UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2006
OR
| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of registrant in its charter)
Delaware 22-2407475
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip Code)
(888) 319-6962
(Registrant's telephone number, including Area Code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
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 and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Indicate by check whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at May 10, 2006
Common Stock, $0.002 par value 12,870,940 Shares
------------------------------ -----------------
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Quarterly Period Ended March 31, 2006
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements: 2
Condensed Consolidated Statements of Operations for the
Nine and Three Months Ended March 31, 2006 and 2005 (unaudited) 2
Condensed Consolidated Balance Sheets as of March 31, 2006
(unaudited) and June 30, 2005 3
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the Year Ended June 30, 2005
and the Nine Months Ended March 31, 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2006 and 2005 (unaudited) 5
Notes to Condensed Consolidated Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 26
Item 1A. Risk Factors 26
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 27
Other
Signatures 28
Disclosure Regarding Forward-Looking Statements
Certain statements in the Quarterly Report on Form 10-Q may constitute
"forward-looking" statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act"), Section 21E of the Securities Act of 1934 (the
"Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the
"PSLRA") or in releases made by the Securities and Exchange Commission, all as
may be amended from time to time. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Integrated BioPharma, Inc. or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Statements
that are not historical fact are forward-looking statements. Forward-looking
statements can be identified by, among other things, the use of forward-looking
language, such as the words, "plan", "believe", "expect", "anticipate",
"intend", "estimate", "project", "may", "will", "would", "could", "should",
"seeks", or "scheduled to", or other similar words, or the negative of these
terms or other variations of these terms or comparable language, or by
discussion of strategy or intentions. These cautionary statements are being made
pursuant to the Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the "safe harbor" provisions of such
laws. The Company cautions investors that any forward-looking statements made by
the Company are not guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual results to
differ materially from those forward-looking statements with respect to the
Company, include, but are not limited to, the risks and uncertainties affecting
its businesses described in Item 1 of the Company's Annual Report filed on Form
10-KSB for the year ended June 30, 2005 and in registration statements and other
securities filings by the Company.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable,
actual results could differ materially from a projection or assumption in any of
its forward-looking statements, are subject to change and inherent risks and
uncertainties. The forward-looking statements contained in this Quarterly Report
on Form 10-Q are made only as of the date hereof and the Company does not have
or undertake any obligation to update or revise any forward-looking statements
whether as a result of new information, subsequent events or otherwise, unless
otherwise required by law.
1
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
March 31, March 31,
------------------------------ ------------------------------
2006 2005 2006 2005
------------ ----------- ----------- ------------
Sales, net $ 12,936,092 $ 8,868,295 $40,691,493 $ 21,286,889
Cost of sales 8,642,898 6,749,833 26,087,232 18,508,770
------------ ----------- ----------- ------------
Gross profit 4,293,194 2,118,462 14,604,261 2,778,119
Selling and administrative expenses 4,225,559 3,039,363 11,186,911 8,043,650
------------ ----------- ----------- ------------
Operating income (loss) 67,635 (920,901) 3,417,350 (5,265,531)
Gain on settlement of lawsuit - 2,475,322 - 2,475,322
Other (50,118) 7,484 (146,744) 47,364
------------ ----------- ----------- ------------
Other income (expense) (50,118) 2,482,806 (146,744) 2,522,686
------------ ----------- ----------- ------------
Income (loss) before income taxes 17,517 1,561,905 3,270,606 (2,742,845)
Federal and state income taxes 30,155 65,230 95,769 42,357
------------ ----------- ----------- ------------
Income (loss) before minority interest (12,638) 1,496,675 3,174,837 (2,785,202)
Minority interest 22,149 8 139,265 (20,978)
------------ ----------- ----------- ------------
Net income (loss) 9,511 1,496,683 3,314,102 (2,806,180)
Deemed dividend from beneficial conversion feature
of Series B Preferred stock dividend (671,143) (583,000) (1,837,143) (1,749,000)
Series B Preferred stock dividend (117,648) (120,822) (364,662) (367,836)
------------ ----------- ----------- ------------
Net income (loss) applicable to common shareholders $ (779,280) $ 792,861 $ 1,112,297 $(4,923,016)
============ =========== =========== ============
Net income (loss) per common share:
Basic $ (0.06) $ 0.06 $ 0.09 $ (0.39)
============ =========== =========== ============
Diluted $ (0.06) $ 0.05 $ 0.07 $ (0.39)
============ =========== =========== ============
Weighted average common shares outstanding 12,798,048 12,621,468 12,745,815 12,589,920
Dilutive potential shares:
Warrants and options - 3,998,978 2,635,497 -
Convertible preferred stock - - - -
Weighted average common share outstanding
- assuming dilution 12,798,048 16,620,446 15,381,312 12,589,920
============ =========== =========== ============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2006 2005
------------ ------------
Assets
Current Assets:
Cash and cash equivalents $ 3,737,781 $ 2,427,553
Accounts receivable, net 6,194,514 4,470,927
Inventories, net 11,156,411 9,987,288
Deferred income taxes 114,000 107,000
Other current assets 1,232,153 715,074
------------ ------------
Total current assets 22,434,859 17,707,842
Property and equipment, net 4,222,085 4,664,306
Goodwill 145,410 145,410
Intangible assets, net 3,674,642 3,473,366
Deferred income taxes 102,000 70,000
Security deposits and other assets 231,374 181,547
------------ ------------
Total Assets $ 30,810,370 $ 26,242,471
============ ============
Liabilities and Stockholders' Equity:
Current Liabilities:
Note payable - bank $ 4,500,000 $ 4,500,000
Accounts payable 5,204,312 3,986,607
Accrued expenses and other current liabilities 1,357,196 1,612,904
Loan payable - Trade Investment Services, LLC, related party 172,260 172,260
------------ ------------
Total Current Liabilities 11,233,768 10,271,771
Commitments and Contingencies
Series B 7% Redeemable Convertible Preferred Stock, net of beneficial
conversion feature, warrants issued and issuance costs, $0.002 par value;
1,250 shares authorized; 700 shares issued, 675 and 700 outstanding at
March 31, 2006 and June 30, 2005, liquidation preference of $6,750,000
at March 31, 2006 and $7,000,000 at June 30, 2005 4,379,143 2,792,000
Minority Interest 210,513 349,804
Stockholders' Equity:
Preferred Stock, $0.002 par value;1,000,000 shares authorized; no shares issued - -
Common Stock, $0.002 par value; 25,000,000 shares authorized; 12,840,340
shares issued at March 31, 2006 and 12,685,690 at June 30, 2005;
12,805,440 shares outstanding at March 31, 2006 and
12,650,790 at June 30, 2005 25,681 25,371
Restricted stock 307,125 -
Additional paid-in-capital 29,063,570 28,325,252
Accumulated deficit (14,310,091) (15,422,388)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
------------ ------------
Total Stockholders' Equity 14,986,946 12,828,896
------------ ------------
Total Liabilities and Stockholders' Equity $ 30,810,370 $ 26,242,471
============ ============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 2005 AND THE NINE MONTHS ENDED MARCH 31, 2006
Series A
Convertible Common Stock Additional Total
Preferred Par Restricted Paid-in- Accumulated Treasury Stock Stockholders'
Stock Shares Value Stock Capital Deficit Shares Cost Equity
----- ---------- ------- -------- ----------- ------------- ------ --------- -----------
Balance, July 1, 2004 $ - 12,510,690 $25,021 $ - $27,961,003 $ (4,020,155) 25,800 $(28,831) $23,937,038
Exercise of stock
options for cash - 148,000 296 - 178,003 - - - 178,299
Issuance of common
stock for consulting fees - 27,000 54 - 186,246 - - - 186,300
Stock repurchase plan - - - - - - 9,100 (70,508) (70,508)
Dividends paid on Series B
preferred stock - - - - - (490,000) - - (490,000)
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - - (2,332,000) - - (2,332,000)
Net Loss - - - - - (8,580,233) - - (8,580,233)
----- ---------- ------- -------- ----------- ------------- ------ --------- -----------
Balance, June 30, 2005 - 12,685,690 25,371 - 28,325,252 (15,422,388) 34,900 (99,339) 12,828,896
(Unaudited)
Exercise of stock
options for cash - 118,400 237 - 128,103 - - - 128,340
Series B preferred stock
converted to common - 25,000 50 - 249,950 - - - 250,000
Restricted stock award - - - 351,000 - - - - 351,000
Restricted stock earned - 11,250 23 (43,875) 43,852 - - - -
Dividends paid on Series B
preferred stock - - - - - (364,662) - - (364,662)
Compensation expense
for employee stock
options - - - - 316,413 - - - 316,413
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - - (1,837,143) - - (1,837,143)
Net Income - - - - - 3,314,102 - - 3,314,102
----- ---------- ------- -------- ----------- ------------- ------ --------- -----------
Balance, March 31,
2006 (Unaudited) $ - 12,840,340 $25,681 $307,125 $29,063,570 $(14,310,091) 34,900 $(99,339) $14,986,946
===== ========== ======= ======== =========== ============= ====== ========= ===========
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
March 31,
----------------------------------------
2006 2005
------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 3,314,102 $ (2,806,180)
Adjustments to reconcile net income (loss) to net cash prodvided by
(used in) operating activities:
Depreciation and amortization 845,482 1,150,323
Deferred income taxes (39,000) (4,000)
Allowance for inventory 7,500 7,500
Bad debt expense 8,300 7,500
Issuance of common stock for consulting services 43,875 186,300
Compensation expense for employee stock options 316,413 -
Minority interest (139,291) 20,978
Changes in assets and liabilities (excludes impact of acquistions):
(Increase) decrease in:
Accounts receivable (1,731,887) (1,682,021)
Inventories (1,176,623) (3,169,269)
Prepaid expenses and other assets (209,954) (286,536)
Security deposits and other assets (49,827) 51,433
(Decrease) increase in:
Accounts payable 1,217,704 1,569,912
Income taxes payable - (47,025)
Accrued expenses and other liabilities (255,708) 475,587
------------------ ------------------
Net cash provided by (used in) operating activities 2,151,086 (4,525,498)
------------------ ------------------
Cash flows from investing activities:
Purchase of intangible assets (436,969) (250,000)
Investment in joint venture - (25,366)
Purchase of property and equipment (167,567) (1,504,636)
------------------ ------------------
Net cash used in investing activities (604,536) (1,780,002)
------------------ ------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 128,340 121,849
Repayments of notes payable - (19,655)
Purchase of treasury stock - (70,508)
Dividends paid (364,662) (367,836)
------------------ ------------------
Net cash used in financing activities (236,322) (336,150)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents 1,310,228 (6,641,650)
Cash and cash equivalents at beginning of period 2,427,553 9,548,046
------------------ ------------------
Cash and cash equivalents at end of period $ 3,737,781 $ 2,906,396
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 193,746 $ 115,731
================== ==================
Income taxes $ 122,914 $ 46,138
================== ==================
Supplemental disclosures of Non-cash transactions:
Deemed dividend from beneficial conversion feature of Series B Preferred stock $ (1,837,143) $ (1,749,000)
================== ==================
Conversion of Series B Preferred stock to Common Stock $ 250,000 $ -
================== ==================
Issuance of restricted stock award $ 351,000 $ -
================== ==================
See accompanying notes to condensed consolidated financial statements.
