UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-K
Annual Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended June 30, 2006 Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of registrant as specified 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)
Registrant's telephone number: (888) 319-6962
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $.002 American Stock Exchange
par value per share
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes | | No |X|
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes | | No |X|
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 mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
| |
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer | |
Accelerated Filer | |
Non-accelerated Filer |X|
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Registrant's revenues for the fiscal year ended June 30, 2006 were $57,820,466.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant based on the trading price of the Registrant's Common Stock on
September 22, 2006 was $24,725,527.
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Outstanding at
Class September 22, 2006
----------------------------- ------------------
Common Stock, $.002 par value 13,346,461 Shares
DOCUMENTS INCORPORATED BY REFERENCE
The information required by part III will be incorporated by reference from
certain portions of a definitive Proxy Statement which is expected to be filed
by the Registrant within 120 days after the close of its fiscal year.
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-K ANNUAL REPORT
INDEX
Part I Page
Item 1. Description of Business 3
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Registrant Purchases of Equity Securities 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 27
Item 8. Financial Statements 28
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 28
Item 9A. Controls and Procedures 28
Item 9B. Other Information 28
Part III
Item 10. Directors and Executive Officers of the Registrant 29
Item 11. Executive Compensation 29
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 29
Item 13. Certain Relationships and Related Transactions 29
Item 14. Principal Accountant Fees and Services 29
Part IV
Item 15. Exhibits and Financial Statement Schedules 30
Signatures 33
1
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K may constitute
forward-looking statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act"), Section 21E of the Securities Exchange 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 ("SEC"),
all as may be amended from time to time. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of Integrated BioPharma,
Inc. and its subsidiaries ("INB") or industry results, to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such factors including, among others, changes
in general economic and business conditions; loss of market share through
competition; introduction of competing products by other companies; the timing
of regulatory approval and the introduction of new products by INB; changes in
industry capacity; pressure on prices from competition or from purchasers of
INB's products; regulatory changes in the pharmaceutical manufacturing industry
and nutraceutical industry; regulatory obstacles to the introduction of new
technologies or products that are important to INB; availability of qualified
personnel; the loss of any significant customers or suppliers; and other factors
both referenced and not referenced in this Report. 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. INB cautions
investors that any forward-looking statements made by INB 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 INB include, but are not limited to,
the risks and uncertainties affecting their businesses described in Item 1A of
this Annual Report on Form 10-K and in other securities filings by INB and its
subsidiaries.
Although INB 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. INB's future financial condition and results of
operations, as well as any forward-looking statements, are subject to change and
inherent risks and uncertainties. The forward-looking statements contained in
this Annual Report on Form 10-K are made only as of the date hereof and INB 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.
2
PART I
Item 1. Description of Business
General
Integrated BioPharma, Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "INB"), is engaged primarily in 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, pharmaceutical
technical services through its contract research organization; and the
biotechnology business that uses its patented plant-based technology to produce
vaccines and therapeutic antibodies. The Company's customers are located
primarily in the United States. The Company was previously known as Integrated
Health Technologies, Inc. and, prior to that, as Chem International, Inc. The
Company was reincorporated in its current form in Delaware in 1995. The
Company's common stock trades on the American Stock Exchange under the symbol
"INB." The Company continues to do business as Chem International, Inc. with its
customers and certain vendors.
The Company has three primary business segments, Nutraceuticals, Pharmaceuticals
and Biotechnologies as described below.
Nutraceuticals
The Company's subsidiary, InB:Manhattan Drug Company, Inc. ("Manhattan Drug"),
manufactures vitamins and nutritional supplements for sale to distributors,
multilevel marketers and specialized health-care providers. The Company also
manufactures, through Manhattan Drug, such products for sale under its own
private label, "The Vitamin Factory", primarily through mail order utilizing
catalogs and the Internet through a wholly-owned subsidiary, The Vitamin
Factory, Inc. and "Scientific Sports Nutrition", primarily through wholesalers
and distributors targeting consumers who are professional, amateur and
recreational athletes. The Vitamin Factory's Internet site also offers for sale
the Company's branded proprietary nutraceutical product line. The Company also
distributes fine natural chemicals through its wholly-owned subsidiary IHT
Health Products, Inc.
