxes and
benefits ($1,461,000), selling commissions ($577,000), freight expenses
($419,000), legal, accounting and other professional services ($587,000),
insurance expense ($170,000) and utilities ($108,000). Salaries, including
payroll taxes and benefits increased $863,000, or 144.1% from the twelve-months
ended June 30, 2003 due to increases in staff to accommodate increased
production. Selling commissions, utilities, insurance and freight similarly
increased by 226.3%, 61.2%, 48.7% and 28.7% respectively, from the twelve-months
ended June 30, 2003 due to increased production and sales.
Operating Income
Operating income for the fiscal year ended June 30, 2004 increased
approximately $3.1 million, or 151.6%, to approximately $5.1 million from
approximately $2.0 million in the twelve-months ended June 30, 2003. The
increase in operating income is primarily the result of our increasing net sales
$13.6 million, diversification of our product line to higher margin drugs and
increased manufacturing efficiencies.
Income Taxes
Our provision for income taxes for the year ended June 30, 2004 increased
approximately $1,405,000 to $1,986,000 when compared to $581,000 for the
twelve-months ended June 30, 2003. This is primarily due to the 193.0% increase
in income before income taxes of $3,365,000 when comparing $5,109,000 to
$1,744,000 for the fiscal year ended June 30, 2004 and the twelve-months ended
June 30, 2003, respectively.
Cash Flows
We financed our operations and capital expenditures in 2004 through cash
flows from operations, bank loans, lines of credit, cash acquired in our reverse
merger in May, 2003 and cash received from the exercises of stock options. Net
income for the fiscal year ended June 30, 2004 was $3.1 million, an increase of
$2.0 million from $1.1 million for the twelve-months ended June 30, 2003. Net
cash provided by operating activities for the fiscal year ended June 30, 2004
was $2.1 million, as compared to $1.2 million for the same period last year. Net
cash from operating activities during this period increased $2.1 million as a
result of realizing $2.0 million in cash savings from the tax benefits
associated with the exercise of stock options, as well as depreciation and
amortization expenses of $886,000. Net cash was substantially offset by
increases in accounts receivable ($2.0 million) and inventories ($947,000). The
increase in inventories occurred gradually throughout the fiscal year in order
to accommodate increasing demand for our products. Net cash was also offset by a
decrease of $784,000 in accounts payable, accrued expenses and other
liabilities. Other items affecting our net cash provided from operating
activities aggregated $192,000.
36
During the fiscal year ended June 30, 2004, we were able to pay down bank
loans aggregating $462,000 and bank lines of credit by $1.64 million, in total
approximately $2.1 million.
Net cash used in investing activities was $3.1 million for the fiscal year
ended June 30, 2004, which is as a result of increases in fixed assets of $2.4
million and the down payment for a new facility of $2.0 million in Brookhaven,
New York, offset by the collection of $1.5 million of notes receivable from our
reverse merger with Atec Group, Inc., and the sale of property and equipment of
$19,000. Net cash provided by financing activities was $1.5 million for the
fiscal year ended June 30, 2004, which resulted from the receipt of $3.5 million
from option exercises and $64,000 of additional cash received after the reverse
merger transaction, less repayment of various bank lines and notes of
approximately $2.1 million.
As a result of our cash flows from operations and financing activities
during the fiscal year ended June 30, 2004, working capital increased $6.2
million to $11.7 million from $5.5 million at June 30, 2003.
Accounts Receivable
Our accounts receivable at June 30, 2004 was $6.8 million as compared to
$4.9 million at June 30, 2003. This increase is primarily attributable to the
increase in sales for the fiscal year ended June 30, 2004. The average number of
days outstanding of our accounts receivable for the fiscal year ended June 30,
2004 was 51.6 days and for the twelve-months ended June 30, 2003 was 60.5 days.
Inventory
At June 30, 2004, our inventory was $5.5 million as compared to $4.6
million at June 30, 2003. We believe the increase in inventory is necessary in
order to maintain our growth and overall customer demands. Our turnover of
inventory for the year ended June 30, 2004, and for the twelve-months ended June
30, 2003 was 6.19 turns and 6.23, respectively.
Accounts Payable
Accounts payable, accrued expenses and other liabilities, in the
aggregate, decreased approximately $769,000. We believed it was important to
improve our relationships with key vendors. As such, during the fiscal year
ended June 30, 2004, we reduced our overall accounts payable when compared to
June 30, 2003.
37
Cash and Cash Equivalents
During the year ended June 30, 2004, cash and cash equivalents increased
$548,000 from $2,336,000 at June 30, 2003 to $2,885,000 at June 30, 2004,
primarily among other factor the result of: (i) collection of $1,524,000 of
notes receivable associated with the reverse merger and (ii) through the
collection of approximately $3,520,000 from the exercise of stock options. These
inflows were offset by: (i) net cash used in operating activities of $1,947,000,
consisting of net income of $3,123,000, offset by net funds used in operating
activities of $1,176,000; (ii) the cash used for the acquisition of our new
facility as well as new packaging equipment and other fixed assets aggregating
$4,424,000; and (iii) repayment of various bank lines of credit and bank notes
payable totaling approximately $2,102,000.
For Six Months ended June 30, 2003 compared to the Six Months Ended June 30,
2002
(All June 30, 2002 financial information is unaudited.)
Financial Highlights
o Net sales increased 27.3% or $3.2 million to $14.9 million from $11.7
million.
o Gross profit increased 27.0% or $580,000 to $2.7 million from $2.1
million.
o Operating income increased 15.6% or $168,000 to $1.2 million from $1.0
million.
o Net income increased 18.5% or $113,000 to $724,000 from $611,000.
Net Sales and Gross Profit
Net sales for the six-month period ended June 30, 2003 were $15.0 million
compared to $11.7 million for the six-month period ended June 30, 2002, an
increase of 27.3% or $3.2 million. The increase in sales is primarily
attributable to increased orders from our existing customers resulting from our
increased production capacity. We launched production of Naproxen in December
2001. We have experienced an increase in our sales of Naproxen which is
primarily the result of customer awareness of our entry into this market and
their willingness to increase orders for Naproxen as they do for Ibuprofen. The
increase in net sales was not attributable to any change in prices which, for
our entire product line, remained stable. Gross profit for the six months ended
June 30, 2003 was $2.7 million.
During the six months ended June 30, 2003, two customers accounted for
approximately 50% of total sales.
Cost of Sales
Cost of sales increased $2.6 million to $12.2 million for the six-month
period ended June 30, 2003, or 27.4% from $9.6 million for the six-month period
ended June 30, 2002, primarily due to increased production and sales.
Approximately $1.9 million, or 72.2% of this increase is attributable to the
cost of raw materials, increased quantities of which were necessary due to
increased production. Raw material prices were constant during the period.
Approximately $386,000, or 14.7%, was for increased labor costs, including
payroll taxes and benefits. Approximately $242,000 or 9.2% is attributable to
increased costs of packaging, lab and factory supplies.
38
Research and Development
Research and development expenses for the six-month period ended June 30,
2003 were $186,000 or 1% of net sales, compared to $149,000, or 1% of net sales
for the same period in 2002, an increase of $37,000. Research and development
expenses were used primarily for materials and biostudies for new drugs
currently in development.
Selling, General and Administrative
Selling, general and administrative expenses were $1.3 million, in the
six-month period ended June 30, 2003, or 8.5% of net sales, compared to
$900,000, or 7.6% of net sales, for the same period in 2002.
Selling, general and administrative expenses for the six-month period
ended June 30, 2003 were primarily made up of salaries, including payroll taxes
and benefits ($320,000), selling commissions ($91,000), freight expenses
($197,000), legal, accounting and other professional services ($252,000),
insurance expense ($71,000), bad debts ($40,000), and utilities ($40,000).
Salaries increased $40,000, or 14.3% from the six month period ended June 30,
2002 due to increases in staff to accommodate increased production. Legal,
accounting and other professional services increased $204,000, or 429.7% from
the six month period ended June 30, 2002. This increase is attributable to costs
associated with the acquisition of Interpharm, Inc. by ATEC and the increased
legal and accounting expenses resulting from being a public company. No sales
were made to any customer whose balance was written off during the six month
period ended June 30, 2003.
Operating Income
Operating income for the six-month period ended June 30, 2003 increased
$168,000 to $1.2 million as compared to $1.1 million, or 15.6% as compared to
the same period ended June 30, 2002. The six-month period ended June 30, 2003
included an increase of approximately $204,000 of legal, professional and
accounting costs, as compared to the same period in 2002. These increased
expenses are the result of the acquisition of Interpharm, Inc., by ATEC which
was consummated on May 30, 2003, and the legal and accounting fees associated
with being a public company. For the six-month period ended June 30, 2002, there
were no such fees.
Income Taxes
The effective tax rate for the six-month period ended June 30, 2003 was
35% compared to 34% for 2002. Our deferred tax asset was primarily attributable
to New York State investment tax and employment incentive tax credits. The tax
credits utilized are limited to the state taxes computed on the minimum taxable
income base. These tax credits also expire in 15 years if not utilized. We
estimated a reserve for the deferred tax asset based upon prior years' actual
credits utilized and projected credits to be utilized on future taxable income.
The valuation allowance reserve has decreased due to our increased taxable
income which has utilized more credits and our estimate of future growth which
has reduced the estimated credits that will not be utilized.
39
Cash Flows
Cash flows from operations were $200,000 during the six-month period ended
June 30, 2003. As a result of Interpharm, Inc.'s cash flows from operations
during the six-month period ended June 30, 2003 and the sale of Atec Group,
Inc.'s computer operations on May 30, 2003, working capital increased $2.9
million to $5.2 million from $2.3 million at December 31, 2002.
Net cash used in investing activities for the six-month period ended June
30, 2003 was approximately $1.0 million related to the purchase of production
equipment.
During the six-month period ended June 30, 2003, we generated
approximately $3.1 million including approximately $2.1 million (net of $190,000
of costs) from the reverse merger with ATEC and $1.0 million of proceeds from
our bank credit line. The exercise of 2,187,863 options from July 1, 2003 to
September 12, 2003 resulted in cash proceeds to us of $2.7 million. These
options were outstanding prior to the closing of the transaction with ATEC.
In August 2003, we increased our credit lines from $3.5 million (at
December 31, 2002) to $7 million. In addition, we retired approximately $3.3
million in related party loans to Interpharm in exchange for our Series A-1
Preferred Stock.
Accounts Receivable
Our accounts receivable at June 30, 2003 was $4.9 million as compared to
$4.2 million at December 31, 2002. This increase is primarily attributable to
the increase in sales for the six-month period ended June 30, 2003. The average
number of days outstanding of our accounts receivable for the six-month period
ended June 30, 2003 consistently ranged from 54 to 59 days.
Inventory
In late 2000 and early 2001, Interpharm, Inc. commenced a program to
increase inventory production levels to meet demand created by increasing sales.
At June 30, 2003, our inventory increased to $4.6 million from $3.4 million at
December 31, 2002, which is a level we believe to be sufficient to meet demand.