5
Note 1. Principles of Consolidation and Basis of Presentation
The Company is engaged primarily in the manufacturing, distributing, marketing
and sales of vitamins, nutritional supplements and herbal products; the
manufacture and distribution of paclitaxel, which is the primary
chemotherapeutic agent in the treatment of breast cancer; technical services
through its contract research organization; and the biotechnology business which
uses its patented plant-based technology to produce vaccines and therapeutic
antibodies. The Company's customers are located primarily throughout the United
States.
The accompanying interim unaudited condensed consolidated financial statements
have been prepared in conformity with Rule 10-01 of Regulation S-X of the
Securities and Exchange Commission ("SEC") and therefore do not include
information or footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with accounting
principles generally accepted in the United States of America. However, all
adjustments (consisting only of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the periods presented have been included.
These condensed consolidated financial statements should be read in conjunction
with the financial statements and notes thereto, together with Management's
Discussion and Analysis or Plan of Operation, contained in the Company's Annual
Report on Form 10-KSB for the fiscal year ended June 30, 2005 ("10-KSB"), as
filed with the SEC. The June 30, 2005 balance sheet was derived from audited
financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States of America. The
results of operations for the three and nine months ended March 31, 2006 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2006 or for any other period.
Effective July 1, 2005, the Company no longer qualified as a small business
issuer as the result of its revenues exceeding $25.0 million for the prior two
fiscal years. Accordingly, effective July 1, 2005, the Company began to comply
with the reporting requirements of Regulation S-K instead of Regulation S-B.
The accompanying condensed consolidated financial statements for the interim
periods are unaudited and include the accounts of the Company and its
subsidiaries, all of which are wholly-owned or majority owned with an offset to
minority interest. All significant intercompany transactions and balances have
been eliminated. Certain prior period amounts have been reclassified in the
condensed consolidated financial statements to conform to the current year
presentation.
On October 1, 2004, the Company acquired a 51% interest in Micro Nutrition, Inc.
("Micro") for a cash payment of $362,486. The accounts of Micro are consolidated
with those of the Company since such date. Micro is a California corporation in
the mail order business selling primarily nutritional specialty food items.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles 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 revenues and expenses during the
reporting period. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The most significant estimates include:
o sales returns and allowances;
o allowance for doubtful accounts;
o inventory valuation and obsolescence;
o valuation and recoverability of long-lived and intangible assets
and goodwill, including the values assigned to acquired
intangible assets;
o income taxes and valuation allowance on deferred income taxes, and;
o accruals for, and the probability of, the outcome of current litigation.
On a continual basis, management reviews its estimates utilizing currently
available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates. Nothing has come our attention, which would cause a change in these
estimates.
6
Stock-Based Compensation. At March 31, 2006, the Company has two stock-based
compensation plans. For the three and nine months ended March 31, 2005, no
stock-based employee compensation is reflected in net income, as all the options
granted under the plan had an exercise price equal to the market value of the
underlying common stock on the date of grant.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment," ("SFAS No. 123(R)") which is a revision of SFAS No. 123, "Accounting
for Stock-Based Compensation". SFAS123(R) requires that the compensation cost
relating to share-based payment transactions be recognized in financial
statements. The compensation cost is measured based on the fair value of the
equity or liability instruments issued. The Statement is effective as of July 1,
2005 and accordingly, the Company adopted SFAS 123(R) in the quarter ended
September 30, 2005. The compensation cost of the adoption of this agreement was
an additional $316,413 of compensation for the nine months ended March 31, 2006.
Additionally, the Company has chosen to account for the adoption under the
modified prospective method, which requires compensation expense to be recorded
for all unvested stock options at the beginning of the first quarter of adoption
of SFAS 123(R). As of March 31, 2006, the unvested portion of previously granted
awards that were outstanding as of the date of adoption of SFAS123(R) have been
expensed. The Company previously had elected to account for stock-based
compensation in accordance with the provisions of Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees". Under APB
No. 25, compensation cost for stock options is measured as the excess, if any,
of the quoted market price of the Company's stock at the date of the grant over
the amount an employee must pay to acquire the stock.
Prior to the adoption of SFAS 123(R) the Company had accounted for stock-based
compensation in accordance with FASB Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." The effect on net income
and earnings per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation",
to stock-based employee compensation is as follows (prior to the adoption of
SFAS 123(R)):
Three months ended Nine months ended
March 31, March 31,
2005 2005
---------------- ---------------
Net income (loss) available to
common stockholders, as reported $ 792,861 $ (4,923,016)
Add: Stock-based employee compensation
expense included in net income (loss),
net of related tax effects - -
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (839,147) (3,708,178)
---------------- ---------------
Pro forma net (loss) available to
common stockholders $ (46,286) $ (8,631,194)
================ ===============
Earnings per share:
Basic - as reported $ 0.06 $ (0.39)
================ ===============
Basic - pro forma $ (0.00) $ (0.69)
================ ===============
Diluted - as reported $ 0.05 $ (0.39)
================ ===============
Diluted - pro forma $ (0.00) $ (0.69)
================ ===============
7
For the periods prior to and subsequent to the adoption of SFAS 123(R) the
Company used the Black-Scholes option pricing model to determine stock options
fair value. The fair value for these options was estimated at the date of each
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for March 31,
2006 2005
---------- --------
Risk-free interest rate 4.0% 4.0%
Expected volatility 78% to 93% 118%
Dividend yield -- --
Expected life 10 years 10 years
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair-value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
Earnings Per Share. In accordance with SFAS No. 128, "Earnings Per Share," basic
earnings per common share are based on weighted average number of common shares
outstanding. Diluted earnings per share amounts are based on the weighted
average number of common shares outstanding, plus the incremental shares that
would have been outstanding upon the assumed exercise of all potentially
dilutive stock options, warrants and convertible preferred stock, subject to
antidilution limitations.
During the nine months ended March 31, 2006, 5,445,548 stock options and
warrants with exercise prices below the market price were included in the
computation of diluted earnings per share. During the nine months ended March
31, 2005, options and warrants to purchase 5,580,261 shares of common stock were
outstanding but were not included in the computation of diluted earnings per
share as they were greater than the market price of the common shares or
antidilutive as a result of net losses during the period. During the three
months ended March 31, 2006, options and warrants to purchase 6,815,048 shares
of common stock were outstanding but were not included in the computation of
diluted earnings per share as they were greater than the market price of the
common shares or antidilutive as a result of net losses during the period.
During the three months ended March 31, 2005, 4,642,595 stock options and
warrants with exercise prices below the market price were included in the
computation of diluted earnings per share. During the periods ended March 31,
2006 and 2005, Convertible Series B Preferred Stock common stock equivalents in
the amount of 6,750,000 and 7,000,000 shares, respectively, were not included in
the computation of diluted earnings per share as their conversion price was
greater than the market price of the common shares or they were antidilutive as
a result of net losses for the periods presented.