On October 22, 2003, the Company completed the acquisition of various assets
related to the Naturally Aloe(TM), Naturally Noni(TM) and Avera Sport(TM)
product lines from Aloe Commodities International, Inc. ("Aloe"). The assets
included trademarks, copyrights, art work, formula for the products, labels,
customer lists, goodwill, inventories and books and records.
The originally acquired product lines have been further expanded in our
wholly-owned subsidiary, AgroLabs, Inc., with the addition of additional
products carrying the "Naturally" label and natural product ingredients which
are referred to as our branded proprietary nutraceutical business.
In fiscal year ended June 30, 2005, the Company acquired a 51% interest in Micro
Nutrition, Inc. Micro Nutrition, Inc. is a California corporation in the mail
order business selling primarily nutritional specialty food items.
Pharmaceuticals
On February 1, 2003 and July 22, 2003, the Company acquired an aggregate of 97%
of the shares of common stock of Paxis Pharmaceuticals, Inc. ("Paxis"). Paxis
manufactures and distributes Paclitaxel, which is the primary chemotherapeutic
agent in the treatment of breast cancer, at its Boulder, Colorado manufacturing
facility. The Company acquired 50% of the shares of Paxis from Trade Investment
Services, LLC ("TIS") (an entity controlled equally by the Chief Executive
Officer ("CEO") of the Company, a brother of the CEO who is also a director of
the Company and a significant shareholder and director of the Company), which
funded Paxis' development. In July 2003, the Company acquired forty-seven
percent (47%) of the shares of Paxis. In November 2004, Paxis changed its name
to InB:Paxis Pharmaceuticals, Inc. Paxis acquired from Hauser, Inc. ("Hauser")
its cGMP-(current good manufacturing practices) compliant Paclitaxel production
facilities, processing equipment, and intellectual assets. Paxis also purchased
intellectual property (the "Technology") from Hauser. On October 8, 2003, the
Company acquired the remaining three (3%) percent of Paxis.
3
In May 2006, Paxis announced the execution of a supply agreement with a European
generics manufacturing company with extensive sales, marketing, and distribution
channels in the European Community, Eastern Europe, the United Kingdom and the
United States. The agreement provides for minimum purchases during the first
year of at least $2.4 million of Paxis' API product. Paxis made its first
shipment under the supply agreement in August 2006. The Company can give no
assurance that Paxis can be operated profitably.
Paxis entered into a joint venture as of July 16, 2003 with Chatham Biotec, Ltd.
("Chatham"), a Canadian company, which harvests and dries biomass, to form a
Canadian-based joint venture to produce extract and intermediate precursor
Paclitaxel from Canadian Taxus biomass. Chatham supplies the Canadian biomass
and the joint venture processes it, using Paxis' extraction expertise in a
facility currently controlled by the joint venture. The joint venture supplies
Paxis' requirements for extract at cost, from which Paxis produces its
Paclitaxel and related products. The joint venture may sell extract and
intermediate products to third parties. The Company can give no assurance that
the joint venture can be operated successfully.
On September 16, 2004, the Company completed the purchase of substantially all
of the assets of Hauser CRO, including substantially all of its laboratories,
development and manufacturing facilities and equipment; its intellectual
property, including that related to Paclitaxel and other taxanes; goodwill,
professional staff and certain of its ongoing contracts. As part of the
transaction, the Company also acquired Hauser's rights under a prior contract to
receive royalties and other payments from the Company's subsidiary, Paxis, for
Hauser intellectual property used by Paxis in the manufacture of Paclitaxel. The
assets were acquired in a newly formed subsidiary that changed its name to
InB:Hauser Pharmaceutical Services, Inc. in November 2004.