Accounts Payable
The accounts payable, accrued expenses and other liabilities increased
approximately $1.2 million and amounts due on our working capital credit line
increased $1.1 million from December 31, 2002. This increase is primarily
attributable to increased inventory production to meet demand.
40
Cash and Cash Equivalents
Cash and cash equivalents at June 30, 2003 were $2.3 million as compared
to $106,000 at December 31, 2002, an increase of $2.2 million. This increase is
primarily attributable to the proceeds from the sale of ATEC computer
operations, Interpharm, Inc.'s cash flow from operating activities and net bank
borrowings of approximately $1.0 million. Offsetting these events were equipment
purchases of $1,031,000 during the six month period ending June 30, 2003.
From time to time in the past, Interpharm, Inc.'s shareholders, directors,
and officers had made loans to it for working capital. As of December 31, 2002,
each of theses loans was paid by Interpharm, Inc. with the exception of a loan
with a $3.0 million principal balance from Dr. Maganlal K. Sutaria to
Interpharm, Inc. and a $311,375 loan from a shareholder. Both loans were
converted into Series A-1 preferred stock on May 30, 2003.
41
From time to time in the past, Interpharm, Inc.'s shareholders, directors
and officers had made loans to it for working capital. As of December 31, 2002,
each of these loans was paid by Interpharm, Inc. with the exception of a loan
with a balance of $304,750 from Mona Sutaria and a loan with a $3 million
principal balance from Dr. Maganlal K. Sutaria to Interpharm, Inc. The
$3,000,000 loan reflected in Interpharm, Inc.'s December 31, 2002 financial
statements has a maturity date of January 1, 2012. Repayment of this loan was
subordinated to Interpharm, Inc.'s bank debt.
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 ongoing 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 its
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
Revenue from the sale of Interpharm products are recognized upon shipment
of the product. Upon a review of specific accounts and historical experience we
record, when necessary, a provision for allowances, chargebacks, returns and
other sales credits based. These provisions have been recorded as a reduction of
sales in the consolidated statements of operations.
We purchase raw materials from two suppliers, which are manufactured into
finished goods and sold back to such suppliers as well as to other customers. We
can, and do, purchase raw materials from other suppliers. We also (i) have the
general inventory risk of loss associated with the raw materials purchased; (ii)
negotiate the selling price for the finished product; (iii) significantly change
the raw material into a finished product based upon our specifications, and (iv)
have the option to obtain the raw materials from alternate sources. 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.
42
Allowance for Doubtful Accounts
We record allowances for doubtful accounts based upon customer specific
analysis and assessment of past-due balances. Additional allowances for doubtful
accounts may be required if there is an increase in past-due balances or for
customer specific circumstances. The allowance for doubtful accounts was $65,684
at June 30, 2005 and $74,166 at June 30, 2004.
Inventory
Our inventories are valued at the lower of cost or market, determined on a
first-in, first -out basis, and include the cost of raw materials and
manufacturing. 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.
Income Taxes
We account for income taxes using the liability method which requires the
determination of deferred tax assets and liabilities based on the differences
between the financial and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which differences are expected to reverse. The
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the net deferred tax asset will not be realized. Our net deferred tax
asset at June 30, 2005 was $4.413 million and $4.182 million at June 30, 2004.
Recent New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4". SFAS No.151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and handling
costs, and wasted materials (spoilage) are required to be recognized as current
period costs. The provisions of SFAS No. 151 are effective for the Company's
fiscal year 2006. The Company is currently evaluating the provisions of SFAS No.
151 and does not expect that adoption will have a material impact on its
financial position, results of operations, or cash flows.
In December 2004, the FASB finalized SFAS No. 123R amending SFAS No. 123,
effective beginning the first quarter of fiscal 2006. SFAS No. 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 No. 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.
43
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. The Company leases its premises
from Sutaria Realty Family Trust ("Trust"). The Trust is owned directly or
indirectly by two officers of the Company (see Note 8). The Company has reviewed
the provisions of this Staff Position and determined that the Trust is not a VIE
that needs to be consolidated.
In October 2004, the FASB ratified, the consensus reached by the EITF with
respect to Issue No. 04-8, "The Effect of Contingently Convertible Debt on
Diluted Earnings Per Share." The EITF's consensus states that shares of common
stock contingently issuable pursuant to contingent convertible securities should
be included in diluted earnings per share computations (if dilutive) regardless
of whether their market price triggers (or other contingent features) have been
met. EITF 04-8 was effective for reporting periods ending after December 15,
2004. As further discussed in Note 10 the only contingently convertible
securities we have are the shares of Series A-1 preferred stock. Since the
contingency is not based on market price EITF No. 04-8 is not applicable to the
Company.
In December 2004, the FASB issued SFAS No. 153 (SFAS 153), "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." SFAS 153 eliminates the exception from fair value
measurement for nonmonetary exchanges of similar productive assets in paragraph
21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and
replaces it with an exception for exchanges that do not have commercial
substance. SFAS 153 specifies that a nonmonetary exchange has commercial
substance if the future cash flows of the entity are expected to change
significantly as a result of the exchange. SFAS 153 is effective for periods
beginning after June 15, 2005. We do not expect that adoption of SFAS 153 will
have a material effect on our consolidated financial position, consolidated
results of operations, or liquidity.
ISSUE 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.
44
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Our principal financial instrument currently is a $21.0 million credit
facility. At June 30, 2005, approximately $7.1 million mortgage note payable and
borrowings of $9.97 million under the line of credit was outstanding. Any
obligations created under this credit facility incur interest calculated at our
option at (i) LIBOR plus 1.5% PA for periods ranging in length from 3 to 36
months, or (ii) at the Bank's then fixed prime rate. At June 30, 2005, the
interest rates on the borrowings ranged from 4.46% PA to 5.14% PA and the
interest rate on the mortgage note payable was 4.46% PA.
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.
If principal amounts outstanding under our credit facilities remained at
the year end level for an entire year and our effective interest rate increased
or decreased by 1%, we would pay or save, respectively, approximately $0.17
million in interest that year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements, including the notes thereto,
together with the report from our independent registered public accounting firm
are presented beginning at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the previous two fiscal years, and the subsequent interim period,
our accountant has not resigned, declined to stand for re-election and was not
dismissed. During the previous two fiscal years, and the subsequent interim
period, there were no material disagreements with Interpharm, Inc.'s accountant
with respect to any matter.
ITEM 9A. 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.
45
At the conclusion of the period ended June 30, 2005, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer, Chief Financial Officer and
General Counsel, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer, Chief Financial Officer and General Counsel concluded
that our disclosure controls and procedures were effective in alerting them in a
timely manner to information relating to the Company required to be disclosed in
this report
Our independent registered accounting firm Marcum & Kliegman, LLP ("MK"),
informed us and our Audit Committee of the Board of Directors that in connection
with their audit of our financial results for the fiscal year ended June 30,
2005, MK had discovered conditions which they deemed to be significant
deficiencies, (as defined by standards established by the Public Company
Accounting Oversight Board) in our financial statement closing process. The
significant deficiencies related to the performance of processes and procedures
for the period end closing process and its review by internal accounting
personnel. Management has informed MK and the Audit Committee that it will add
additional personnel and modify its controls over the financial statement
closing process to prevent reoccurrences of this deficiency and will continue to
monitor the effectiveness of these actions and will make any other changes or
take such additional actions as management determines to be appropriate.
Management does not believe that the above significant deficiencies
affected the results of the fiscal quarter ended June 30, 2005 or any prior
period
ITEM 9B - OTHER INFORMATION
None
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by reference
to the section entitled "Directors and Executive Officers of the Registrant " of
the 2005 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference
to the section entitled "Executive Compensation " of the 2005 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information required by this Item is incorporated herein by reference
to the section entitled "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters " of the 2005 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Lease
Our 100,000 square foot facility at 75 Adams Avenue in Hauppauge, New York
is owned by Sutaria Family Realty, LLC which is owned by Perry Sutaria, Raj
Sutaria and Mona Rametra.
No third party assessment or appraisal of the lease was made at the time
it was entered into or at any subsequent time. Interpharm, Inc. is obligated to
pay minimum annual rent of $480,000, plus property taxes, insurance, maintenance
and other expenses related to the leased facility. Upon a change in ownership 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.
Investment in APR, LLC.
In February and April 2005, we purchased 5.0 Class A membership interests
("Interests") from each of Cameron Reid ("Reid"), the Company's Chief Executive
Officer, and John Lomans ("Lomans"), who has no affiliation with us, for an
aggregate purchase price of $1,022,500 (including costs of $22,500) of APR, LLC,
a Delaware limited liability company primarily engaged in the development of
complex bulk pharmaceutical products ("APR"). The purchases were made pursuant
to separate Class A Membership Interest Purchase Agreements dated February 16,
2005 between us and Reid and Lomans (the "Purchase Agreements"). At the time of
the purchases, Reid and Lomans owned all of the outstanding Class A membership
interests of APR, which had outstanding 100 Class A membership interests and 100
Class B membership interests. 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 our
major customers and suppliers. As a result, we currently own 10 Interests out of
the 100 Interests now outstanding.
47
In accordance with the terms of the Purchase Agreements, we have granted
to Reid and Lomans each a proxy to vote 5 of the Interests owned by us on all
matters on which the holders of Interests may vote. Our 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 deliberations on this matter. We are
accounting for our investment in APR pursuant to the cost method of accounting.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is incorporated herein by reference
to the section entitled "Principal Accounting Fees and Services" of the 2005
Proxy Statement.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
The following financial statements of Interpharm Holdings, Inc., are
included herein:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of June 30, 2005 and June 30, 2004
Consolidated Statements of Operations for the years ended June 30, 2005 and
2004, for the six-months ended June 30, 2003 and 2002 (unaudited) and for the
year ended December 31, 2002
Consolidated Statement of Stockholders' Equity for the years ended June 30, 2005
and 2004, for the six-months ended June 30, 2003 and for the year ended December
31, 2002
Consolidated Statements of Comprehensive (Loss) Income for the years ended June
30, 2005 and 2004, for the six-months ended June 30, 2003 and 2002 (unaudited)
and for the year ended December 31, 2002
Consolidated Statements of Cash Flows for the years ended June 30, 2005 and
2004, for the six-months ended June 30, 2003 and 2002 (unaudited) and for the
year ended December 31, 2002
48
(2) OTHER SCHEDULES
All other schedules are omitted since the required information is not
present or is not present in an amount sufficient to require submission of
schedules, or because the information required is included in the financial
statements and notes thereto.
(3) EXHIBITS
See (c) below.