During the nine months ended March 31, 2006 and the three months ended March 31,
2005, options and warrants to purchase 1,369,500 shares and 1,563,666 shares of
common stock, respectively, were outstanding but were not included in the
computation of diluted earnings per share because their exercise price was
greater than the market price of the common shares.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 153. "Exchanges of Non monetary
Assets, an Amendment of APB Opinion No. 29" ("SFAS No. 153"). SFAS No. 153 is
effective for non monetary asset exchanges occurring in our fiscal year
beginning July 1, 2005. SFAS No. 153 requires that exchanges of productive
assets be accounted for at fair value unless fair value cannot be reasonably
determined or the transaction lacks commercial substance. SFAS No. 153 does not
have a material impact on our financial statements.
In May 2005, the FASB issued SFAS No. 154 "Accounting Changes and Error
Corrections - A Replacement of APB Opinion No. 20 and FASB Statement No. 3
("SFAS No. 154")". SFAS No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. SFAS No. 154 does not change the guidance for reporting
the correction of an error in previously issued financial statements or a change
in accounting estimate. The provisions of SFAS No. 154 shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. The impact of this statement will depend on accounting
changes in future periods, if any, therefore we are not able to assess, at this
time, the future impact of this statement on our consolidated financial position
or results of operations.
8
Note 2. Goodwill and Other Intangible Assets
Goodwill and other intangible assets are tested for impairment at the reporting
unit level (operating segment or one level below an operating segment) on an
annual basis and between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a reporting unit below
its carrying value. Application of the goodwill impairment test requires
judgment, including the identification of reporting units, assignment of assets
and liabilities to reporting units, assignment of goodwill to reporting units,
and determination of the fair value of each reporting unit. The Company
performed its annual impairment test during the fourth quarter of fiscal 2005.
The Company concluded that the goodwill recognized on the Paxis Pharmaceutical,
Inc. acquisition was impaired and consequently wrote off $542,728 in the fiscal
year ended June 30, 2005. As of March 31, 2006 and June 30, 2005, goodwill
consisted of $145,410 from the Aloe Acquisition.
The carrying amount of acquired other intangible assets as of March 31, 2006 and
June 30, 2005 is as follows:
March 31, 2006 June 30, 2005
--------------------------------------------- --------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Net Amount Amortization Net
----------- ------------ ----------- ----------- ------------ -----------
Trade names and patents $ 1,694,969 $ 191,565 $ 1,503,404 $ 1,508,000 $ 125,667 $ 1,382,333
Intellectual property 1,500,000 229,167 1,270,833 1,250,000 125,002 1,124,998
Unpatented technology 547,000 169,999 377,001 547,000 140,000 407,000
License agreement 611,730 88,326 523,404 611,730 52,695 559,035
----------- ------------ ----------- ----------- ------------ -----------
Total $ 4,353,699 $ 679,057 $3,674,642 $ 3,916,730 $ 443,364 $3 ,473,366
=========== ============ =========== =========== ============ ===========
During the nine month period ended March 31, 2006, the Company made its
semiannual payment of $250,000 towards its maximum purchase price of $2.5
million under its intellectual property acquisition agreement with the Center
for Molecular Biotechnology of Fraunhofer USA, Inc. entered into in January
2004. Amortization expense recorded on other intangible assets for the three and
nine months ended March 31, 2006 and 2005 was $87,584 and $86,825, and $235,693
and $230,078, respectively. Amortization expense is recorded on the
straight-line method over periods ranging from 10 years to 20 years.
The estimated annual amortization expense for other intangible assets for the
five succeeding fiscal years is as follows:
Year ended Amortization
June 30, Expense
----------- ----------
2006, remainder $ 87,584
2007 331,600
2008 331,600
2009 331,600
2010 331,600
Thereafter 2,260,658
----------- ----------
Total $3,674,642
==========
9
Note 3. Inventories
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS No. 151
amends ARB No. 43, "Inventory Pricing," to clarify the accounting for certain
costs as period expense. The SFAS No. 151 is effective for fiscal years
beginning after June 15, 2005. The Company adopted SFAS No. 151 in the quarter
ended September 30, 2005. There was no impact from the adoption of this
statement.
Inventories are stated at the lower of cost or market using the first-in,
first-out method and consist of the following as of March 31, 2006 and June 30,
2005:
March 31, June 30,
2006 2005
----------- ----------
Raw materials $ 5,674,965 $5,577,034
Work-in-process 2,751,703 1,330,855
Finished goods 2,729,743 3,079,399
----------- ----------
Total $11,156,411 $9,987,288
=========== ==========
Note 4. Property and Equipment
Property and equipment consists of the following as of March 31, 2006 and June
30, 2005:
March 31, June 30,
2006 2005
----------- ----------
Land and building $ 1,250,000 $1,250,000
Leasehold improvements 2,157,321 2,157,321
Machinery and equipment 8,964,548 8,796,980
Transportation equipment 37,714 37,714
----------- ----------
12,409,583 12,242,015
Less: Accumulated
depreciation
and amortization 8,187,498 7,577,709
----------- ----------
Total $ 4,222,085 $4,664,306
=========== ==========
Note 5. Note and Loan Payable
Note payable is a promissory note provided by Bank of America dated December 31,
2004 (the "Note") in the amount of $4,500,000 with interest at a variable rate
based on 1.25% over the current LIBOR rate. The Note has been renewed through
January 4, 2007 under the existing terms and conditions of the Note. The Note is
guaranteed by Mr. Carl DeSantis, a shareholder and director of the Company. At
March 31, 2006 and June 30, 2005 the interest rate was 6.07% and 4.58%,
respectively.
Loan payable-Trade Investment Services is a demand loan provided by Trade
Investment Services, LLC ("TIS"), a former shareholder of Paxis, dated July 1,
2002 with interest at 9.00%.
Note 6. Line of Credit
On October 27, 2005, the Company closed on a $2,000,000 revolving line of credit
agreement, which bears interest at 3% above the prime interest rate and expires
on October 27, 2007. The line of credit includes specific loan covenants. The
loan is collateralized by specific assets of the Company and is personally
guaranteed by the Chairman of the Board of the Company. As of March 31, 2006,
the Company has not made any draw downs on this line of credit. During the three
and nine months ended March 31, 2006, the Company expensed $36,000 and $60,000,
respectively, in commitment and other fees associated with the line of credit.
10
Note 7. Significant Risks and Uncertainties
(a) Concentrations of Credit Risk-Cash. The Company maintains balances at
several financial institutions. Deposits at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At March 31, 2006 and June
30, 2005, the Company's uninsured cash balances were approximately $2.9 million
and $1.7 million, respectively.
(b) Concentrations of Credit Risk-Receivables. The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts and other allowances at March 31,
2006 and June 30, 2005 is $64,847 and $56,547, respectively.
(c) Major Customers. For the nine months ended March 31, 2006, approximately 44%
or $19.4 million, 24% or $10.6 million and 20% or $8.7 million of gross sales
were derived from three customers. For the nine months ended March 31, 2005,
approximately 39% or $8.2 million and 32% or $3.9 million of gross sales were
derived from two customers. For the three months ended March 31, 2006,
approximately 64% or $9.1 million, 24% or $3.4 million and 8% or $1.2 million of
gross sales were derived from three customers. For the three months ended March
31, 2005, approximately 39% or $3.5 million and 39% or $3.5 million of gross
sales were derived from two customers. The loss of any of these customers would
have an adverse affect on the Company's operations. Accounts receivable from
these three customers comprised approximately 55% as compared to two customers
representing 64% of total accounts receivable at March 31, 2006 and June 30,
2005, respectively.
Note 8. Commitments and Contingencies
(a) Leases
Related Party Leases- Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's chairman, president and principal stockholder and certain family
members and 10% owned by a former senior executive officer. The lease provides
for minimum annual rental of $323,559 through May 31, 2015 plus increases in
real estate taxes and building operating expenses. On July 1, 2004, the Company
leased an additional 24,810 square feet of warehouse space on a month-to month
basis. Rent expense for the three and nine months ended March 31, 2006 and 2005
on this lease was $226,000 and $248,000 and $547,000 and $626,000, respectively,
and is included in both manufacturing and selling and administrative expenses.
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2007. Rent expense has been straight-lined over the life of
the lease. At its option, the Company has the right to renew the lease for an
additional five-year period. On August 27, 2002 the lease was amended reducing
the square footage from approximately 32,500 to 22,500 and reducing the monthly
rent to $22,483 per month for the remainder of the lease. Rent expense for the
three and nine months ended March 31, 2006 and 2005 was approximately $93,000
and $61,000 and $290,000 and $243,000, respectively and is included in
manufacturing expenses.
The Company leases warehouse and office facilities through March 31, 2007. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. The Company leases office space through December 31, 2006. The lease
was effective on October 1, 2005 and provides for a minimum monthly rental of
$1,126. The Company leases office space through December 31, 2012, and provides
for a minimum monthly rental of $16,092. The Company leases warehouse equipment
for a five (5) year period with an annual rental of $16,104 and office equipment
for a five (5) year period with an annual rental of $8,400.