Biotechnologies
On February 21, 2003, the Company completed a merger with NuCycle Acquisition
Corp. (together with its wholly-owned subsidiary NuCycle Therapy, Inc.,
"NuCycle"). In the fiscal year ended June 30, 2005, NuCycle changed its name to
InB:Biotechnologies, Inc. ("InB:Biotech"). InB:Biotech is focused on the
discovery, development and commercialization of proprietary products from
plants. The Company is developing its patented plant-based expression
technologies for the production of vaccines, antibodies and other therapeutic
proteins. InB:Biotech is also using plants as sources of novel, high quality
nutritional supplements. InB:Biotech's patented process for the hydroponic
growth of edible plants causes them to accumulate high levels of important
nutritional minerals.
The Company, in collaboration with Fraunhofer USA Center for Molecular
Biotechnology ("CMB"), is developing the capability to rapidly produce
effective, plant-made influenza vaccines. Programs are on-going to create novel
subunit vaccines directed against both human and avian strains. The Company's
near-term objective is to complete preclinical evaluation and transition
selected vaccine candidates into Phase I clinical trials. The Company has
executed various agreements with CMB with an aggregate remaining financial
commitment of $2.8 million as of June 30, 2006.
Offering of Series B Redeemable Convertible Preferred Stock
On April 20, 2004, in connection with its private offering of its Series B
Convertible Preferred Stock, par value $0.002 per share (the "Series B"), the
Company issued 750 shares of Series B, at a purchase price of $10,000 per share
of Series B, and warrants for 375,000 shares of its common stock with an
exercise price of $14.00 per share. The Series B are convertible at the option
of each Investor into shares of common stock at a conversion price of $10.00 per
share, subject to anti-dilution and other customary adjustments. As of June 30,
2006, 75 shares of Series B have been converted into common stock.
If any Series B preferred shares remain outstanding on the maturity date (April
20, 2007), the Company will either (i) convert such preferred shares at a
conversion rate determined by dividing 115% of the conversion amount being
converted by the applicable conversion price as of the maturity date for such
preferred shares or (ii) redeem such preferred shares for an amount in cash per
preferred share equal to the conversion amount. The Company is required to give
sixty (60) days written notice to each holder of Series B shares, which shall
state its election. The Company can redeem or cause a conversion of all or a
portion of the Series B shares.
4
The Company also issued Additional Investment Rights (the "AIRs") to the
Investors, entitling them over the next 18 months to purchase an aggregate of
375 additional Series B Preferred Shares and Warrants to purchase an additional
187,500 shares of common stock. In October 2005, these AIRs expired unexercised.
Significant Revenues from Major Customers
In the fiscal year ended June 30, 2006, sales from each of the following
customers accounted for at least 10% of the Company's revenues in a particular
segment: Costco Wholesale, Inc., Herbalife International of America, Inc. and
Sam's Club. The loss of any of these customers would have an adverse affect on
the Company's operations.
Raw Materials
The principal raw materials used in the manufacturing process in the Company's
nutraceutical segment are natural and synthetic vitamins, minerals, herbs,
related nutritional supplements, gelatin capsules, coating materials, fruit
extracts, fruit juices and the necessary components for packaging the finished
products. The raw materials are available from numerous sources within the
United States and abroad. The gelatin capsules, coating materials and packaging
materials are similarly widely available. The principal raw materials used in
the Company's pharmaceutical segment are made up of a variety of materials used
to develop and manufacture Paclitaxel. The Company entered into a joint venture
agreement with a raw material supplier for its Paxis subsidiary. The Company
generally purchases its raw materials, on a purchaser order basis, without
long-term commitments.