(b) REPORTS ON FORM 8-K
We filed the following reports on Form 8-K in the quarter ended June 30,
2005:
REPORT DATE ITEM REPORTED
----------- -------------
May 26, 2005 5.02 - Resignation of Surinder Rametra as executive Officer
- Business Development
(c) EXHIBITS
Number Description
3.1 Certificate of Incorporation of the Company; (1)
3.2 Certificate of Amendment of Certificate of Incorporation, filed October
21, 1992; (1)
3.3 By-laws of the Company; (1)
3.4 Certificate of Amendment of Certificate of Incorporation, filed December
22, 1992; (1)
3.5 Form of Certificate of Powers, Designations, Preferences and Rights of the
Series A 10% Cumulative Convertible Preferred Stock; (1)
3.6 Certificate of Powers, Designations, Preferences and Rights of the Series
K Convertible Preferred Stock; (1)
3.7 Certificate of Powers, Designations, Preferences and Rights of the Series
A-1 Convertible Preferred Stock; (1)
4.7 Form of Common Stock Certificate; (1)
4.9 Form of Preferred Stock Certificate; (1)
10.1 November 25, 2002 Capital Stock Exchange Agreement; (2)
10.2 January 24, 2002 agreement between Interpharm, Inc. and URL/Mutual (3);
10.3 Form of Employment Agreements for Interpharm Holdings, Inc. employees (3);
10.4 December 5, 2002 Department of Veterans Affairs acceptance of Interpharm,
Inc.'s bid to supply Ibuprofen Tablets (3);
49
10.5 Contract of Sale for Land and Building at 50 Horseblock Rd., Yaphank, NY
10.6 Supply Agreement between Interpharm Holdings, Inc. and Centrix
Pharmaceutical, Inc. for Development of Liquid Products
10.7 February 24, 2005 Agreement between Interpharm Holdings, Inc. and Tris
Pharma, Inc. for development of Solid Products;
10.8 July 6, 2005 amendment to February 24, 2005 Agreement between Interpharm
Holdings, Inc. and Tris Pharma, Inc. for development of Solid Products
10.9 Supply Agreement between Interpharm Holdings, Inc. and Centrix
Pharmaceutical, Inc. (4)
21.1 List of Subsidiaries;
23.1 Consent of Marcum & Kliegman, LLP;
31.1 Certification of Dr. Maganlal K. Sutaria pursuant to Exchange Act Rules
13a-15(d) and 15d-15(e), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
31.2 Certification of George Aronson pursuant to Exchange Act Rules 13a-15(d)
and 15d-15(e), 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;
99.1 Form of Incentive Stock Option Agreement (3);
99.2 Form of Non-Qualified Stock Option Agreement (3);
99.3 Interpharm Holdings, Inc. Code of Ethics;
99.4 Interpharm Holdings, Inc. Nominating Committee Charter.
Footnotes:
1. Incorporated by reference from Registration Statement on Form SB-2
registration no. 33-54356 filed by the Company with the Securities and
Exchange Commission on November 9, 1992.
2. Annexed to our Current Report on Form 8-K filed on November 26, 2002 and
incorporated herein by reference;
3. Annexed to our Transition Report on Form 10-K filed on September 29, 2003
and incorporated herein by reference.
4. Annexed to our Current Report on Form 8-K filed on July 18, 2005 and
incorporated herein by reference.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ Cameron Reid
-----------------
Cameron Reid, Chief Executive Officer
Dated: September 28, 2005
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ George Aronson September 28, 2005
-----------------------------------------------------
George Aronson, Chief Financial Executive Officer
/s/ Bhupatlal K. Sutaria September 28, 2005
-----------------------------------------------------
Bhupatlal K. Sutaria, President and Treasurer
/s/ Dr. Maganlal K. Sutaria September 28, 2005
-----------------------------------------------------
Dr Maganlal K. Sutaria, Chairman of the Board of Directors
/s/ Dr. Mark Goodman September 28, 2005
-----------------------------------------------------
Dr. Mark Goodman, Director
/s/Stewart Benjamin September 28, 2005
-----------------------------------------------------
Stewart Benjamin, Director
/s/David Reback September 28, 2005
-----------------------------------------------------
David Reback, Director
/s/ Kennith C Johnson September 28, 2005
-----------------------------------------------------
Kennith C Johnson, Director
51
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended June 30, 2005 and 2004, for the Six Months Ended June 30,
2003 and 2002 (Unaudited) and for the Year Ended December 31, 2002
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONTENTS
--------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Comprehensive (Loss) Income F-6
Consolidated Statements of Cash Flows F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
To the Audit Committee of
Interpharm Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Interpharm
Holdings, Inc. and Subsidiaries (the "Company") as of June 30, 2005 and 2004,
and the related consolidated statements of operations, stockholders' equity,
comprehensive (loss) income and cash flows for the years then ended and for the
six month period ended June 30, 2003, and for the year ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Interpharm Holdings, Inc. and Subsidiaries at June 30, 2005 and 2004, and the
consolidated results of its operations and its cash flows for the years then
ended and for the six month period ended June 30, 2003, and the year ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.
Melville, New York
September 27, 2005
F-1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
June 30,
---------------------------
2005 2004
------------ ------------
CURRENT ASSETS
Cash and cash equivalents $ 536,630 $ 2,884,639
Marketable securities, at fair market value -- 36,791
Accounts receivable, net 7,664,148 6,849,778
Inventories, net 8,940,734 5,530,161
Prepaid expenses and other current assets 1,155,770 453,157
Deferred tax assets 87,000 1,280,000
------------ ------------
Total Current Assets 18,384,282 17,034,526
Land, building and equipment, net 21,871,798 15,007,132
Deferred tax assets 4,326,000 2,902,000
Investment in APR, LLC 1,022,500 --
Deposits 785,080 224,287
------------ ------------
TOTAL ASSETS $ 46,389,660 $ 35,167,945
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30,
---------------------------
2005 2004
------------ ------------
CURRENT LIABILITIES
Current maturities of bank debt $ 10,340,000 $ 764,014
Accounts payable, accrued expenses and other liabilities 6,232,586 4,545,345
------------ ------------
Total Current Liabilities 16,572,586 5,309,359
------------ ------------
OTHER LIABILITIES
Bank debt, less current maturities 6,690,833 7,060,833
Other liabilities 15,334 14,968
------------ ------------
Total Other Liabilities 6,706,167 7,075,801
------------ ------------
TOTAL LIABILITIES 23,278,753 12,385,160
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued and outstanding -
6,608,233 and 6,902,963, respectively; aggregate liquidation preference of
$5,483,095 and $5,494,080,
respectively 343,315 348,042
Common stock, $0.01 par value,70,000,000 shares authorized;
shares issued - 32,338,607 and 25,591,311 respectively 323,386 255,913
Additional paid-in capital 19,104,035 19,184,291
Accumulated other comprehensive loss -- (92)
Retained earnings 3,340,171 3,792,499
Treasury stock at cost, 624,145 shares in 2004 -- (797,868)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 23,110,907 22,782,785
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 46,389,660 $ 35,167,945
============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
Year Ended June 30, Six Months Ended June 30,
------------------------------- ----------------------------
2005 2004 2003 2002
------------ ------------ ------------ ------------
(Unaudited)
SALES, Net $ 39,910,970 $ 41,099,728 $ 14,953,438 $ 11,743,440
COST OF SALES (including related party rent expense of $408,000 for
the years ended June 30, 2005 and 2004, $204,000 for the six
months ended June 30, 2003 and 2002 and $408,000 for the year ended
December 31, 2002) 30,838,738 31,304,893 12,214,822 9,587,344
------------ ------------ ------------ ------------
GROSS PROFIT 9,072,232 9,794,835 2,738,616 2,156,096
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general and administrative 5,092,270 4,124,261 1,274,445 896,276
Related party rent 72,000 72,000 36,000 36,000
Research and development 4,002,974 538,199 185,601 148,850
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 9,167,244 4,734,460 1,496,046 1,081,126
------------ ------------ ------------ ------------
OPERATING (LOSS) INCOME (95,012) 5,060,375 1,242,570 1,074,970
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES)
Gain on sale of marketable securities 8,943 -- -- --
Related party interest expense -- -- (69,125) (94,063)
Interest expense (136,035) (21,367) (63,299) (52,542)
Interest and other income -- 69,451 8,166 --
------------ ------------ ------------ ------------
TOTAL OTHER (EXPENSES) INCOME (127,092) 48,084 (124,258) (146,605)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME
TAXES (222,104) 5,108,459 1,118,312 928,365
(BENEFIT FROM) PROVISION FOR
INCOME TAXES (72,672) 1,985,638 394,667 317,563
------------ ------------ ------------ ------------
NET (LOSS) INCOME (149,432) 3,122,821 723,645 610,802
INCOME ATTRIBUTABLE TO PREFERRED STOCKHOLDERS 165,569 360,045 99,915 152,701
------------ ------------ ------------ ------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (315,001) $ 2,762,776 $ 623,730 $ 458,101
============ ============ ============ ============
(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS
Basic (loss) earnings per share $ (0.01) $ 0.16 $ 0.08 $ 0.07
============ ============ ============ ============
Diluted (loss) earnings per share $ (0.01) $ 0.04 $ 0.02 $ 0.02
============ ============ ============ ============
Basic weighted average shares outstanding 25,683,726 17,594,979 7,721,524 6,151,178
============ ============ ============ ============
Diluted weighted average shares and
equivalent shares outstanding 25,683,726 68,637,185 41,664,357 35,935,062
============ ============ ============ ============
Year Ended
December 31,
------------
2002
------------
SALES, Net $ 24,312,245
COST OF SALES (including related party rent expense of $408,000 for
the years ended June 30, 2005 and 2004, $204,000 for the six months
ended June 30, 2003 and 2002 and $408,000 for the year ended
December 31, 2002) 19,872,936
------------
GROSS PROFIT 4,439,309
------------
OPERATING EXPENSES
Selling, general and administrative 2,107,694
Related party rent 72,000
Research and development 415,618
------------
TOTAL OPERATING EXPENSES 2,595,312
------------
OPERATING (LOSS) INCOME 1,843,997
------------
OTHER INCOME (EXPENSES)
Gain on sale of marketable securities --
Related party interest expense (188,125)
Interest expense (102,103)
Interest and other income 63
------------
TOTAL OTHER (EXPENSES) INCOME (290,165)
------------
(LOSS) INCOME BEFORE INCOME
TAXES 1,553,832
(BENEFIT FROM) PROVISION FOR
INCOME TAXES 503,413
------------
NET (LOSS) INCOME 1,050,419
INCOME ATTRIBUTABLE TO PREFERRED STOCKHOLDERS 262,605
------------
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS $ 787,814
============
(LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS
Basic (loss) earnings per share $ 0.13
============
Diluted (loss) earnings per share $ 0.03
============
Basic weighted average shares outstanding 6,151,178
============
Diluted weighted average shares and
equivalent shares outstanding 35,935,062
============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------
Preferred Stock Common Stock
Shares Amount Shares Amount
------------ ------------ ------------ ------------
BALANCE - January 1, 2002 2,050,393 $ 20,504 6,151,178 $ 61,512
Unrealized loss on marketable securities, net -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE - December 31, 2002 2,050,393 20,504 6,151,178 61,512
Outstanding equity securities of
ATEC Group, Inc. 395,094 282,963 9,495,471 94,955
Conversion of related party notes payable to Series A-1
preferred stock 4,855,389 48,554 -- --
Shares issued for options exercised -- -- 25,000 250
Unrealized gain on marketable securities, net -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE - June 30, 2003 7,300,876 352,021 15,671,649 156,717
Shares issued for options and warrants exercised -- -- 3,535,887 35,358