11
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2008.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Year Ending Lease Party Lease
June 30, Commitment Commitment Total
--------------- ----------- ---------- ----------
2006, remainder $ 167,205 $ 80,890 $ 248,095
2007 527,047 323,559 850,606
2008 215,387 323,559 538,946
2009 209,185 323,559 532,744
2010 202,642 323,559 526,201
Thereafter 485,366 1,590,832 2,076,198
--------------- ----------- ---------- ----------
Total $ 1,806,832 $2,965,958 $4,772,790
=========== ========== ==========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $1,271,000 and $1,200,000 for the nine months ended March 31, 2006
and 2005, respectively. Rent expense, including real estate taxes and
maintenance charges, for the three months ended March 31, 2006 and 2005, was
approximately $399,000 and $441,000 respectively.
(b) Consulting Agreement - On October 20, 2003, the Company entered into a one
year consultant agreement with an investor relations consultant. The Company
paid $80,000 over the term of the agreement. In addition, the Company initially
agreed to issue to the consultant 36,000 shares of its common stock. On July 13,
2004, the Company terminated the agreement. Under the terms of the termination
agreement, the Company was not obligated to pay the $10,000 per month fee after
July 15, 2004. Additionally, the Company issued to the consultant 27,000 shares
of common stock valued at the fair market price on the date of issuance in lieu
of the original 36,000 shares. The 27,000 shares of common stock were valued at
$186,300 and are included in selling and administrative expenses for the nine
months ended March 31, 2005.
(c) Intellectual Property Agreement - In connection with the acquisition in
January 2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for additional intellectual property. As of March 31, 2006 and June
30, 2005, $1,500,000 and $1,250,000, respectively, have been paid for the
intellectual property and is being amortized on a straight-line basis over a
ten-year period.
(d) Legal Proceedings -NatEx Georgia LLC and Vasili Patarkalishvili versus
Robert B. Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis
Pharmaceuticals, Inc., Dean P. Stull and Integrated BioPharma, Inc. is pending
in the Supreme Court of the State of New York in New York County. Plaintiffs
NatEx Georgia LLC and Vasili Patarkalishvili commenced this action on July 19,
2004, alleging claims for breach of contact, fraud and breach of the implied
duty of good faith and fair dealing arising out of an alleged failure by Paxis
to perform under the parties' agreements by which NatEx had agreed to supply
Paxis with Paclitaxel extract. The complaint sought damages of more than $5
million. The Company moved to dismiss all claims. On January 6, 2006, the state
court granted the Company's motion to dismiss the fraud, breach of implied duty
of good faith and fair dealing claims entirely and the breach of contract claim
in part, and preserved for plaintiffs only a limited right to conduct discovery
with respect to the delivery of goods. On February 2, 2006, the plaintiffs filed
a Notice of Appeal of the trial court's decision. On March 26, 2006, the trial
court granted the plaintiffs' counsel's motion to withdraw. The court has given
the plaintiff until June 27, 2006 to retain new counsel. The Company intends to
continue to defend vigorously the claims in this lawsuit. The outcome of the
lawsuit is uncertain; however, the Company believes that it will not have a
material financial impact.
12
Note 9. Related Party Transactions
The Company has a consulting agreement with Eugene Kay, a former employee of the
Company and a brother of E. Gerald Kay, the Company's Chairman of the Board.
This agreement is on a month-to-month basis for $1,100 per month. The total
consulting expense recorded per this verbal agreement for the three and nine
months ended March 31, 2006 and 2005 was $9,900 and $3,300, respectively. The
Company has another consulting agreement with EVJ, LLC, a limited liability
company controlled by Robert Kay, a director of the Company, the Chairman of its
subsidiary, InB: Paxis, and a brother of E. Gerald Kay and Eugene Kay. This
agreement was assumed by and became a liability of the Company as a part of the
Company's acquisition of Paxis Pharmaceuticals Inc. in 2004. The total
consulting expense under this agreement was $30,000 and $90,000 for the three
and nine months ended March 31, 2006, respectively, and $45,000 and $135,000 for
the three and nine months ended March 31, 2005.
Note 10. Equity Transactions
(a) Stock Option Plan and Warrants - On July 19, 2005, the Company granted
25,000 incentive stock options for a period of ten years at an exercise price
equal to the market price of $2.05. During the three month period ended December
31, 2005, the Company granted 148,000 incentive stock options for a period of
ten years at a exercise price equal to the market price ranging from $3.13 to
$4.10. The Company did not grant any stock options in the three month period
ended March 31, 2006.
(b) Restricted Stock Award - Effective January 3, 2006, the Company granted
90,000 restricted shares (the "Restricted Shares") of the common stock at the
then market price of $3.90 in connection with a consulting agreement whereby the
consultant is to provide investor and public relations services for a two-year
period. The Restricted Shares are to be issued in a private placement pursuant
to Section 4(2) of the Securities Act of 1933, pending the approval of the
American Stock Exchange of an additional listing application. The agreement is
terminable by the Company after the first year of the term in the event the
consultant does not meet certain performance milestones. In the event of such
termination, the consultant is required to surrender half of its compensation,
in the form of either shares of common stock or cash. In accordance with SFAS
123(R) and Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity
Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services", the measurement date for
determining fair value of the Restricted Stock was determined based on the
market value of the Company's common stock as of the effective date of the
agreement. As such, on the effective date, the Company recognized prepaid
consulting expenses of $351,000 with a corresponding increase in equity. In the
three and nine month periods ended March 31, 2006, the Company recognized
consulting fee expense of approximately $44,000 in connection with this
agreement.
(c) Series B Redeemable Convertible Preferred Stock - In October 2005, the
Additional Investment Rights ("AIR") granted to the holders of the Series B
Redeemable Convertible Preferred Stock (the "Series B Preferred Shares") expired
unexercised. The AIR entitled the holders of the Series B Preferred Shares to
purchase an additional 375,000 shares of Common Stock and had warrants to
purchase an additional 187,500 shares of Common Stock. In the three month period
ended March 31, 2006, a holder of 25 Series B Preferred Shares converted its
shares into 25,000 shares of Common Stock of the Company in accordance with the
conversion procedures of the Series B Preferred Shares.
(d) Treasury Stock Purchases - On June 25, 2004 Integrated BioPharma, Inc.
adopted a stock repurchase plan giving management authority to purchase up to
$3.0 million worth of the Company's stock in open market transactions or
privately negotiated transactions at the Company's discretion. The Company
purchased an aggregate of 9,100 shares of its common stock for a purchase price
of $70,508 in July 2004.
13
Note 11. Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments.
The Company has divided its operations into three reportable segments as
follows: Sales of vitamins and nutritional supplements, sales of its active
pharmaceutical ingredient Paclitaxel and sales of technical services through its
Hauser subsidiary. The international sales, concentrated primarily in Europe,
for the three and nine months ended March 31, 2006 and 2005 were $2,430,799 and
$1,853,406 and $7,537,465 and $4,107,363, respectively.
Financial information relating to the three and nine months ended March 31, 2006
and 2005 operations by business segment is as follows:
For the Three Months Ended
March 31,
----------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- --------------------------------------------------------
Nutra- Pharma- Technical Nutra- Pharma- Technical
ceutical ceutical Services Total ceutical ceutical Services Total
----------- ------------ ---------- ----------- ----------- ------------ ------------ -------------
Sales, net
U.S. customers $ 9,886,762 $ 14,025 $ 604,506 $10,505,293 $ 6,785,012 $ - $ 229,877 $ 7,014,889
International
customers 2,430,799 - - 2,430,799 1,853,406 - - 1 ,853,406
----------- ------------ ---------- ----------- ----------- ------------ ------------ -------------
Total Sales, net $12,317,561 $ 14,025 $ 604,506 $12,936,092 $ 8,638,418 $ - $ 229,877 $ 8,868,295
=========== ============ ========== =========== =========== ============ ============ =============
Segment operating
profit (loss) $ 1,051,297 $ (613,056) $(370,606) $ 67,635 $ 1,155,835 $(1,577,920) $ (498,816) $ (920,901)
=========== ============ ========== =========== =========== ============ ============ =============
Depreciation $ 116,421 $ 80,887 $ 36,296 $ 233,604 $ 109,830 $ 182,435 $ 32,733 $ 324,998
=========== ============ ========== =========== =========== ============ ============ =============
Capital
expenditures $ 72,728 $ - $ 6,977 $ 79,705 $ 23,335 $ 142,247 $ 63,820 $ 229,402
=========== ============ ========== =========== =========== ============ ============ =============
For the Nine Months Ended
March 31,
----------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- --------------------------------------------------------
Nutra- Pharma- Technical Nutra- Pharma- Technical
ceutical ceutical Services Total ceutical ceutical Services Total
----------- ------------ ---------- ----------- ----------- ------------ ------------ -------------
Sales, net
U.S. customers $31,084,569 $ 31,700 $2,037,759 $33,154,028 $16,091,648 $ 547,507 $ 540,371 $ 17,179,526
International
customers 7,537,465 - - 7,537,465 4,107,363 - - 4,107,363
----------- ------------ ---------- ----------- ----------- ------------ ------------ -------------
Total Sales, net $38,622,034 $ 31,700 $2,037,759 $40,691,493 $20,199,011 $ 547,507 $ 540,371 $ 21,286,889
=========== ============ ========== =========== =========== ============ ============ =============
Segment operating
profit (loss) $ 6,839,853 $(2,579,385) $(843,118) $ 3,417,350 $ (164,206) $(3,964,621) $(1,136,704) $ (5,265,531)
=========== ============ ========== =========== =========== ============ ============ =============
Depreciation $ 262,864 $ 242,667 $ 104,258 $ 609,789 $ 323,340 $ 525,983 $ 70,922 $ 920,245
=========== ============ ========== =========== =========== ============ ============ =============
Capital
expenditures $ 128,226 $ - $ 39,341 $ 167,567 $ 52,166 $ 456,506 $ 995,967 $ 1,504,639
=========== ============ ========== =========== =========== ============ ============ =============
As Of March 31, As Of June 30,
----------------------------------------------------- --------------------------------------------------------
2006 2005
----------------------------------------------------- --------------------------------------------------------
Total Assets $24,123,588 $ 4,202,620 $2,484,162 $30,810,370 $19,382,744 $ 4,953,434 $ 1,906,293 $ 26,242,471
=========== ============ ========== =========== =========== ============ ============ =============
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION
AND RESULTS OF OPERATION
Certain statements set forth under this caption constitute "forward-looking
statements." See "Disclosure Regarding Forward-Looking Statements" on page 1 of
this Report for additional factors relating to such statements. The following
discussion should also be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and Notes thereto included elsewhere herein
and the Company's Annual Report on Form 10-KSB.