The Company's principal suppliers in its Nutraceutical Segment are JD Moody
Marketing Services, Inc., Triarco Industries, Inc., and DSM Nutritional
Products, Inc. In connection with the Company's Pharmaceutical Segment,
botanical materials derived from the Canadian yew tree, or Taxus canadensis, are
used to produce Paclitaxel. Canadian yew trees are in limited supply. Paxis has
entered into a joint venture with Chatham Biotec, Ltd. to produce extract and
intermediate precursor Paclitaxel from Canadian yew trees. The Company can give
no assurance that the joint venture will be successful in producing such
Paclitaxel extracts or intermediates, or that the Company can locate alternate
sources of yew trees.
Development and Supply Agreement
On March 13, 1998, the Company signed a development and supply agreement with
Herbalife International of America, Inc. ("Herbalife") whereby the Company
develops, manufactures and supplies certain nutritional products to Herbalife,
which agreement was renewed through December 31, 2006. This agreement does not,
however, obligate the Company to supply any particular amount of goods to
Herbalife. The Company and Herbalife are currently negotiating an amendment to
this agreement.
Seasonality
The Company's results of operations in its Pharmaceuticals and Biotechnologies
segments are not significantly affected by seasonal factors. The Nutraceutical
business segment tends to be seasonal. The Company has found that in its first
fiscal quarter ending in September, orders for its branded proprietary
nutraceutical products slow (absent the addition of new customers with a
significant first time order), as buyers in their markets may have purchased
sufficient inventory to carry them through the summer months. Conversely, in the
Company's second fiscal quarter, ending in December, orders for its products
increase as the demand for the Company's branded nutraceutical products seems to
increase in late December to earlier January as consumers become health
conscious as they enter the new year.
The Company believes that there are other non-seasonal factors that also
may also influence the variability of quarterly results including, but not
limited to, general economic and industry conditions that affect consumer
spending, changing consumer demands and current news on nutritional supplements.
In addition, our recent growth has caused additional variability in our
quarterly results. 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 periods.
5
Variability of Quarterly Results and Impact of Advertising
In connection with the Company's program to expand its nutraceutical business,
advertising and promotional expenses, including those classified as a reduction
in sales, increased from $1.8 million, representing 5.6% of net sales, in the
fiscal year ended June 30, 2005 to $6.7 million, representing 11.6% of net
sales, in the fiscal year ended June 30, 2006. As the Company continues this
program it may continue to incur increased advertising and promotional expenses.
Such expenses include promotional activities conducted through the retail trade,
distributors or directly with consumers, including in-store displays, product
placement programs, coupons, radio and print advertising, and other similar
activities. Since such expenses may occur in fiscal quarters before resulting
increases, if any, in revenues occur, the program may increase variability of
the Company's quarterly results. Other factors that also may influence the
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 periods.
Intellectual Property
The Company has established an intellectual property position in three primary
areas of plant-related technology: i) the production of proteins in a variety of
plant-based expression systems utilizing a range of different vectors and
approaches, with an emphasis on transient or sustained gene expression using
viral vectors in connection with human applications; ii) the production of
proteins in a variety of plant-based expression systems utilizing a range of
different vectors and approaches, with an emphasis on transient or sustained
gene expression using viral vectors in connection with vetinarian applications;
and iii) Nutritional formulations based on plant-derived minerals and methods
for producing the formulations.
In the area of protein production in plants, the Company has ten (10) utility
patent applications and five (5) provisional applications pending before the
U.S. Patent and Trademark Office currently pending. In addition, the Company has
one (1) issued patent directed to Virus-Induced Gene Silencing in Plants. The
technology is expected to be of use in improving levels of protein expression
using viral vectors in plants. The patents cover a range of technology platforms
including transient expression of genes in plants using viral vectors and vector
systems, trans-activation of gene expression in plants, production of
pharmaceutically active proteins in sprouted seedlings with a focus on viral
vectors, clonal plant tissues and cultures developed utilizing viral vectors,
methods to facilitate purification of proteins expressed in plants, and improved
plant transformation systems. Specific areas covered include production of
vaccine antigens and multi-subunit proteins such as antibodies. The Company also
has several foreign patent applications pending corresponding to many of these
patent applications.