Tax benefit in connection with exercise of stock options -- -- -- --
Adjustments related to reverse merger -- -- 4,000 40
Conversion of Series J preferred stock (105,000) (1,050) 105,000 1,050
Conversion of Series K preferred stock (292,913) (2,929) 6,274,775 62,748
Unrealized loss on marketable securities, net -- -- -- --
Net income -- -- -- --
------------ ------------ ------------ ------------
BALANCE - June 30, 2004 6,902,963 348,042 25,591,311 255,913
Shares issued for options exercised -- -- 1,096,630 10,966
Tax benefit in connection with exercise of stock options -- -- -- --
Redemption of Series A preferred stock (20) (1) -- --
Conversion of Series C preferred stock (1,797) (1,797) 36 --
Conversion of Series K preferred stock (292,913) (2,929) 6,274,775 62,748
Unrealized gain on marketable securities, net -- -- -- --
Retirement of treasury stock -- -- (624,145) (6,241)
Dividends declared - Series A-1 -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE - June 30, 2005 6,608,233 $ 343,315 32,338,607 $ 323,386
============ ============ ============ ============
Accumulated
Additional Other Retained
Paid-In Comprehensive Earnings/
Capital Income (Loss) (Deficit)
------------ ------------ ------------
BALANCE - January 1, 2002 $ 2,287,984 $ 2,443 $ (1,104,386)
Unrealized loss on marketable securities, net -- (3,334) --
Net income -- -- 1,050,419
------------ ------------ ------------
BALANCE - December 31, 2002 2,287,984 (891) (53,967)
Outstanding equity securities of
ATEC Group, Inc. 6,494,432 -- --
Conversion of related party notes payable to Series A-1
preferred stock 3,262,821 -- --
Shares issued for options exercised 31,000 -- --
Unrealized gain on marketable securities, net -- 12,470 --
Net income -- -- 723,645
------------ ------------ ------------
BALANCE - June 30, 2003 12,076,237 11,579 669,678
Shares issued for options and warrants exercised 3,484,784 -- --
Tax benefit in connection with exercise of stock options 3,679,100 -- --
Adjustments related to reverse merger 3,989 -- --
Conversion of Series J preferred stock -- -- --
Conversion of Series K preferred stock (59,819) -- --
Unrealized loss on marketable securities, net -- (11,671) --
Net income -- -- 3,122,821
------------ ------------ ------------
BALANCE - June 30, 2004 19,184,291 (92) 3,792,499
Shares issued for options exercised 616,400 -- --
Tax benefit in connection with exercise of stock options 153,000 -- --
Redemption of Series A preferred stock (7) -- --
Conversion of Series C preferred stock 1,797 -- --
Conversion of Series K preferred stock (59,819) -- --
Unrealized gain on marketable securities, net -- 92 --
Retirement of treasury stock (791,627) -- --
Dividends declared - Series A-1 -- -- (302,896)
Net loss -- -- (149,432)
------------ ------------ ------------
BALANCE - June 30, 2005 $ 19,104,035 $ -- $ 3,340,171
============ ============ ============
Total
Treasury Stock Stockholders'
Shares Amount Equity
------------ ------------ ------------
BALANCE - January 1, 2002 -- $ -- $ 1,268,057
Unrealized loss on marketable securities, net -- -- (3,334)
Net income -- -- 1,050,419
------------ ------------ ------------
BALANCE - December 31, 2002 -- -- $ 2,315,142
Outstanding equity securities of
ATEC Group, Inc. 624,145 (797,868) 6,074,482
Conversion of related party notes payable to Series A-1
preferred stock -- -- 3,311,375
Shares issued for option exercised -- -- 31,250
Unrealized gain on marketable securities, net -- -- 12,470
Net income -- 723,645
------------ ------------ ------------
BALANCE - June 30, 2003 624,145 (797,868) 12,468,364
Shares issued for options and warrants exercised -- -- 3,520,142
Tax benefit in connection with exercise of stock options -- -- 3,679,100
Adjustments related to reverse merger -- -- 4,029
Conversion of Series J preferred stock -- -- --
Conversion of Series K preferred stock -- -- --
Unrealized loss on marketable securities, net -- -- (11,671)
Net income -- -- 3,122,821
------------ ------------ ------------
BALANCE - June 30, 2004 624,145 (797,868) 22,782,785
Shares issued for options exercised -- -- 627,366
Tax benefit in connection with exercise of stock options -- -- 153,000
Redemption of Series A preferred stock -- -- (8)
Conversion of Series C preferred stock -- -- --
Conversion of Series K preferred stock -- -- --
Unrealized gain on marketable securities, net -- -- 92
Retirement of treasury stock (624,145) 797,868 --
Dividends declared - Series A-1 -- -- (302,896)
Net loss -- (149,432)
------------ ------------ ------------
BALANCE - June 30, 2005 -- $ -- $ 23,110,907
============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
--------------------------------------------------------------------------------
Year Ended
Year Ended June 30, Six Months Ended June 30, December 31,
-------------------------- ------------------------- -----------
2005 2004 2003 2002 2002
----------- ----------- ----------- ----------- -----------
(Unaudited)
NET (LOSS) INCOME $ (149,432) $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419
OTHER COMPREHENSIVE (LOSS) INCOME
Unrealized gain (loss) on marketable
securities, net 92 (11,671) 12,470 (3,677) (3,334)
----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE
(LOSS) INCOME $ (149,340) $ 3,111,150 $ 736,115 $ 607,125 $ 1,047,085
=========== =========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
Year Ended
Year Ended June 30, Six Months Ended June 30, December 31,
---------------------------- ---------------------------- ------------
2005 2004 2003 2002 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES
Net (loss) income $ (149,432) $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419
------------ ------------ ------------ ------------ ------------
Adjustments to reconcile net (loss) income
to net cash (used in) provided by operating
activities:
Gain on sale of marketable securities (8,943) -- -- -- --
Depreciation and amortization 1,247,823 886,141 317,034 221,253 494,986
Deferred tax (benefit) expense (78,000) 1,998,500 116,100 58,000 79,500
Accrued interest on related party loans -- -- 6,625 94,063 188,125
Provision for doubtful accounts -- 40,000 40,200 -- 47,165
Gain on disposal of equipment -- (2,554) -- -- --
Changes in operating assets and liabilities:
Accounts receivable (814,370) (1,959,669) (812,167) (417,855) (308,583)
Inventories (3,410,573) (946,956) (1,194,106) (471,685) (1,219,985)
Prepaid expenses and other current
assets (702,613) (229,008) (152,671) (42,306) 76,195
Accounts payable, accrued expenses
and other liabilities 1,563,430 (783,563) 1,155,772 679,806 1,339,713
------------ ------------ ------------ ------------ ------------
TOTAL ADJUSTMENTS (2,203,246) (997,109) (523,213) 121,276 697,116
------------ ------------ ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (2,352,678) 2,125,712 200,432 732,078 1,747,535
------------ ------------ ------------ ------------ ------------
CASH FLOWS FROM
INVESTING ACTIVITIES
Proceeds from sale of marketable securities 45,826 -- -- -- --
Payments for deposits (560,793) (178,414) -- -- --
Purchase of marketable securities -- -- -- (19,011) (19,011)
Proceeds from notes receivable -- 1,524,092 -- -- --
Proceeds from sale of equipment -- 19,000 -- -- --
Investment in APR, LLC (1,022,500) -- -- -- --
Purchases of land, building and equipment (8,112,489) (4,424,417) (1,031,403) (730,859) (1,184,210)
------------ ------------ ------------ ------------ ------------
NET CASH USED IN
INVESTING ACTIVITIES $ (9,649,956) $ (3,059,739) $ (1,031,403) $ (749,870) $ (1,203,221)
------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
--------------------------------------------------------------------------------
Year Ended
Year Ended June 30, Six Months Ended June 30, December 31,
----------------------------------------------------------------------------
2005 2004 2003 2002 2002
------------ ------------ ------------ ------------ ------------
(Unaudited)
CASH FLOWS FROM FINANCING
ACTIVITIES
(Repayments of) proceeds from
advised credit facility - old $ (424,847) $ (2,101,708) $ 962,625 $ (98,454) $ (214,662)
Borrowings from advised credit
facility - new 9,970,000 -- -- -- --
Repayments of mortgage notes (339,167) -- -- -- --
Due to related parties -- -- -- (24,000) (807,721)
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 2,067,510 -- --
Proceeds from options and warrants
exercised 627,366 3,520,142 31,250 -- --
------------ ------------ ------------ ------------ ------------
NET CASH PROVIDED BY
(USED IN) FINANCING
ACTIVITIES 9,654,625 1,482,463 3,061,385 (122,454) (1,022,383)
------------ ------------ ------------ ------------ ------------
NET (DECREASE) INCREASE
IN CASH AND
CASH EQUIVALENTS (2,348,009) 548,436 2,230,414 (140,246) (478,069)
CASH AND CASH
EQUIVALENTS - Beginning 2,884,639 2,336,203 105,789 583,858 583,858
------------ ------------ ------------ ------------ ------------
CASH AND CASH
EQUIVALENTS - Ending $ 536,630 $ 2,884,639 $ 2,336,203 $ 443,612 $ 105,789
============ ============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, Continued
--------------------------------------------------------------------------------
Year Ended June 30,
---------------------------------------
2005 2004
------------------ ------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the periods
for:
Interest $ 98,730 $ 21,367
================== ==================
Income Taxes $ 31,148 $ 110,013
================== ==================
Tax benefit in connection with exercise of stock options
$ 153,000 $ 3,619,000
================== ==================
Mortgage loan utilized to acquire
new facility (Note 7) $ -- $ 7,400,000
================== ==================
Conversion of related party notes
payable to Series A-1 preferred
stock $ -- $ --
================== ==================
Reverse merger (see Note 1)
Cash received, net of $190,051 of
transaction costs paid in 2003 $ -- $ 64,029
Equipment -- --
Notes receivable -- --
Deposits -- --
Deferred tax assets -- (60,000)
Accounts payable -- --
Other liabilities -- --
------------------ ------------------
Net assets obtained in reverse
merger transaction $ -- $ 4,029
================== ==================
Six Months Ended June 30,
----------------------------------------
2003 2002
------------------ ------------------
(Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the periods
for:
Interest $ 125,799 $ 52,542
================== ==================
Income Taxes $ 348,302 $ 227,728
================== ==================
Tax benefit in connection with exercise of stock options
$ -- $ --
================== ==================
Mortgage loan utilized to acquire
new facility (Note 7) $ -- $ --
================== ==================
Conversion of related party notes
payable to Series A-1 preferred
stock $ 3,311,375 $ --
================== ==================
Reverse merger (see Note 1)
Cash received, net of $190,051 of
transaction costs paid in 2003 $ 2,067,510 $ --
Equipment 11,965 --
Notes receivable 1,524,092 --
Deposits 34,494 --
Deferred tax assets 2,610,000 --
Accounts payable (144,044) --
Other liabilities (29,535) --
------------------ ------------------
Net assets obtained in reverse
merger transaction $ 6,074,482 $ --
================== ==================
Year Ended
December 31,
------------------
2002
------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the periods
for:
Interest $ 412,230
==================
Income Taxes $ 405,047
==================
Tax benefit in connection with exercise of stock options
$ --
==================
Mortgage loan utilized to acquire
new facility (Note 7) $ --
==================
Conversion of related party notes
payable to Series A-1 preferred
stock $ --
==================
Reverse merger (see Note 1)
Cash received, net of $190,051 of
transaction costs paid in 2003 $ --
Equipment --
Notes receivable --
Deposits --
Deferred tax assets --
Accounts payable --
Other liabilities --
------------------
Net assets obtained in reverse
merger transaction $ --
==================
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies
Nature of Business
Interpharm Holdings, Inc. and Subsidiaries (the "Company") 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.