Effective July 1, 2005, the Company no longer qualified as a small business
issuer as the result of its revenues exceeding $25.0 million for the prior two
fiscal years. Accordingly, effective July 1, 2005, the Company began to comply
with the reporting requirements of Regulation S-K instead of Regulation S-B.
The Company is engaged primarily in the manufacturing, distributing, marketing
and sales of vitamins, nutritional supplements and herbal products; the
manufacture and distribution of paclitaxel, which is the primary
chemotherapeutic agent in the treatment of breast cancer; technical services
through its contract research organization, and the biotechnology business,
which uses its patented plant-based technology to produce vaccines and
therapeutic antibodies. The Company's customers are located primarily throughout
the United States.
For the nine months ended March 31, 2006, our Paxis subsidiary incurred a net
loss of approximately $2,580,000, which includes a write down to its inventory
in the amount of $500,000. On July 1, 2005, we announced a reduction in the rate
of production of paclitaxel, an Approved Pharmaceutical Ingredient ("API") and a
corresponding reduction in the Company's workforce. The net loss for the three
month period ended March 31, 2006 was approximately $613,000, a decrease of
approximately $37,000 from the previous quarter and $202,000 from our first
quarter, which resulted primarily from overall cost savings in manufacturing
expenses. We continue to monitor the ongoing costs of operating the Paxis
facility. In the nine month period ended March 31, 2006, we hired a director of
marketing for our Hauser and Paxis subsidiaries whose main objective is to
market our research and manufacturing capabilities and to work with our staff in
implementing a strategic sales and marketing plan. We continue to see an
increase in our proposal activity and an expansion in our potential customer
base for both companies since implementing this strategic sales and marketing
plan.
Critical Accounting Policies and Estimates
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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 revenues and expenses during the reporting period.
Management bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources. The
most significant estimates include:
o sales returns and allowances;
o allowance for doubtful accounts;
o inventory valuation and obsolescence;
o valuation and recoverability of long-lived and intangible assets
and goodwill, including the values assigned to acquired
intangible assets;
o income taxes and valuation allowance on deferred income taxes; and
o accruals for, and the probability of, the outcome of current litigation.
On a continual basis, management reviews its estimates utilizing currently
available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates. There have been no material changes in the calculation of these
estimates since the audited financial statements at June 30, 2005.
15
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. We continuously monitor payments from our customers and
maintain allowances for doubtful accounts for estimated losses in the period
they become known.
Our sales policy is to require customers to provide purchase orders establishing
selling prices and shipping terms. Shipping terms vary depending upon the
customer. Shipping terms are either F.O.B. shipping point with title and risk of
loss passing to the customer at point of shipment or F.O.B. destination where
title and risk passes to the customer when the goods are received.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped we make an estimate of any potential returns or
allowances.
If the historical data we use to calculate the allowance provided for doubtful
accounts does not reflect the future ability to collect outstanding receivables,
additional provisions for doubtful accounts may be needed and the future results
of operations could be materially affected. In recording any additional
allowances, a respective charge against income is reflected in the general and
administrative expenses, and would reduce the operating results in the period in
which the increase is recorded.
The Company performed a sensitivity analysis to determine the impact of
fluctuations in our estimates for our allowance for doubtful accounts. As of
March 31, 2006, the allowance for doubtful accounts was $64,847. If this amount
were in error by plus or minus one percent of the account receivable balance,
the impact would be an additional $62,600 of income or expense.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The inventory amounts are
composed primarily of inventory items in both the nutraceutical and
pharmaceutical segments of business. As a result of our nutraceutical inventory
being manufactured primarily on a purchase order basis, the quantity of both raw
materials and finished goods inventory provides for minimal risk for potential
overstock or obsolescence. Our pharmaceutical inventory is valued at market
values, which is lower of than our cost basis.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
The Company performed a sensitivity analysis to determine the impact of
fluctuations in our estimates for inventory allowances. As of March 31, 2006 the
allowance was $37,500. If this number were in error by one percent of the total
inventory balance, the impact would be an additional $112,000 of expense.
Long Lived Assets
Purchased intangibles consisting of patents and unpatented technological
expertise, intellectual property, license fees and trade names purchased as part
of business acquisitions are presented net of related accumulated amortization
and are being amortized on a straight-line basis over the remaining useful
lives.
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". The Company reviews the value of its long-lived
assets for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable or
that the useful lives of these assets are no longer appropriate. Conditions that
would necessitate an impairment assessment include material adverse changes in
operations, significant adverse differences in actual results in comparison with
initial valuation forecasts prepared at the time of acquisition, a decision to
abandon certain acquired products, services, or marketplaces, or other
significant adverse changes that would indicate the carrying amount of the
recorded asset might not be recoverable.
16
Goodwill and Other Intangible Assets
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 requires that goodwill and intangible assets with
indefinite lives no longer be amortized against earnings, but instead tested for
impairment at least annually based on a fair-value approach as described in SFAS
No. 142.
Intangible assets with finite lives are amortized over their estimated useful
lives. The useful life of an intangible asset is the period over which the asset
is expected to contribute directly or indirectly to future cash flows. The
carrying value of intangible assets with finite lives is evaluated whenever
events or circumstances indicate that the carrying value may not be recoverable.
The carrying value is not recoverable when the projected undiscounted future
cash flows are less than the carrying value. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses.
General
The Company recognizes revenue in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin 101. The Company recognizes product sales
revenue, the prices of which are fixed and determinable, when title and risk of
loss have transferred to the customer, when estimated provisions for product
returns, rebates, charge-backs and other sales allowances are reasonably
determinable, and when collectibility is reasonably assured. Accruals for these
items are presented in the condensed consolidated financial statements as
reductions to sales. The Company's net sales represent gross sales invoiced to
customers, less certain related charges for discounts, returns, rebates,
charge-backs and other allowances. Cost of sales includes the cost of raw
materials and all labor and overhead associated with the manufacturing and
packaging of the products. Gross margins are affected by, among other things,
changes in the relative sales mix among the Company's products, as well as gross
margins of acquired entities.
Operating results in all periods presented reflect the impact of acquisitions.
The timing of those acquisitions and the changing mix of businesses as acquired
companies are integrated into the Company may affect the comparability of
results from one period to another.
17
Results of Operations
The following table sets forth the income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months For the nine months
ended March 31, ended March 31,
--------------------------------- -----------------------------
2006 2005 2006 2005
---------------- ------------- -------------- ------------
Sales, net 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 66.8% 76.1% 64.1% 86.9%
Selling and administrative 32.7% 34.3% 27.5% 37.8%
---------------- ------------- -------------- ------------
99.5% 110.4% 91.6% 124.7%
---------------- ------------- -------------- ------------
Income (loss) from operations 0.5% (10.4%) 8.4% (24.7%)
---------------- ------------- -------------- ------------
Other income (expense):
Gain on settlement of lawsuit - 27.9% - 11.6%
Interest expense (0.6%) (0.4%) (0.5%) (0.5%)
Other income 0.1% 0.4% 0.1% 0.5%
Interest and investment income 0.1% 0.1% 0.0% 0.2%
---------------- ------------- -------------- ------------
(0.4%) 28.0% (0.4%) 11.9%
---------------- ------------- -------------- ------------
Income (loss) before income taxes 0.1% 17.6% 8.0% (12.9%)
Federal and state income taxes 0.2% 0.7% 0.2% 0.2%
---------------- ------------- -------------- ------------
Income (loss) before minority interest (0.1%) 16.9% 7.8% (13.1%)
Minority interest 0.2% 0.0% 0.3% (0.1%)
---------------- ------------- -------------- ------------
Net income (loss) 0.1% 16.9% 8.1% (13.2%)
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (5.2%) (6.6%) (4.5%) (8.2%)
Series B Preferred Stock dividend (0.9%) (1.4%) (0.9%) (1.7%)
---------------- ------------- -------------- ------------
Net income (loss) allocable to common
shareholders (6.0%) 8.9% 2.7% (23.1%)
================ ============= ============== ============
18
For the nine month period ended March 31, 2006 compared to the nine month period
ended March 31, 2005
Sales, net. Sales, net, for the nine months ended March 31, 2006 and 2005 were
$40,691,493 and $21,286,889, respectively, an increase of $19,404,604 or 91.2%.