In the area of nutritional formulations, the Company has fourteen (14) issued
U.S. patents (and several foreign patents) relating to methods for accumulating
metals in plants. One (1) out of the fourteen (14) patents relates to
nutritional supplements containing methylselenocysteine. The Company also has
one pending utility application relating to nutritional supplements containing
methylselenocysteine.
Government Regulations
The manufacturing, processing, formulation, packaging, labeling and advertising
of the Company's products are subject to regulation by a number of federal
agencies, including the Food and Drug Administration ("FDA"), the Federal Trade
Commission ("FTC"), the United States Postal Service, the Consumer Product
Safety Commission and the United States Department of Agriculture. The Company's
activities are also regulated by various state and local agencies in which the
Company's products are sold. The FDA is primarily responsible for the regulation
of the manufacturing, labeling and sale of the Company's products. The operation
of the Company's vitamin manufacturing facility is subject to regulation by the
FDA as a food manufacturing facility. The United States Postal Service and the
FTC regulate advertising claims with respect to the Company's products. In
addition, the Company manufactures and markets certain of its products in
compliance with the guidelines promulgated by the United States Pharmacopoeia
Convention, Inc. ("USP") and other voluntary standard organizations.
6
The Dietary Supplement Health and Education Act of 1994 ("DSHEA") was enacted on
October 25, 1994. The Dietary Supplement Act amends the Federal Food, Drug and
Cosmetic Act ("FFD&CA") by defining dietary supplements, which include vitamins,
minerals, nutritional supplements and herbs, and by providing a regulatory
framework to ensure safe, quality dietary supplements and the dissemination of
accurate information about such products. Dietary supplements are regulated as
foods under the DSHEA and FDA is generally prohibited from regulating the active
ingredients in dietary supplements as food additives, or as drugs unless product
claims trigger drug status. It requires the FDA to regulate dietary supplements
so as to guarantee consumer access to beneficial dietary supplements, allowing
truthful and proven claims. Generally, dietary ingredients that were on the
market before October 15, 1994 may be sold without FDA pre-approval and without
notifying the FDA. However, new dietary ingredients (those not used in dietary
supplements marketed before October 15, 1994) require pre-market submission to
the FDA of evidence of a history of their safe use, or other evidence
establishing that they are reasonably expected to be safe. There can be no
assurance that the FDA will accept the evidence of safety for any new dietary
ingredient that the Company may decide to use. FDA's refusal to accept such
evidence could result in regulation of such dietary ingredients as food
additives, requiring FDA pre-approval based on newly conducted, costly safety
testing.
DSHEA provides for specific nutritional labeling requirements for dietary
supplements effective January 1, 1997. The Dietary Supplement Act permits
substantiated, truthful and non-misleading statements of nutritional support to
be made in labeling, such as statements describing general well being from
consumption of a dietary ingredient or the role of a nutrient or dietary
ingredient in affecting or maintaining structure or function of the body. The
FDA requires the Company to notify the agency of such statements. There can be
no assurance that the FDA will not consider particular labeling statements used
by the Company to be drug claims rather than acceptable statements of
nutritional support, necessitating approval of a costly new drug application, or
re-labeling to delete such statements. It is also possible that the FDA could
allege false statements were submitted to it if structure/function claim
notifications were either non-existent or so lacking in scientific support as to
be plainly false.
In addition, the DSHEA authorizes the FDA to promulgate Current Good
Manufacturing Practices ("cGMP") specific to the manufacture of dietary
supplements, to be modeled after food cGMP. The Company currently manufactures
its dietary supplement products pursuant to food cGMP.