All references below to the six months ended June 30, 2002 are unaudited.
Reverse Merger
On May 30, 2003, Interpharm, Inc. was acquired by ATEC Group, Inc.
("ATEC"), which simultaneously changed its name to Interpharm Holdings,
Inc. In this transaction, ATEC acquired all of the issued and outstanding
shares of Interpharm, Inc. in exchange for both ATEC common stock and
Series K Convertible Preferred Stock ("Series K"), which totaled
approximately 48% of ATEC's voting securities after the transaction was
consummated.
ATEC issued to the stockholders of Interpharm, Inc. a total of 6,151,178
shares of common stock and 2,050,393 shares of Series K in exchange for
all outstanding shares of Interpharm, Inc. In addition, Interpharm, Inc.
assumed the equity structure of ATEC, which comprised of 9,495,471 shares
of common stock, less 624,145 shares of treasury stock and four classes of
preferred stock totaling 395,094 shares. For additional information
concerning these equity securities, please see Note 11.
Since this transaction is in substance a recapitalization of Interpharm,
Inc. and not a business combination, the reverse merger with ATEC has been
recorded based on the fair value of ATEC's net tangible assets, which
consist primarily of cash, equipment, notes receivable, deposits and a
deferred tax asset with an aggregate value of $6,078,511 (net of
transaction costs of $190,051). Accordingly, pro forma information is not
presented. The recapitalization has been given retroactive effect in the
accompanying financial statements. The accompanying consolidated financial
statements represent those of Interpharm, Inc. for all periods prior to
the consummation of the reverse merger.
Principles of Consolidation
The consolidated financial statements include the accounts of Interpharm
Holdings, Inc. and its wholly-owned subsidiaries. The results of ATEC are
included in the consolidated financial statements commencing May 30, 2003.
F-10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Change of Fiscal Year
The Company has changed its fiscal year end from December 31 to June 30. A
Transition Report on Form 10-K was filed for the six month transition
period ended June 30, 2003.
Revenue Recognition
The Company recognizes revenue upon the shipment of product. The Company
records a provision for allowances, returns and other sales credits based
upon a review of specific accounts and historical experience. Such
provision for allowances, returns and credits has been recorded as a
reduction of sales in the consolidated statements of operations.
The Company purchases raw materials from two suppliers, which are
manufactured into finished goods and sold back to such suppliers as well
as to other customers. The Company can, and does, purchase raw materials
from other suppliers. Pursuant to Emerging Issues Task Force, ("EITF") No.
99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent,"
the Company recorded sales to, and purchases from, these suppliers on a
gross basis. Sales and purchases were recorded on a gross basis since the
Company (i) has a risk of loss associated with the raw materials
purchased, (ii) converts the raw material into a finished product based
upon Company developed specifications, (iii) has other sources of supply
of the raw material, and (iv) has credit risk related to the sale of such
product to the suppliers. For the years ended June 30, 2005 and 2004, the
six month periods ended June 30, 2003 and 2002 and for the year ended
December 31, 2002, the Company purchased raw materials from the two
suppliers totaling approximately $9,251,000, $12,367,000, $3,573,000,
$3,693,000, and $6,805,000, respectively and sold finished goods to such
suppliers totaling approximately $17,414,000, $22,625,000, $5,795,000,
$5,290,000, and $10,745,000, respectively.
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.
The effect of the recapitalization of Interpharm, Inc. has been given
retroactive application in the earnings per share calculation. The common
stock issued and outstanding with respect to the pre-merger ATEC Group,
Inc. has been included since the effective date of the reverse merger. In
accordance with EITF Issue No. 03-6, "Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per Share," 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. The adoption of EITF Issue No. 03-6 did not
require any changes to the Company's calculation of EPS.
F-11
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
The computation of diluted EPS does not assume conversion, exercise or
contingent issuance of securities that would have an antidilutive effect
on EPS (i.e. improving earnings per share). The dilutive effect of
outstanding options and warrants and their equivalents are reflected in
dilutive EPS by the application of the treasury stock method. In periods
when there is net income available to common stockholders, options and
warrants will have a dilutive effect only when the average market price
of the common stock during the period exceeds the exercise price of the
options or warrants.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments with original maturities of three months or less
to be cash equivalents. From time to time, the company maintains cash
balances in excess of the FDIC insurance limit.
Marketable Securities
Marketable securities, which are classified as "available for sale," are
valued at fair market value. Unrealized gains or losses are recorded net
of income taxes as accumulated other comprehensive income or loss in
stockholders' equity, whereas realized gains and losses are recognized in
the Company's consolidated statements of operations using the first-in,
first-out method. Other than temporary declines in the value of
marketable securities are also recognized as a loss in the consolidated
statements of operations.
Allowance for Doubtful Accounts
The allowance for doubtful accounts reflects management's best estimate
of probable losses inherent in the account receivable balance. Management
determines the allowance based on known troubled accounts, historical
experience and other currently available evidence.
Inventories
Inventories are valued at the lower of cost (first-in, first-out basis)
or market value. Losses from the write-down of damaged, nonusable, or
otherwise nonsalable inventories are recorded in the period in which they
occur.
Land, Building and Equipment
Land, building and equipment is stated at cost. Maintenance and repairs
are charged to expense as incurred, costs of major additions and
betterments are capitalized. When equipment is sold or otherwise disposed
of, the cost and related accumulated depreciation is eliminated from the
accounts and any resulting gain or loss is reflected in operations.
Depreciation and Amortization
Depreciation is provided for on the straight-line method over the
estimated useful lives of the related assets. The cost of leasehold
improvements is amortized over the lesser of the length of the related
leases or the estimated useful lives of the improvements.
F-12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
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 $343,000 including interest approximating
$252,000, during the fiscal year ended June 30, 2005 in connection with
its capital improvements to the Brookhaven, NY facility.
Comprehensive (Loss) Income
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income," the Company reports
comprehensive (loss) income in addition to net (loss) income.
Comprehensive (loss) income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
(loss) income.
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
depreciation, deferred tax asset valuations and inventory overhead
costing estimates.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. To determine if impairment exists,
the Company compares the estimated future undiscounted cash flows from
the related long-lived assets to the net carrying amount of such assets.
Once it has been determined that impairment exists, the carrying value of
the asset is adjusted to fair value. Factors considered in the
determination of fair value include current operating results, trends and
the present value of estimated expected future cash flows.
Income Taxes
The Company accounts for income taxes using the liability method which
requires the determination of deferred tax assets and liabilities based
on the differences between the financial and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which
differences are expected to reverse. The net deferred tax asset is
adjusted by a valuation allowance, if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized. The Company and its subsidiaries
file a consolidated income tax return.
F-13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Significant Accounting Policies, continued
Shipping Costs
The Company's shipping and handling costs are included in selling,
general and administrative expenses. For the years ended June 30, 2005
and 2004, the six months ended June 30, 2003 and 2002 and for the year
ended December 31, 2002, shipping and handling costs approximated
$434,000, $419,000, $198,000, $181,000, and $370,000, respectively.
Research and Development
Pursuant to SFAS No. 2 "Accounting for Research and Development Costs,"
our research and development costs are expensed as incurred or at the
date payment of non-refundable amounts become due, whichever occurs
first. Research and development costs, which consist of salaries and
related costs of research and development personnel, fees paid to
consultants and outside service providers, raw materials used
specifically in the development of its new products and bioequivalence
studies.
Concentrations and Fair Value of Financial Instruments
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash investments and
accounts receivable. At June 30, 2005, the Company has cash investments
totaling approximately $65,000 at two financial institutions.
Concentrations of credit risk with respect to accounts receivable are
disclosed in Note 13. The Company performs ongoing credit evaluations of
its customers' financial conditions and, generally, requires no
collateral from its customers. Unless otherwise disclosed, the fair
values of financial instruments approximate their recorded value.
Reclassification
Certain accounts in the prior period's financial statements have been
reclassified for comparative purposes to conform with the presentation in
the current period's financial statements. These reclassifications have
no effect on previously reported operations.
Stock Based Compensation
At June 30, 2005, the Company had two stock-based employee compensation
plans. As permitted under SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure," which amended SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company 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:
F-14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
--------------------------------------------------------------------------
2005 2004 2003 2002
---------------- ---------------- ---------------- ----------------
Net (loss) income as reported $ (149,432) $ 3,122,821 $ 723,645 $ 1,050,419
Less: Stock-based employee
compensation expense
determined under fair value-
based method for all awards,
net of income tax 7,600,000 803,544 60,000 --
---------------- ---------------- ---------------- ----------------
Pro forma $ (7,749,432) $ 2,319,277 $ 663,645 $ 1,050,419
================ ================ ================ ================
Basic net (loss) earnings per share
As reported $ (0.01) $ 0.16 $ 0.08 $ 0.13
================ ================ ================ ================
Pro forma $ (0.30) $ 0.15 $ 0.07 $ 0.13
================ ================ ================ ================
Diluted net (loss) earnings per
share
As reported $ (0.01) $ 0.04 $ 0.02 $ 0.03
================ ================ ================ ================
Pro forma $ (0.30) $ 0.04 $ 0.02 $ 0.03
================ ================ ================ ================
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 beginning the first quarter of
fiscal 2006. 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 year end includes the
pro-forma effects of accelerating options valued at $4.2 million, as
discussed below.
During 2005 in an effort to reduce the expected impact to be incurred in
future periods as a result of adopting SFAS No.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 and other options have been granted subsequent
to December 31, 2004 with future vesting provisions, the Company expects
to record stock options expense commencing the first quarter of fiscal
2006.
F-15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
The fair values of Company common stock options granted to employees were
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility ranging
from 106% to 131% (2) risk-free interest rate ranging from 4.25% to 5.58%
and (3) expected average lives of 10 years.