The increase is comprised of the following:
Nine months ended Dollar Increase Percentage
March 31, (Decrease) Change
------------------------------------- ----------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
----------------- ---------------- ----------------- --------------
Nutraceutical - US Customers $ 31,084,569 $ 16,091,648 $ 14,992,921 93.2%
Nutraceutical - International Customers 7,537,465 4,107,363 3,430,102 83.5%
----------------- ---------------- ----------------- --------------
Total Nutraceutical 38,622,034 20,199,011 18,423,023 91.2%
Pharmaceutical 31,700 547,507 (515,807) (94.2%)
Technical Services 2,037,759 540,371 1,497,388 277.1%
----------------- ---------------- ----------------- --------------
Total $ 40,691,493 $ 21,286,889 $ 19,404,604 91.2%
================= ================ ================= ==============
Our increase in sales, net is primarily attributable to the increase in sales in
our branded proprietary nutraceutical products. Net sales of such products
increased from $7.6 million in the nine months ended March 31, 2005 to $25.5
million in the nine months ended March 31, 2006, an increase of 235%. We were
able to achieve this increase in sales by increasing our advertising through
participation in strategic product placement programs, offering manufacturing
coupons at point of sale and with adding additional products sold under our
branded nutraceutical product line. We spent $2.9 million on this type of
advertising in the nine month period ended March 31, 2006 as compared to
approximately $441,000 for the comparable 2005 period.
The increase in net sales in our Technical Services business segment is a direct
result of us owning Hauser for the full nine month period ended March 31, 2006
versus six and a half months for the comparable 2005 period. Prior to acquiring
substantially all the assets of Hauser, Hauser was operating while in bankruptcy
and had experienced a substantial loss in its customer base. Since our
acquisition we have experienced an increase in sales and are beginning to see
results from the hiring of a director of sales and marketing and from Hauser
having the financial backing required to maintain its existing customer base and
to attract new business.
Gross profit of $14.6 million for the nine months ended March 31, 2006 was $11.8
million higher than gross profit for the nine months ended March 31, 2005 of
$2.8 million. Exclusive of the Paxis subsidiary, the gross profit percentage for
the nine months ended March 31, 2006 was 41% and 27% for the nine months ended
March 31, 2005. The increase in the gross profit percentage of 14% is primarily
the result of increased sales in our branded proprietary nutracuetical product
to approximately 48% of total consolidated sales in the nine month period ended
March 31, 2006 from 27% in the comparable 2005 period, increasing its
contribution of gross profit from 75% in the nine month period ended March 31,
2005 to approximately 80% in the nine month period ended March 31, 2006. For the
nine months ended March 31, 2006, approximately 88% of revenues were derived
from three customers as compared to two customers representing 71% of revenues
for the nine months ended March 31, 2005. The loss of any of these customers
would have an adverse affect on the Company's operations.
Cost of sales. Cost of sales increased to $26.1 million for the nine months
ended March 31, 2006 as compared to $18.5 million for the nine months ended
March 31, 2005. Cost of sales decreased as a percentage of sales to 64% for the
nine months ended March 31, 2006 as compared to 87% for the nine months ended
March 31, 2005. The decrease of 23% in cost of sales was due to the increase in
sales of the Company's branded proprietary nutraceutical products, which yield
higher profit margins compared to our other product lines in our nutraceutical
business segment. For the nine months ended March 31, 2006, 8% of the cost of
sales or $2.1 million was attributable to sales of less than $32,000 in the
Pharmaceutical business segment; excluding this segment our cost of sales would
have been 59% and for the nine month period ended March 31, 2005, cost of sales
would have been 73%, excluding $3.4 million of cost of sales attributable to the
Pharmaceutical business segment on sales of approximately $548,000 or
approximately 3% of total sales for that period.
19
Selling and Administrative Expenses. Selling and administrative expenses were
$11,186,911 for the nine months ended March 31, 2006, an increase of $3,143,261
or 39.1% as compared with $8,043,650 for the nine months ended March 31, 2005.
As a percentage of sales, net, selling and administrative expenses were 27.5%
for the nine months ended March 31, 2006 and 37.8% for the prior comparable
period. A tabular presentation of the changes in selling and administrative
expenses is as follows:
Nine months ended Dollar Increase Percentage
March 31, (Decrease) Change
----------------------------------- -------------------------------
2006 2005 2006 vs 2005 2006 vs 2004
------------ ------------ ------------ ----------------
Salaries $ 2,237,180 $ 1,832,913 $ 404,267 22.1%
Advertising 1,789,979 476,736 1,313,243 275.5%
Consulting & Other Professional Fees 1,131,799 1,454,260 (322,461) (22.2%)
Indirect Expenses 880,319 502,207 378,112 75.3%
Commissions 707,408 259,363 448,045 172.7%
Auto, Travel & Entertainment 568,248 718,065 (149,817) (20.9%)
Office 488,559 248,857 239,702 96.3%
Employee Benefits 476,780 308,347 168,433 54.6%
Depreciation & Amortization 459,683 434,244 25,439 5.9%
Insurance 444,458 327,405 117,053 35.8%
Office Rent 440,637 355,529 85,108 23.9%
Compensation expense for employee
stock options 316,413 - 316,413 100.0%
Research & Development 244,477 215,797 28,680 13.3%
Bad debt (recoveries) 38,285 (3,553) 41,838 (1,177.5%)
Other 962,686 913,480 49,206 5.4%
------------ ------------ ------------ ----------------
Total $ 11,186,911 $ 8,043,650 $ 3,143,261 39.1%
============ ============ ============ ================
Salaries increased by approximately $404,000 primarily as the result of
increased salaries aggregating approximately $232,500 with the addition of two
corporate officers added to the payroll and increases, incentive bonus payments
and hiring of additional staff of approximately $151,500 for the nine month
period ended March 31, 2006 with no comparable expenses in the nine month period
ended March 31, 2005. Employee benefits increased by approximately $168,000 in
aggregate dollars and represented an increase of approximately 4.5% as a
percentage of total compensation as a result of the Paxis employees qualifying
for the Company's 401(k) matching contribution for the nine month period ended
March 31, 2006 with no such matching contribution occurring in the nine months
ended March 31, 2005 and the increased cost of medical benefits.
Advertising expense represented approximately 4.4% of net sales in the nine
months ended March 31, 2006 compared to 2.2% of net sales for the nine months
ended March 31, 2005. Advertising expense increased as a result of additional
products in our branded proprietary nutraceutical business and the expansion of
our customer base for such products in the 2006 period.
Consulting fees and other professional fees decreased by an aggregate amount of
approximately $322,000. The decrease is primarily attributable to a write-off of
approximately $276,000, in the nine month period ended March 31, 2005, relating
to consulting and professional fees incurred in connection with sales promotion
costs which were previously capitalized pending the commencement of a
promotional campaign, which was ultimately abandoned; and secondarily, as a
result of the termination of an agreement made on July 8, 2004 in the nine
months ended March 31, 2005 with a consultant, whose services were not replaced
in the comparable 2006 period, which resulted with the issuance of 27,000 shares
of common stock with a corresponding consulting fee expense of $186,300. These
decreases were offset in part by an increase in public relations fees of
approximately $57,000, mostly comprised of non cash consulting fees of $43,875
resulting from the issuance of restricted stock in connection with our
consulting agreement with Grand View Consultants and other consulting fees
increasing by approximately $112,500 in connection with payments made under a
consulting agreement with the former Chief Financial Officer of the Company.
20
Indirect expenses increased by approximately $378,000 mostly as the result of
our Hauser subsidiary having nine months of results in the 2006 period and six
and a half months in the comparable 2005 period.
Commission expense increased in both absolute dollars and as a percentage of
sales, net. For the nine months ended March 31, 2006, commissions represented
1.7% of sales, net compared to 1.2% for the nine months ended March 31, 2005,
the increase as a percentage of sales of 0.5% is primarily due to the increased
sales in our branded proprietary nutraceutical business whereby we pay broker
commissions on net sales to a majority of our customer base.
Auto, travel and entertainment expenses decreased by approximately $150,000 in
the nine month period ended March 31, 2006 compared to the nine month period
ended March 31, 2005 primarily as a result of the decreased travel from our
corporate headquarters in New Jersey to our Paxis and Hauser facilities in
Colorado.