Dietary supplements are also subject to the Nutrition, Labeling and Education
Act ("NLEA"), which regulates health claims, ingredient labeling and nutrient
content claims characterizing the level of a nutrient in a product. NLEA
prohibits the use of any health claim for dietary supplements unless the health
claim is supported by significant scientific agreement and is pre-approved by
the FDA.
In certain markets, including the United States, claims made with respect to
dietary supplements may change the regulatory status of the Company's products.
For example, in the United States, the FDA could possibly take the position that
claims made for some of the Company's products make those products new drugs
requiring pre-approval by the FDA. The FDA could also place those products
within the scope of its over-the-counter ("OTC") drug regulations and require it
to comply with a published FDA OTC monograph. OTC monographs dictate permissible
ingredients, appropriate labeling language and require the marketer or supplier
of the products to register and file annual drug listing information with the
FDA. The Company does not at present sell OTC drug products. If the FDA were to
assert that the Company's product claims cause them to be considered new drugs
or fall within the scope of OTC regulations, the Company would be required to
either, file a new drug application, comply with the applicable monographs, or
change the claims made in connection with those products.
The FTC regulates the marketing practices and advertising of all the Company's
products. In recent years, the FTC instituted enforcement actions against
several dietary supplement companies for false and misleading marketing
practices and advertising of certain products. These enforcement actions have
resulted in consent decrees and monetary payments by the companies involved.
Under FTC standards, the dissemination of any false advertising constitutes an
unfair or deceptive act or practice actionable under Section 45 of the Fair
Trade Commission Act and a false advertisement actionable under Section 52 of
that Act. A false advertisement is one that is "misleading in a material
respect." In determining whether an advertisement or labeling information is
misleading in a material respect, the FTC determines not only whether overt
representations and implied representations are false but also whether the
7
advertisement fails to reveal material facts. Under the FTC's standard, any
health benefit representation made in advertising must be backed by "competent
and reliable scientific evidence" by which the FTC means:
tests, analyses, research studies, or other evidence based upon the
expertise of professionals in the relevant area, that have been
conducted and evaluated in an objective manner by persons qualified to
do so, using procedures generally accepted by the profession to yield
accurate and reliable results.
The FTC has increased its review of the use of the type of testimonials that may
be used to market the Company's products. The FTC requires competent and
reliable evidence substantiating claims and testimonials at the time that such
claims of health benefit are first made. The failure to have this evidence when
product claims are first made violates the Federal Trade Commission Act.
Although the FTC has never threatened an enforcement action against the Company
for the advertising of its products, there can be no assurance that the FTC will
not question the advertising for the Company's products in the future.
The Company believes that it is currently in compliance with all applicable
government regulations. The Company cannot predict what new legislation or
regulations governing the Company's operations will be enacted by legislative
bodies or promulgated by agencies that regulate its activities. The Company
recognizes that its industry has come under increased scrutiny, principally due
to the FDA's investigation of the use of ephedrine alkaloids (ephedra). The FDA
is expected to increase its enforcement activity against dietary supplements
that the Agency considers violative of FFD&CA. In particular, the FDA is
increasing its enforcement of DSHEA provisions. Those activities will be
enhanced by the appropriation for increased FDA budgets for dietary supplement
regulation enforcement.
The Company believes it may become subject to additional laws or regulations
administered by the FDA or other federal, state, or foreign regulatory
authorities. It also believes the laws or regulations which are considered
favorable may be repealed, or more stringent interpretations of current laws or
regulations may be implemented. Any or all of such requirements could be a
burden to the Company. Future regulations could require the Company to:
o change the way it conducts business;
o use expanded or different labeling;
o recall, reformulate or discontinue certain products;
o keep additional records;
o increase the available documentation of the properties of its products;
and/or
o increase the scientific proof of product ingredients, safety, and/or
usefulness.