New Accounting Pronouncements
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4." SFAS No.151 clarifies that abnormal
inventory costs such as costs of idle facilities, excess freight and
handling costs, and wasted materials (spoilage) are required to be
recognized as current period costs. The provisions of SFAS No. 151 are
effective for the Company's fiscal year 2006. The Company is currently
evaluating the provisions of SFAS No. 151 and does not expect that
adoption will have a material impact on its consolidated financial
position, results of operations, or cash flows.
In December 2004, the FASB finalized SFAS No. 123R amending SFAS No. 123,
effective beginning the first quarter of fiscal 2006. SFAS No. 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 No. 123R will have
no effect on the Company's cash flows, but is expected to have a material
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. The
Company leases its premises from Sutaria Realty Family Trust ("Trust").
The Trust is owned directly or indirectly by two officers of the Company
(see Note 8). The Company has reviewed the provisions of this Staff
Position and determined that the Trust is not a VIE that needs to be
consolidated.
In October 2004, the FASB ratified, the consensus reached by the EITF
with respect to Issue No. 04-8, "The Effect of Contingently Convertible
Debt on Diluted Earnings Per Share." The EITF's consensus states that
shares of common stock contingently issuable pursuant to contingent
convertible securities should be included in diluted earnings per share
computations (if dilutive) regardless of whether their market price
triggers (or other contingent features) have been met. EITF 04-8 was
effective for reporting periods ending after December 15, 2004. As
further discussed in Note 10 the Company's only contingently convertible
securities are the shares of Series A-1 preferred stock. Since the
contingency is not based on market price
F-16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 1 - Summary of Significant Accounting Policies, continued
New Accounting Pronouncements, continued
triggers, EITF No. 04-8 is not applicable to the Company.
In December 2004, the FASB issued SFAS No. 153 , "Exchanges of
Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for
Nonmonetary Transactions." SFAS No. 153 eliminates the exception from
fair value measurement for nonmonetary exchanges of similar productive
assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for
Nonmonetary Transactions," and replaces it with an exception for
exchanges that do not have commercial substance. SFAS No. 153 specifies
that a nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of
the exchange. SFAS No.153 is effective for periods beginning after June
15, 2005. The Company does not expect that adoption of SFAS No.153 will
have a material effect on its consolidated financial position,
consolidated results of operations, or liquidity.
NOTE 2 - Marketable Securities
Management has classified its equity securities as available-for-sale
securities, which are reported at fair market value. The Company, as a
result of liquidating its holdings of marketable securities during the
year ended June 30, 2005, recognized an $8,943 gain. The costs and fair
market value of marketable securities are as follows:
June 30,
---------------------------
2005 2004
------------ ------------
Cost $ -- $ 36,883
Unrealized loss -- (92)
------------ ------------
Fair market value $ -- $ 36,791
============ ============
NOTE 3 - Accounts Receivable
Accounts receivable is shown net of an allowance for doubtful accounts of
$65,684 and $74,166 at June 30, 2005 and 2004, respectively. The changes
in the allowance for doubtful accounts are summarized as follows:
F-17
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 3 - Accounts Receivable, continued
Year Ended Six Months Year Ended
June 30, Ended June 30, December 31,
------------------------------------------------------------
2005 2004 2003 2002
------------ ------------ ------------ ------------
Beginning balance $ 74,166 $ 47,776 $ 47,776 $ 47,776
Provision for doubtful accounts -- 40,000 40,200 47,165
Charge-offs (8,481) (13,610) (40,200) (47,165)
------------ ------------ ------------ ------------
Ending balance $ 65,685 $ 74,166 $ 47,776 $ 47,776
============ ============ ============ ============
NOTE 4 - Inventories
Inventories consist of the following:
June 30,
---------------------------
2005 2004
------------ ------------
Finished goods $ 720,990 $ 534,175
Work in process 5,538,905 2,710,270
Raw materials 2,116,579 1,932,971
Packaging materials 564,260 352,745
------------ ------------
Total $ 8,940,734 $ 5,530,161
============ ============
During the quarter ended December 31, 2002, the Company incurred a
$202,000 loss from the write-down of damaged and unusable raw materials
inventory.
F-18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 5 - Land, Building and Equipment
Land, building and equipment consists of the following:
June 30, Estimated
--------------------------- Useful
2005 2004 Lives
----------- ----------- ----------
Land $ 4,924,000 $ 4,924,000
Building, equipment and construction in
progress (a) 9,313,580 4,475,482 7-20 Years
Machinery and equipment 8,289,248 5,457,395 5-7 Years
Furniture and fixtures 435,078 319,762 5 Years
Leasehold improvements 2,950,425 2,623,203 5-15 Years
----------- -----------
25,912,331 17,799,842
Less: accumulated
depreciation and amortization 4,040,533 2,792,710
----------- -----------
Land, Building and Equipment, net $21,871,798 $15,007,132
=========== ===========
(a) Not yet been placed into service and no depreciation expense has yet been
recorded.
On June 29, 2004, the Company completed a transaction in which it acquired
a second facility located in Brookhaven, New York. The 92,000 square foot
facility, situated on 37 acres, was purchased for $9,399,482 which
included closing costs of $149,482. $4,924,000 has been allocated to land
with the balance, $4,475,482, attributable to the building. The Company
secured a $7,400,000 mortgage loan for part of the purchase price.
Depreciation and amortization expense for the years ended June 30, 2005
and 2004, the six month period ended June 30, 2003 and for the year ended
December 31, 2002 was $1,247,823, $886,141, $317,034 and $494,986,
respectively.
NOTE 6 - Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable, accrued expenses and other liabilities consist of the
following:
June 30,
---------------------------
2005 2004
------------ ------------
Trade accounts payable $ 4,624,982 $ 3,455,444
Accrued expenses and other liabilities 1,607,604 1,089,901
------------ ------------
Total $ 6,232,586 $ 4,545,345
============ ============
F-19
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Bank Debt
A summary of the outstanding long-term debt is as follows:
June 30,
-------------------------
2005 2004
----------- ----------
Advised credit facility - new (a) $ 9,970,000 $ --
Advised credit facility - old (b) -- 424,847
Mortgage note payable (a) 7,060,833 7,400,000
----------- ----------
Total Bank Debt 17,030,833 7,824,847
Less: Current Maturities 10,340,000 764,014
----------- ----------
Long-Term Debt, Less Current Maturities $ 6,690,833 $7,060,833
=========== ==========
a. On March 29, 2004, the Company obtained a new $21 million credit
facility from the s provided the old credit facility. The new credit
facility consists of (i) a $7.4 million m the purchase of the Company's
second manufacturing plant in Brookhaven, NY (Note 5); million of credit
lines primarily to acquire new equipment and for renovations, and (iii) a
general line of credit. Details of the new facility are as follows:
o The $7,400,000 mortgage loan is to be repaid with 119 monthly
principal installments of $30,833 commencing on August 1, 2004 with
the balance due June 1, 2014.
o Two advised secured credit lines aggregating $6,600,000 primarily
for acquisitions of equipment and for renovations of the Company's
new Brookhaven, NY plant. The balance of the funds accessed through
these credit lines will convert into fully amortizing 60 month term
loans.
o A $2,000,000 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 fully amortizing 60 month
term loans.
o The $5,000,000 advised secured line of credit is primarily for
working capital and purposes.
This new credit facility is collateralized by substantially all assets of
the Company. At the Option of the Company, interest will generally 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 June 30, 2005, the interest rates
on the working capital lines range from 4.46% to 5.14% and interest on
the mortgage loan was 4.46%. On July 1, 2005, the mortgage loan interest
rate increased to 5.19% and will be recalculated at December 1, 2005. The
Bank will review the new credit facility annually; the next review is
scheduled to occur no later than November 30, 2005. The credit lines are
terminable by the Bank at any time as to undrawn amounts. In addition,
the Company is required to comply with certain financial covenants, and
as of June 30, 2005, the Company was in default of two financial
covenants. In September 2005, the Company has obtained a waiver from the
Bank.
F-20
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 7 - Bank Debt, continued
In addition to the outstanding borrowings at June 30, 2005, the Company
had approximately $440,000 outstanding under advised letters of credit.
As a result, at June 30, 2005, the Company had approximately $3,190,000
available for future borrowings. During fiscal 2005, the Company and the
Bank informally agreed to consolidate the four credit lines into one
advised credit line totaling $13,600,000. As a result, the $9,970,000 of
advances have not been allocated to each individual credit line. Since
the Company and the Bank have not determined the amount of loans that are
available to be converted into 60 month term loans, the entire advised
credit facility is classified as current.
b. The Company had a credit facility agreement with a Bank, which
consisted of an advised secured line of credit totaling $5,000,000 and a
$2,000,000 non-revolving secured facility for equipment purchases. As of
June 30, 2004, the Company had outstanding borrowings of $424,847 under
the line of credit. During the year ended June 30, 2005, the Company paid
down this entire balance. The credit facility was terminated in
conjunction with obtaining the new credit facility discussed above.
Scheduled annual maturities of the bank debt are as follows:
For the Year
Ending June 30, Amount
-----------------------------------------------
2006 $10,340,000
2007 370,000
2008 370,000
2009 370,000
2010 370,000
Thereafter 5,210,833
-----------
Total $17,030,833
===========
NOTE 8 - Related Party Transactions
Rents
The Company leases its business premises ("Premises") from the Trust, an
entity owned directly by one officer and indirectly by another officer of
the Company, under a noncancelable lease expiring in October 2019. The
Company is obligated to pay minimum annual rent of $480,000, plus
property taxes, insurance, maintenance and other expenses related to the
Premises.
Upon a change in ownership 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.
F-21
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 8 - Related Party Transactions, continued
Future annual minimum rental payments under this operating lease are as
follows:
For the Year
Ending June 30, Amount
---------------- ------------------
2006 $ 480,000
2007 480,000
2008 480,000
2009 480,000
2010 480,000
Thereafter 4,480,000
----------
Total $6,880,000
==========
The lease does not grant the Company the option to purchase the Premises
at any time during the lease term nor at its termination, nor will the
Company share in any proceeds that may result from sale or disposition of
the Premises. The owners of the Trust purchased the Premises by making
cash payments in the amount of $1,255,000 and by issuing $3,720,000 in
mortgage notes.
Investment in APR, LLC
In February and April 2005, the Company purchased 5 Class A membership
interests ("Interests") from each of Cameron Reid ("Reid"), the Company's
Chief Executive Officer, and John Lomans ("Lomans"), who has no
affiliation with the Company, for an aggregate purchase price of
$1,022,500 (including costs of $22,500) of APR, LLC, a Delaware limited
liability company primarily engaged in the development of complex bulk
pharmaceutical products ("APR"). The purchases were made pursuant to
separate Class A Membership Interest Purchase Agreements dated February
16, 2005 between the Company and Reid and Lomans (the "Purchase
Agreements"). At the time of the purchases, Reid and Lomans owned all of
the outstanding Class A membership interests of APR, which had,
outstanding, 100 Class A membership interests and 100 Class B membership
interests. As a result, the Company owns 10 of the 100 Class A membership
Interests outstanding. The two classes of membership interests have
different economic and voting rights, and the Class A members have the
right to make most operational decisions. The Class B interests are held
by one of the Company's major customers and suppliers.