Office expenses increased by approximately $240,000 or 96.3% in the nine month
period ended March 31, 2006 as compared to the comparable 2005 period and
represented 1.2% of sales in both periods. Office rent was approximately
$441,000 the nine month period ended March 31, 2006 compared to approximately
$356,000 in the nine month period ended March 31, 2005, an increase of
approximately $85,000 or 23.9% primarily as a result of increased energy costs
and the addition of Hauser for the full nine month period ended March 31, 2006
compared to six and a half months for the nine month period ended March 31,
2005.
Insurance costs for the nine month period ended March 31, 2006 increased by
approximately $117,000 compared to the nine month period ended March 31, 2005.
The greatest portion of our insurance costs is product liability insurance.
Insurance costs represented 1.1% of sales, net for the nine months ended March
31, 2006 compared to 1.5% of the comparable 2005 period. The decrease in
insurance costs of approximately 0.4%, as a percentage of sales, is a result in
the decrease of pharmaceutical sales in our Paxis subsidiary of approximately
$516,000 from the nine month period ended March 31, 2005 to the nine month
period ended March 31, 2006. The insurance rate of pharmaceutical products sold
is higher than on sales of our nutraceutical products.
Our research and development costs increased by approximately $29,000 from the
nine month period ended March 31, 2005 compared to the nine month period ended
March 31, 2006 primarily as a result reaching several milestones in our flu
vaccine studies and our ongoing Anthrax study, resulting in making approximately
$225,000 in milestone payments, offset by the downsizing of our Paxis
subsidiary.
Pursuant to SFAS No. 123(R), adopted as of July 1, 2005, the Company recognized
$316,413 in compensation expenses for employee stock options in the nine month
period ended March 31, 2006 with no comparable cost for the nine month period
ended March 31, 2005.
Other income (expense). Other income (expense) was a net expense of $146,744 for
the nine months ended March 31, 2006 as compared to net income of $2.5 million
for the comparable period a year ago. Absent the settlement on lawsuit cash
payment in the amount of $2,475,322 in connection with a multi-district class
action brought on behalf of the Company and other direct purchasers of vitamin
products, in which the plaintiffs alleged violations of Section 1 of the Sherman
Antitrust Act and other wrongful anti-competitive conduct in violation of
various federal and state laws, other income (expense) would have decreased by
approximately $194,000. The decrease of approximately $194,000 was attributable
to an increase in interest expense of $111,000 due to the ongoing increase in
the LIBOR rate, a decrease in consulting fee income of $66,000 resulting from a
decrease in the time spent on consulting for an unrelated third party and a
decrease in investment income of $18,000.
21
For the three month period ended March 31, 2006 compared to the three month
period ended March 31, 2005
Sales, net. Sales, net, for the quarter ended March 31, 2006 and 2005 were
$12,936,092 and $8,868,295, respectively, an increase of $4,067,797 or 45.9%.
The increase is comprised of the following:
Three months ended Dollar Increase Percentage
March 31, (Decrease) Change
------------------------------------- ----------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
----------------- ---------------- ----------------- --------------
Nutraceutical - US Customers $ 9,886,762 $ 6,785,012 $ 3,101,750 45.7%
Nutraceutical - International Customers 2,430,799 1,853,406 577,393 31.2%
----------------- ---------------- ----------------- --------------
Total Nutraceutical 12,317,561 8,638,418 3,679,143 42.6%
Pharmaceutical 14,025 - 14,025 -
Technical Services 604,506 229,877 374,629 163.0%
----------------- ---------------- ----------------- --------------
Total $ 12,936,092 $ 8,868,295 $ 4,067,797 45.9%
================= ================ ================= ==============
Our increase in sales, net is primarily attributable to the increase in sales in
our branded proprietary nutraceutical products. Net Sales of such product
increased from $4.6 million in the three months ended March 31, 2005 to $7.9
million in the three months ended March 31, 2006, an increase of 72.6%. We were
able to achieve this increase in sales by increasing our advertising through
participation in strategic product placement programs, offering manufacturer
coupons at point of sale and with adding additional products sold under our
branded nutraceutical product line. We spent $1.3 million on this type of
advertising in the three month period ended March 31, 2006 as compared to
approximately $228,000 for the comparable 2005 period.
Since our acquisition of Hauser in September 2004 we have experienced an
increase in sales from Hauser having the financial backing required to maintain
its existing customer base and to attract new business and are beginning to see
results from the hiring of a director of sales and marketing.
Gross profit for the three months ended March 31, 2006 was $2.2 million higher
than gross profit for the three months ended March 31, 2005. Exclusive of the
Paxis subsidiary, the gross profit percentage for the three months ended March
31, 2006 and March 31, 2004 was 36%. The flat rate in the gross profit
percentage is primarily the result of increased advertising expenses in the
branded proprietary nutraceutical products. Certain advertising expenses are
accounting for as a reduction of the gross sales price, reducing the gross
profit percentage by 5.9% in the three month period ended March 31, 2006 and
1.6% in the three month period ended March 31, 2005, absent the reduction of
advertising, the gross profit percentages would have been 42.3% and 37.8%,
respectively. For the three months ended March 31, 2006, approximately 96% of
revenues were derived from three customers as compared to two customers
representing 78% of revenues for the three months ended March 31, 2005. The loss
of any of these customers would have an adverse affect on the Company's
operations.
Selling and Administrative Expenses. Selling and administrative expenses were
$4,225,559 for the three months ended March 31, 2006, an increase of $1,186,196
or 39% as compared with $3,039,363 for the three months ended March 31, 2005. As
a percentage of sales, net, selling and administrative expenses were 32.7% for
the three months ended March 31, 2006 and 34.3% for the prior comparable period.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
22
Three months ended Dollar Increase Percentage
March 31, (Decrease) Change
-------------------------------- ----------- -----------
2006 2005 2006 vs 2005 2006 vs 2005
----------- ----------- ----------- -----------
Salaries $ 855,374 $ 619,217 $ 236,157 38.1%
Advertising 747,426 207,632 539,794 260.0%
Indirect expenses 341,887 176,760 165,127 93.4%
Consulting and Other Professional Fees 320,563 255,920 64,643 25.3%
Office 244,631 123,351 121,280 98.3%
Research & Development 229,969 87,823 142,146 161.9%
Auto, Travel & Entertainment 225,728 245,558 (19,830) (8.1%)
Commissions 192,428 148,523 43,905 29.6%
Depreciation & Amortization 163,300 163,947 (647) (0.4%)
Employee Benefits 142,353 124,687 17,666 14.2%
Insurance 111,785 165,044 (53,259) (32.3%)
Office Rent 108,506 152,860 (44,354) (29.0%)
Compensation expense for employee
stock options 94,799 - 94,799 100.0%
Bad debt 30,210 2,494 27,716 1,111.3%
Other 416,600 565,547 (148,947) (26.3%)
----------- ----------- ----------- -----------
Total $ 4,225,559 $ 3,039,363 $ 1,186,196 39.0%
=========== =========== =========== ===========
Salaries increased by approximately $236,000 primarily as the result officers'
salaries increasing approximately $154,000 with the addition of a Vice President
of sales and marketing in our MDC subsidiary and the addition of a Chief
Financial Officer for our Parent Company aggregating approximately $90,000 with
no comparable expenses in the three month period ended March 31, 2005 and
increases of approximately $65,000 to other officers' base salaries for the
three month period ended March 31, 2006. Other salaries increased by
approximately $81,000 as a result of hiring additional staff in our
nutraceutical business segment. Employee benefits increased by approximately
$18,000 in aggregated dollars and represented a 3.5% decrease as a percentage of
total compensation.
Advertising expense represented approximately 5.8% of net sales in the three
months ended March 31, 2006 compared to 2.3% of net sales for the three months
ended March 31, 2005. Advertising expense increased by $540,000 as a result of
the increased sales in our branded proprietary nutraceutical products and the
expansion of our customer base for such products in the 2005 period.
Indirect expenses increased by approximately $165,000 or 93.4% mostly as the
result of our Hauser subsidiary increasing its sales by 163% to $605,000 in the
three month period ended March 31, 2006 from $230,000 in the three month period
ended March 31, 2005.
Consulting fees and professional fees increased by approximately $65,000 or
25.3%. The increase is primarily attributable to an increase of approximately
$16,000 in public relations, $35,000 in professional fees, such as legal and
accounting and $14,000 in other consulting fees.
Office expenses increased to $244,600 in the three month period ended March 31,
2006 or 98.3% from $123,400 for the three month period ended March 31, 2005.
This increase is primarily attributable to the increased printing costs in
connection with new marketing materials for the additional products added to our
branded proprietary neutraceutical product line as well as the additional
materials required to attract new customers.
Our research and development costs increased by approximately $142,000 in the
three month period ended March 31, 2006 compared to the three month period ended
March 31, 2005 primarily as a result reaching several milestones in our flu
vaccine studies and our ongoing Anthrax study, resulting in making approximately
$225,000 in milestone payments, offset in part, by the downsizing of our Paxis
subsidiary.