Competition
The business of manufacturing, distributing and marketing vitamins and
nutritional supplements is highly competitive. Many of the Company's competitors
are substantially larger and have greater financial resources with which to
manufacture and market their products. In particular, the retail segment is
highly competitive. Many direct marketers not only focus on selling their own
branded products, but offer national brands at discounts as well. Many
competitors have established brand names recognizable to consumers. In addition,
major pharmaceutical companies offer nationally advertised multivitamin
products.
Many of the Company's competitors in the retailing segment have the financial
resources to advertise freely, to promote sales and to produce sophisticated
catalogs. In many cases, such competitors are able to offer price incentives for
retail purchasers and offer participation in frequent buyers programs. Some
retail competitors also manufacture their own products whereby they have the
ability and financial incentive to sell their own product.
The Company intends to compete by stressing the quality of its manufacturing
product, providing prompt service, competitive pricing of products in its
marketing segment and by focusing on niche products in the international retail
markets. We have also increased our advertising spending dollars to continue to
promote our proprietary branded nutraceutical product line and have expanded our
advertising medias to include radio and print. In our Pharmaceutical segment we
have hired staff with the responsibility to increase our sales and marketing
efforts in the contract services and manufacturing sectors and increased our
exposure to the pharmaceutical community by attending targeted trade shows and
training the staff to submit proposals and follow-up with their business
contacts.
8
Research and Development Activities
The Company currently conducts research and development activities at its
manufacturing facility, its wholly-owned contract research organization and
through arrangements with third party research facilities. Its research and
development activities are primarily involved in the research, development and
commercialization of nutraceuticals, and naturally derived substances with
nutritional, pharmacological or biotech properties. In the fiscal years ended
June 30, 2006, 2005, and 2004, the Company expended $423,871, $389,254 and
$37,700, respectively, on research and development activities.
Environmental Compliance
The Company is subject to regulation under Federal, state and local
environmental laws.
During the fiscal year ended June 30, 2003, the Company engaged an environmental
consultant to assist in obtaining a no further action letter from the New Jersey
Department of Environmental Protection ("NJDEP") with respect to its facility
located at 201 Route 22, Hillside, New Jersey. The facility is used to blend
vitamins and nutritional supplements for human consumption. The site contained
two underground heating oil tanks ("USTs") which were abandoned and closed prior
to 1986. The consultant has investigated the site and on February 4, 2004 filed
a Preliminary Assessment/Site Investigation (PA/ST) Report. On July 29, 2004,
the State of New Jersey's Department of Environmental Protection made the
determination that no further action is necessary for the remediation of the
site, and issued a NFA/CNS letter. The Company spent approximately $28,000 in
related remediation costs.
While the Company believes that it is in material compliance with applicable
environmental laws, continued compliance may require substantial capital
expenditures.
Employees
As of September 22, 2006, the Company had approximately 156 full time employees
of whom 51 belong to the local unit of the Teamsters Union and are covered by a
collective bargaining agreement, which expires August 31, 2010. Approximately 50
employees are administrative and professional personnel, 36 are laboratory
personnel and 70 employees are production and shipping personnel. Among the
professional personnel, 2 employees are engaged in research and development. The
Company considers its relations with its employees to be good.
Available Information
The Company files annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). These
filings are available to the public via the Internet at the SEC's website
located at http://www.sec.gov. You may also read and copy any document the
Company files with the SEC at the SEC's public reference room located at 450
Fifth Street, N.W., Washington, D.C. 20549. For more information, please call
the SEC at 1-800-SEC-0330.
The Company's website is located at www.ibiopharma.com. You may request a copy
of the Company's filings with the SEC (excluding exhibits) at no cost by writing
or telephoning us at the following address or telephone number:
Integrated BioPharma, Inc.
225 Long Avenue
Hillside, New Jersey 07205
Tel: 888-319-6962
Attn: Investor Relations
9
Item 1A. Risk Factors
Factors that May Affect the Future Results of our Business
Our revenue would decline significantly if we lose one or more of our most
significant customers, which could have a significant adverse impact on us.