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.
F-22
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - Income Taxes
The income tax (benefit) expense is comprised of the following:
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
------------------------------------------------------------
2005 2004 2003 2002
------------------------------------------------------------
Current
Federal $ -- $ (30,967) $ 243,255 $ 404,663
State 5,328 18,105 35,312 19,250
------------ ------------ ------------ ------------
Total Current 5,328 (12,862) 278,567 423,913
------------ ------------ ------------ ------------
Deferred
Federal (71,000) 1,785,200 119,500 67,100
State (7,000) 213,300 (3,400) 12,400
------------ ------------ ------------ ------------
Total Deferred (78,000) 1,998,500 116,100 79,500
------------ ------------ ------------ ------------
(Benefit) Provision for
Income Taxes $ (72,672) $ 1,985,638 $ 394,667 $ 503,413
============ ============ ============ ============
The Company's effective income tax rate differs from the statutory U.S.
Federal income tax rate as a result of the following:
Six Months Ended Year Ended
Year Ended June 30, June 30, December 31,
2005 2004 2003 2002
--------------------------------------------------------------------------
Statutory U.S. federal tax rate (34.0)% 34.0% 34.0% 34.0%
State taxes (3.0) 3.0 2.0 1.2
Permanent differences 4.0 0.2 (0.7) (0.9)
Change in valuation allowance - 0.7 (0.4) (1.5)
Other 0.3 1.0 0.4 (0.4)
------ ------ ----- -----
Effective income tax rate (32.7)% 38.9% 35.3% 32.4%
======= ====== ====== ======
F-23
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - Income Taxes, continued
The components of deferred tax assets and liabilities consist of the
following:
June 30,
----------------------------
2005 2004
------------ ------------
Deferred Tax Assets, Current Portion
Capitalized inventory $ 19,000 $ 17,000
Receivable allowance and reserves 25,000 27,000
Other 43,000 45,000
Net operating loss carryforwards -- 1,191,000
------------ ------------
Deferred Tax Assets, current $ 87,000 $ 1,280,000
============ ============
Deferred Tax Assets, Non-Current Portion
Other $ 47,000 $ --
Investment tax credits 600,000 518,000
Net operating loss carryforwards ("NOLS") 4,799,000 3,295,000
------------ ------------
5,446,000 3,813,000
Valuation allowance (702,000) (620,000)
------------ ------------
Deferred Tax Assets, Non-Current 4,744,000 3,193,000
Deferred Tax Liabilities, Non-Current Portion
Depreciation and amortization (418,000) (291,000)
------------ ------------
Deferred Tax Assets, non-current, net $ 4,326,000 $ 2,902,000
============ ============
During the year ended June 30, 2005 and 2004, stock options were
exercised which generated approximately $413,000 and $9,900,000 of income
tax deductions, respectively, resulting in tax benefits of $153,000 and
$3,679,100, respectively, which were credited to additional paid-in
capital.
As part of the reverse merger transaction (see Note 1), approximately
$7,370,000 of ATEC's NOLs are available to the Company. At June 30, 2005
the Company has remaining Federal NOLs of approximately $13,000,000 and
State NOLs of approximately $12,440,000 expiring through 2025. Pursuant
to Section 382 of the Internal Revenue Code regarding substantial changes
in Company ownership, utilization of these NOLs is limited. Approximately
$6,750,000 of these NOL's are available in fiscal 2006, and utilization
of $6,250,000 of these NOL's is limited and becomes available after
fiscal 2006. The limitations lapse at the rate of $2,690,000 per year,
through fiscal 2009. As of June 30, 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 reserved approximately 30% of the
State NOLs which the Company does not anticipate utilizing due to State
limitations.
F-24
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 9 - Income Taxes, continued
In addition, at June 30, 2005, the Company has approximately $600,000 of
New York State investment tax credit carryforwards, expiring in various
years through 2020. These carryforwards are available to reduce future
New York State income tax liabilities. However, the Company has reserved
100% of the investment tax credit carryforward, which the Company does
not anticipate utilizing.
NOTE 10 - Earning Per Share
The calculations of basic and diluted EPS are as follows:
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
-------------------------------------------------------------------------
2005 2004 2003 2002 2002
------------ ------------ ------------ ------------ ------------
Numerator:
Net (loss) income $ (149,432) $ 3,122,821 $ 723,645 $ 610,802 $ 1,050,419
Less: Preferred stock dividend 165,569 165,569 13,150 -- --
Less: Net (loss) income attributable
to Series K preferred
stockholders -- 194,476 86,765 152,701 262,605
------------ ------------ ------------ ------------ ------------
Numerator for basic EPS (315,001) 2,762,776 623,730 458,101 787,814
Effect of dilutive securities:
Net income attributable to
Series K preferred stockholders 165,569 194,476 86,765 152,701 262,605
------------ ------------ ------------ ------------ ------------
Numerator for diluted EPS $ (149,432) $ 2,957,252 $ 710,495 $ 610,802 $ 1,050,419
============ ============ ============ ============ ============
Denominator:
Denominator for basic EPS
Weighted average shares
outstanding 25,683,726 17,594,979 7,721,524 6,151,178 6,151,178
Effect of dilutive securities:
Convertible Series K
preferred stock -- 43,460,533 32,609,356 29,783,884 29,783,884
Convertible Series A, B, C and J
preferred stocks -- 11,454 19,879 -- --
Stock options -- 7,570,219 1,313,598 -- --
------------ ------------ ------------ ------------ ------------
Denominator for diluted EPS 25,683,726 68,637,185 41,664,357 35,935,062 35,935,062
============ ============ ============ ============ ============
Basic EPS $ (0.01) $ 0.16 $ 0.08 $ 0.07 $ 0.13
============ ============ ============ ============ ============
Diluted EPS $ (0.01) $ 0.04 $ 0.02 $ 0.02 $ 0.03
============ ============ ============ ============ ============
F-25
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 10 - Earning Per Share, continued
As of June 30, 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 32,338,607
Stock options outstanding (see Note 11) 12,653,870
Common stock issuable upon conversion of preferred stocks:
Series A 1,522
Series A-1 (maximum contingent conversion) (a) 4,855,389
Series B 292
Series C 5,584
Series K (b) 31,373,875
----------
Total (c) 81,229,139
==========
(a) As described in Note 11, the Series A-1 shares are convertible only
if the Company reaches $150 million in annual sales or upon a
merger, consolidation, sale of assets or similar transaction.
(b) On June 4, 2006 and on each anniversary date thereof, through June
4, 2010, 292,913 Series K shares will automatically convert into
6,274,775 shares of the Company's common stock (see Note 11).
(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).
F-26
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Equity Securities
Preferred Stocks
The Company's preferred stocks consist of the following at June 30, 2005:
Shares Issued
Shares and Liquidation
Authorized Outstanding Par Value Preference
------------ ------------ ------------ ------------
June 30, 2005:
Preferred Stocks:
*Series A cumulative
convertible 29,233 7,611 $ 761 $ 761,100
Series A-1 cumulative
convertible 5,000,000 4,855,389 48,554 3,311,375
*Series B convertible 12,704 1,458 146 14,580
*Series C convertible 350,000 279,208 279,208 1,396,040
*Series J convertible 105,000 -- -- --
Series K convertible 3,000,000 1,464,567 14,646 --
------------ ------------ ------------ ------------
Total preferred 8,496,937 6,608,233 $ 343,315 $ 5,483,095
============ ============ ============ ============
* Classes of preferred stock assumed in the ATEC reverse merger.
At June 30, 2005, the Company had six authorized series of preferred
stock; Series A Cumulative Convertible (par value $.10), Series A-1
Cumulative Convertible (par value $.01), Series B Convertible (par value
$.10), Series C Convertible (par value $1), Series J Convertible (par
value $.01) and Series K Convertible (par value $.01) (hereafter referred
to as the "A", "A-1", "B", "C", "J" and "K" shares, respectively).
The A shares have an annual dividend rate of 10% of the par value, which
is cumulative. They are senior to all other series or classes of capital
stock. The B shares have a non-cumulative stated annual dividend rate of
$1 each and are senior to all but the rights of the A stockholders. The C
and J shares have no dividend rights, except as may be authorized at the
sole discretion of the Company's Board of Directors. The K shares are
entitled to receive dividends to the same extent and in the same amounts
as the common stock. The A-1 shares have a cumulative annual dividend of
$.0341 per share when and as declared by the Board of Directors. In
accordance with these terms, in November, 2004, the Board of Directors
declared a dividend of $178,719. The declared dividend was cumulative
through June 30, 2004, and was paid March 10, 2005. In May, 2005, the
Board of Directors declared a dividend of $124,177. This declared dividend
was cumulative from July 1, 2004 through March 31, 2005 and has not been
paid as of June 30, 2005. Total undeclared dividends amounted to
approximately $41,000 as of June 30, 2005.
F-27
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Equity Securities, continued
Preferred Stocks, continued
Each of the A, B, C and K shares has the right to one vote on all matters
in which stockholders are entitled to vote. The holders of Series A-1 and
J shares shall not be entitled to any voting rights. Each of the A, B, C
and A-1 shares carry dissolution rights upon liquidation amounting to
$100, $10, $5 and $.682 per share, respectively. The A shares grant the
Company the right to redeem such shares at a price of $100 per share. The
A, B and C shares may be converted into shares of common stock at an
exchange rate of five, five and fifty shares, respectively, for each
share of common stock or approximately 7,398 shares. The conversion
rights of the J, K and A-1 shares are described below.
The J shares had a mandatory conversion provision, if any time on or
after the applicable issuance date the closing price of the common stock
of the Company for three consecutive trading days is equal to or greater
than five dollars. In the first quarter of fiscal 2004, the mandatory
conversion price was attained and all of the outstanding J shares
converted into 105,000 shares of common stock. The J shares cannot be
re-issued.
On June 4, 2004, the Company was deemed by AMEX to be in compliance with
applicable listing standards, and as a result, a "Triggering Event"
occurred. Upon the occurrence of the Triggering Event, the holders of the
K shares, in accordance with a defined formula, which assumes among other
things, the conversion of the A, B, C and J shares into common stock,
converted one seventh or 292,913 of the K shares into 6,274,775
restricted shares of the Company's common stock. The K shares
automatically convert into a like amount on each June 4th through 2010,
for an aggregate of an additional 31,373,875 shares of common stock. Upon
a change in control, as defined, the conversion of the K shares may
accelerate. The holders of the K shares have demand registration rights
with respect to the common stock to be issued upon conversion. The net
effect of the conversion feature, together with the shares of common
stock issued in the reverse merger, was to issue to Interpharm, Inc.
stockholders, common stock totaling approximately 80% of the total number
of shares of common stock and voting convertible preferred stock,
outstanding as of the date of the Triggering Event, after giving effect
to the conversion, less shares of common stock issued between the date of
the closing of the reverse merger and the date of the Triggering Event
arising out of obligations which arose after the date of closing.