23
Insurance costs for the three month period ended March 31, 2006 decreased by
approximately $53,000 compared to the nine month period ended March 31, 2005.
The greatest portion of our insurance costs is product liability insurance.
Insurance costs represented 0.9% of sales, net for the three months ended March
31, 2006 compared to 1.9% of the comparable 2005 period. The decrease is the
result of a decreased rate of insurance on our branded proprietary nutraceutical
product line from the three month period ended March 31, 2005 to the three month
period ended March 31, 2006.
Pursuant to SFAS No. 123(R), adopted as of July 1, 2005, the Company recognized
$94,799 in compensation expenses for employee stock options in the three month
period ended March 31, 2006 with no comparable cost for the three month period
ended March 31, 2005.
Other income (expense). Other income (expense) was a net expense of $50,118 for
the three months ended March 31, 2006 as compared to net income of $2.5 million
for the comparable period a year ago. Absent the settlement on lawsuit cash
payment in the amount of $2,475,322 in connection with a multi-district class
action brought on behalf of the Company and other direct purchasers of vitamin
products, in which the plaintiffs alleged violations of Section 1 of the Sherman
Antitrust Act and other wrongful anti-competitive conduct in violation of
various federal and state laws, other income (expense) would have decreased by
approximately $57,600. The decrease of approximately $57,600 was attributable to
an increase in interest expense of $44,000 due to the ongoing increase in the
LIBOR rate, a decrease in consulting fee income of $16,800 resulting from a
decrease in the time spent on consulting for an unrelated third party offset by
an increase in investment income of $3,200.
Seasonality. Although the Company believes that its business is not seasonal in
nature, the Company has experienced, and expects to continue to experience, a
substantial variation in its net sales and operating results from quarter to
quarter. The Company believes that the factors, which influence this variability
of quarterly results, include general economic and industry conditions that
affect consumer spending, changing consumer demands and current news on
nutritional supplements. Accordingly, a comparison of the Company's results of
operations from consecutive periods is not necessarily meaningful, and the
Company's results of operations for any period are not necessarily indicative of
future performance.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
generated from operations. The Company also has a $2.0 million revolving line of
credit available through October 27, 2007. The Company's principal uses of cash
have been to finance working capital, acquisitions, capital expenditures and
preferred Series B stock dividend payments. The Company anticipates these uses
will continue to be its principal uses of cash in the future.
The following table sets forth, for the periods indicated, the Company's net
cash flows used in operating, investing and financing activities, its period end
cash and cash equivalents and other operating measures:
For the nine months ended
March 31,
---------------------------------------
2006 2005
---------------- -----------------
Net cash provided by (used) in operating acitivites $ 2,151,086 $ (4,525,498)
================ =================
Net cash used in investing acitivites $ (604,536) $ (1,780,002)
================ =================
Net cash used in financing acitivites $ (236,322) $ (336,150)
================ =================
Cash and cash equivalents at end of period $ 3,737,781 $ 2,906,396
================ =================
Days sales in inventory 74 86
================ =================
Inventory turnover 4.9 4.3
================ =================
24
At March 31, 2006, the Company's working capital was approximately $11.2
million, an increase of $3.8 million over working capital at June 30, 2005. Cash
and cash equivalents were $3.7 million at March 31, 2006, an increase of $1.3
million from June 30, 2005. In the nine month period ended March 31, 2006, we
provided $2,151,086 of cash from our operating activities compared to using
$4,525,498 of cash in operations in the nine months ended March 31, 2005, an
increase of approximately $6.7 million. Our improved cash position is primarily
attributable to having net income of approximately $3.3 million in the nine
month period ended March 31, 2006 compared to a net loss of approximately $2.8
million, a change of $6.1 million. We believe that anticipated sales for this
year and next year, current cash balances and our existing line of credit should
meet cash needs for operations for the remainder of fiscal 2006 and into fiscal
2007.
On October 27, 2005, the Company closed on a $2,000,000 revolving line of credit
agreement, which bears interest at 3% above the prime interest rate and expires
on October 27, 2007. The line of credit includes specific loan covenants. The
loan is collateralized by specific assets of the Company and is personally
guaranteed by the Chairman of the Board of the Company. As of March 31, 2006,
the Company has not made any draw downs on this line of credit.
The Company has a promissory note provided by Bank of America dated December 31,
2004, (the "Note") in the amount of $4,500,000 with interest at a variable rate
based on 1.25% over the current LIBOR rate. The Note was due on September 4,
2005 and has been renewed through January 4, 2007, under the existing terms and
conditions of the Note. The Note is guaranteed by Mr. Carl DeSantis, a
shareholder and director of the Company.
The Company has approximately $850,000 of total annual commitments at March 31,
2006 for long term non-cancelable leases consisting of obligations under
operating leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
The Company believes its sources of cash will be sufficient to fund its
operations and meet its cash requirements to satisfy its working capital needs,
capital expenditure needs, outstanding commitments, and other liquidity
requirements associated with its existing operations over the next twelve
months. The Company's ability to fund these requirements will depend on its
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond the Company's control. In addition, as part of the Company's strategy, it
may pursue acquisitions and investments that are complementary to its business.
Any material future acquisitions or investments will likely require additional
capital and therefore, the Company cannot predict or assure that additional
funds from existing sources will be sufficient for such future events.
Capital Expenditures
The Company's capital expenditures for the nine months ended March 31, 2006 and
2005 were $167,567 and $1,504,636, respectively. The capital expenditures in the
nine months ended March 31, 2005 were primarily attributable to the purchase of
machinery and equipment in our Paxis and Hauser subsidiaries.
The Company has budgeted approximately $200,000 for capital expenditures for
fiscal 2006. The total amount will continue to be funded from current cash
balances.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncement - refer to footnote 1 of the condensed
consolidated financial statements for the three months ended March 31, 2006
included in Part I - Item 1.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is party to financial instruments
that are subject to market risks arising from changes in interest rates and
foreign currency exchange rates, primarily with respect to the Canadian Dollar
in its customer receivables. The Company's use of derivative instruments is very
limited and it does not enter into derivative instruments for trading purposes.
We performed a sensitivity analysis to determine the impact of fluctuations in
interest rates relating to our outstanding variable debt. If interest rates
varied by plus or minus one percent our income would be higher or lower in the
amount of $45,000 per annum.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, or the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired control objective,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As required by Rule 13a-15(b) under the Exchange Act, we carried out an
evaluation, under the supervision and with the participation of management,
including our principal executive officer and principal financial officer, of
the effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our principal executive officer and
principal financial officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective at the
reasonable assurance level to ensure that information required to be disclosed
by us in reports that we file under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and
forms. The Company has not completed its Sarbanes Oxley section 404 evaluation
and documentation process, or related assessment and is not required to do so
until our fiscal year ending June 30, 2008. The Company may identify
deficiencies that may require remediation in the process of its evaluation and
testing.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
NatEx Georgia LLC and Vasili Patarkalishvili versus Robert B. Kay, E. Gerald
Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull
and Integrated BioPharma, Inc. is pending in the Supreme Court of the State of
New York in New York County. Plaintiffs NatEx Georgia LLC and Vasili
Patarkalishvili commenced this action on July 19, 2004, alleging claims for
breach of contact, fraud and breach of the implied duty of good faith and fair
dealing arising out of an alleged failure by Paxis to perform under the parties'
agreements by which NatEx had agreed to supply Paxis with Paclitaxel extract.
The complaint sought damages of more than $5 million. The Company moved to
dismiss all claims. On January 6, 2006, the state court granted the Company's
motion to dismiss the fraud, breach of implied duty of good faith and fair
dealing claims entirely and the breach of contract claim in part, and preserved
for plaintiffs only a limited right to conduct discovery with respect to the
delivery of goods. On February 2, 2006, the plaintiffs filed a Notice of Appeal
of the trial court's decision. On March 26, 2006, the trial court granted the
plaintiffs' counsel's motion to withdraw. The court has given the plaintiff
until June 27, 2006 to retain new counsel. The Company intends to continue to
defend vigorously the claims in this lawsuit. The outcome of the lawsuit is
uncertain; however, the Company believes that it will not have a material
financial impact.
Item 1A. RISK FACTORS
Not Applicable
26
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
10.1 Consulting Agreement dated as of January 3, 2006 between Integrated
BioPharma, Inc. and Grand View Consultants, Inc.
31.1 Certification pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2 Certification pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1 Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32.2 Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K filed February 14, 2006 pursuant to
Item 7.01 (Regulation FD Disclosure) and Item 9.01 (Financial
Statements and Exhibits).
(2) Current Report on Form 8-K filed February 17, 2006 pursuant to
Item 5.02 (Departure of Directors or Principal Officers; Election of
Directors; Appointment of Principal Officers) and Item 9.01 (Financial
Statements and Exhibits).
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
Date: May 12, 2006 By: /s/ E. Gerald Kay
----------------------
E. Gerald Kay,
Chief Executive Officer
Date: May 12, 2006 By: /s/ Dina L. Masi
--------------------
Dina L. Masi,
Senior Vice President &
Chief Financial Officer
28