On May 30, 2003 the Company authorized the satisfaction of loans due to
the Company's then Chief Executive Officer and one of its stockholders,
by issuing 4,855,389 A-1 shares. The A-1 shares convert on a 1:1 basis
into Company common stock subject to the definitive terms in the list of
designations upon (i) the Company reaching $150 million in sales or (ii)
a merger, consolidation, sale of assets or similar transaction.
Stock Options
In 2003, Interpharm, Inc., as a part of the ATEC reverse merger
transaction, assumed options to acquire ATEC's common stock which were
granted previously by ATEC pursuant to two
F-28
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Equity Securities, continued
Stock Options, continued
Stock Option Plans. The two option plans are the 1997 Stock Option Plan
("1997 Plan") and the 2000 Flexible Stock Option Plan ("2000 Plan"). Both
plans provide for the issuance of qualified and non-qualified options as
those terms are defined by the Internal Revenue Code.
The 1997 Plan provides for the issuance of 6,000,000 shares of common
stock. All options issued, pursuant to the 1997 Plan, can not have a term
greater than ten years. Options granted under this plan vest over periods
established in option agreements. As of June 30, 2005, 1,436,370 options
are outstanding under this plan. No additional shares can be granted
under this plan.
The 2000 Plan provides for the issuance of 10,000,000 shares of common
stock plus an annual increase, effective on the first day of each
calendar year, equal to 10% of the number of outstanding shares of common
stock as of the first day of such calendar year, but in no event, more
than 20,000,000 shares in the aggregate. All options issued, pursuant to
the 2000 Plan, can not have a term greater than ten years. Options
granted under the 2000 Plan vest over periods established in option
agreements. As of June 30, 2005, the 2000 Plan provides for the issuance
of 16,429,438 shares of common stock. As of that date, 11,217,500 options
are outstanding under this plan.
During the fiscal year 2005, excluding 4,854,325 options which were
repriced (see below), 3,261,700 options were granted. Of this amount,
certain grants are detailed as follows:
o 2,000,000 fully vested options were granted to the Company's Chief
Executive Officer, having an exercise price of $1.23.
o 25,000 fully vested options were granted to the Company's Chief
Financial Officer, having an exercise price of $1.23.
o 761,000 performance-based options were granted as follows:
o 125,000 options were granted to the Company's Chief Financial
Officer, having an exercise price of $1.23, which was the
closing price of the Company's common stock on the date of the
grant. The options vest 25% on July 1, 2006 and each
subsequent July 1st through July 1, 2009.
o 636,000 options were granted to certain executives and
employees, having an exercise price of $1.23, which was the
closing price of the Company's common stock on the date of the
grant. The options vest 25% on July 1, 2006 and each
subsequent July 1st through July 1, 2009.
F-29
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Equity Securities, continued
Stock Options, continued
At June 30, 2005, the Company repriced certain options to officers,
executives and employees as follows:
-------------------------------------------- ---------------------------------------
Original Option Grants Repriced Option Grants
--------------- -------------------------------------------- ---------------------------------------
Options Exercise Price Remaining Life Exercise Remaining Life
Granted Ranges Ranges Price Ranges
--------------- -------------------- ----------------------- ------------- -------------------------
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
Officers 3,275,000 $2.24 to $4.41 8.60 to 9.57 years $ 1.23 5 years
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
Executives 425,000 $1.94 to $2.69 4.57 to 9.57 years $ 1.23 4.57 to 5.50 years
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
Employees 1,154,325 $1.64 to $5.50 2.10 to 8.60 years $ 1.23 2.10 to 5.0 years
---------------- --------------- -------------------- ----------------------- ------------- -------------------------
4,854,325
--------------- -------------------- ----------------------- ------------- -------------------------
The repriced options were remeasured at market price on the date of
repricing and, as such, no financial impact was recorded. Substantially
all of the options were fully vested as of the repricing date.
The following table summarizes the options assumed by Interpharm, Inc. in
the ATEC reverse merger and activity for the period June 30, 2003 to June
30, 2005. There were no options issued by Interpharm, Inc. prior to the
reverse merger.
Weighted Average
Number of Options Exercise Price
--------------------- -----------------------
Options assumed from ATEC in reverse merger
transaction - May 30, 2003 7,495,691 $1.51
Granted 5,075,000 $0.68
Exercised (25,000) $1.25
------------
Outstanding at June 30, 2003 12,545,691 $1.17
Granted 1,443,800 $4.03
Exercised (3,477,441) $1.04
Forfeited (23,250) $0.94
------------
Outstanding at June 30, 2004 10,488,800 $1.62
Granted(a) 8,116,025 $1.53
Exercised (1,096,630) $0.57
Forfeited(a) (4,854,325) $3.29
----------
Outstanding at June 30, 2005 12,653,870 $1.01
=========
(a) Includes 4,854,325 options repriced at June 30, 2005.
F-30
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 11 - Equity Securities, continued
Stock Options, continued
The following table summarizes information concerning outstanding and
exercisable stock options as of June 30, 2005:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------
Weighted
Number Average Weighted Number Weighted
Outstanding Remaining Average Exercisable Average
Range of At Contractual Exercise at Exercise
Exercise Prices June 30, 2005 Life Price June 30, 2005 Price
---------------------------- --------------------- ----------------- ------------- ---------------------- --------------
$0.450 - $0.680 6,584,000 7.42 $0.64 3,934,249 $0.62
$1.230 - $3.970 5,924,870 7.69 $1.30 4,918,920 $1.31
$4.410 - $6.800 145,000 3.85 $6.18 145,000 $6.18
------------ ------------
12,653,870 8,595,888
========== ===========
NOTE 12 - Commitments and Contingencies
Legal Proceedings
Because Interpharm, Inc. utilizes certain controlled substances, it is
subject to routine inspection by the U.S. Drug Enforcement Agency. In
June, 2004, Interpharm, Inc. received a notice from the United States
Attorney's Office for the Eastern District of New York relating to a
routine inspection conducted in November, 2003. No complaint has been
filed by the United States Attorney's Office, and, on September 19, 2005,
we settled any and all potential claims pursuant to an Agreement and
Memorandum of Understanding, the terms of which required a $50,000 payment
from us at signing.
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.
Significant New Contracts
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
F-31
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 12 - Commitments and Contingencies, continued
Significant New Contracts, continued
manufacture and market the products. Further, this agreement provides the
Company with a perpetual license of all technology and components of the
Technical Packages necessary to produce the liquid products that are the
subject of the agreement. It also allows the Company the use of the
technology for other products in exchange for an additional fee. In the
event that Tris delivers twenty-five successful Technical Packages, of
which there can be no assurance, the Company will pay Tris approximately
$3,000,000. In accordance with the terms of this agreement, the Company
will make payments as various milestones are achieved. In addition, Tris
is to receive a royalty of between 10% and 12% of net profits resulting
from the sales of each product.
According to the terms of the second agreement, as amended, for the solid
dosage products, the Company will collaborate with Tris on the
development, manufacture and marketing of eight solid oral dosage generic
products and two softgel products, some of which may require the Company
to challenge the patents for the equivalent branded products. This
agreement, as amended, provides for payments of an aggregate of $4,500,000
to Tris, whether or not regulatory approval is obtained for any of the
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. So long as
Tris continues to provide evidence of their effort to develop the eight
solid generic pharmaceutical products and two softgel products, the
Company is obligated to remit payments.
As of June 30, 2005, the Company recorded as a research and development
expense and paid Tris $1,400,000 in connection with these agreements.
Software license
During the year ended June 30, 2005, the Company entered into a four year
software license agreement which will require the Company to make
quarterly payments of $28,535, plus applicable sales taxes through
December 31, 2008. Thereafter the Company may opt to remit annual fees in
order to maintain a perpetual user's license.
Future minimum annual payments for the software license are as follows:
For the Year
Ending June 30, Amount
-----------------------------------------------
2006 $ 124,000
2007 124,000
2008 124,000
2009 62,000
-----------
Total $ 434,000
===========
F-32
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 13 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the years ended
June 30, 2005 and 2004, the six month periods ended June 30, 2003 and
2002 and for the year ended December 31, 2002:
Sales - Percent of Revenue
--------------------------
Year Ended Six Months Ended Year Ended
June 30, June 30, December 31,
2005 2004 2003 2002 2002
---- ---- ---- ---- ----
Customer A 23% 26% * * *
Customer B 22% 29% 37% 45% 44%
Customer C * * 13% 16% *
* Sales to customers were less than 10%
The Company complies with its supply agreements to sell various strength
Ibuprofen to the Department of Veteran Affairs ("DVA") through
intermediary wholesale prime vendors which are designated by the DVA.
During the year ended June 30, 2004 the DVA added a second prime vendor,
and as a result, reduced our sales to the initial prime vendor to an
amount below 10% of its revenue. Sales to both wholesale prime vendors
during the years ended June 30, 2005 and 2004 aggregated approximately
11.1% and 9.7%, respectively.
Accounts Receivable
June 30,
2005 2004
--------------------------- ------------------- -----------------
Customer A $1,788,572 $849,055
Customer B 1,863,436 2,760,500
Customer C 618,636 172,851
Major Suppliers
The Company purchased materials from three suppliers, during the years
ended June 30, 2005 and 2004, totaling approximately 70% and 82%,
respectively, and two suppliers totaling approximately 60%, 72% and 68%
of the Company's total purchases, during the six month periods ended June
30, 2003 and 2002 and for the year ended December 31, 2002, respectively.
At June 30, 2005 and 2004 amounts due to these suppliers included in
accounts payable, were approximately $2,311,000 and $2,590,000,
respectively.
F-33
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
NOTE 14 - Quarterly Financial Data (Unaudited)
Summarized quarterly financial information consists of the following:
Sept. 30, 2004 Dec. 31, 2004 March 31, 2005 June 30, 2005
--------------------- ---------------------- --------------------- ----------------------
Sales, net $9,053,132 $8,838,067 $10,669,660 $11,350,111
Gross profit 1,940,104 2,593,502 2,271,780 2,266,846
Net income (loss) 413,272 625,532 (633,574) (554,662)
Basic EPS $0.01 $0.02 $(0.03) $(0.01)
===== ===== ======= =======
Diluted EPS $0.01 $0.01 $(0.03) $(0.01)
===== ===== ======= =======
Sept. 30, 2003 Dec. 31, 2003 March 31, 2004 June 30, 2004
--------------------- ---------------------- --------------------- ----------------------
Sales, net $6,875,348 $11,706,231 $11,307,974 $11,210,175
Gross profit 1,431,830 2,618,275 2,815,151 2,929,579
Net income 227,439 1,024,097 983,530 887,755
Basic EPS $0.01 $0.05 $0.05 $0.04
===== ===== ===== =====
Diluted EPS $0.00 $0.01 $0.01 $0.01
===== ===== ===== =====
The unaudited interim financial information reflects all adjustments,
which in the opinion of management, are necessary to fairly present the
results of the interim periods presented. All adjustments are of a normal
recurring nature. The sum of the quarterly EPS amounts may not equal the
full year amounts due to rounding.
F-34