A significant portion of our revenues are concentrated among three customers,
Herbalife International of America, Inc., Costco Wholesale, Inc. and Sam's Club.
For the years ended June 30, 2006, 2005 and 2004, these customers represented
approximately 86%, 80% and 71% of total revenue, respectively. The loss of any
of these customers could have a significant adverse impact on our financial
condition and results of operations.
We depend on our senior management, the loss of whom would have an adverse
effect on us.
We presently are dependent upon the executive abilities of our Chairman of the
Board, President and Chief Executive Officer, E. Gerald Kay, and our other
executive officers. Our business and operations to date chiefly have been
implemented under the direction of these individuals, who presently are, and in
the future will be, responsible for the implementation of our anticipated plans
and programs. While we have obtained key-man life insurance in the amount of
$1.0 million on the life of E. Gerald Kay, with our company as the named
beneficiary, the loss or unavailability of the services of one or more of our
principal executives would have an adverse effect on us. We may encounter
difficulty in our ability to recruit and ultimately hire any replacement or
additional executive officers having similar background, experience and
qualifications as those of our current executive officers.
There is no assurance that we will remain listed on an active trading market.
Although our common stock is quoted on the American Stock Exchange, there can be
no assurance that we will, in the future, be able to meet all the requirements
for continued quotation on that exchange. In the absence of an active trading
market or if our common stock cannot be traded on the American Stock Exchange,
our common stock could instead be traded on the OTC Bulletin Board or in the
Pink Sheets. In such event, the liquidity and stock price in the secondary
market may be adversely affected. In addition, in the event our common stock was
de-listed; broker-dealers have certain regulatory burdens imposed upon them
which may discourage them from effecting transactions in our common stock and
hence, could further limit the liquidity of our common stock.
We may not receive approval for our pending patent applications for nutritional
supplements, which could enable our competitors to use similar methods and
processes.
We are the registered owner of fourteen (14) issued U.S. patents and several
foreign patents directed to methods for accumulating metals in plant seedlings
and nutritional formulations produced using the plant seedlings, or has rights
to these patents in the field of nutritional supplements and one (1) issued
patent directed to Virus-Induced Gene Slicing in Plants. In the area of protein
production in plants, we also have ten (10) patent utility applications and five
(5) provisional applications pending before the U.S. Patent and Trademark Office
and several foreign applications currently pending. We can give no assurance
that we will be granted such patents. To the extent we are not granted such
patents, our competitors could more easily produce plant-based proteins similar
to ours.
We have entered into several transactions with entities controlled by some of
our officers and directors, which could pose a conflict of interest.
We have entered into several agreements and arrangements described in our
previous SEC public filings and to be fully described in our proxy statement for
our 2006 annual meeting of stockholders, including the lease of real property
from Vitamin Realty Associates, L.L.C., the merger with NuCycle Acquisition
Corp., and the acquisition of the Paxis business from Trade Investment Services,
LLC, which involved transactions with entities significantly owned by members of
the Kay family and other of our significant shareholders and/or executive
officers, who collectively own a majority of our shares of common stock.
Although we believe that these transactions were advantageous to us and were on
terms no less favorable to us than could have been obtained from unaffiliated
third parties, transactions with related parties can potentially pose a conflict
of interest.
10
Our Executive Officers and Directors have majority voting power and may take
actions that may not be in the best interest of other stockholders, but in their
own interest.
Our Executive Officers and Directors beneficially own approximately 71% of our
outstanding shares. If these stockholders act together, they may be able to
exert significant control over our management and affairs requiring stockholder
approval, including approval of significant corporate transactions. This
concentration of ownership may have the effect of delaying or preventing a
change in control and might adversely affect the market price of our common
stock. This concentration of ownership may not be in the best interests of all
our stockholders.
We have a staggered Board of Directors, which could impede an attempt to acquire
us or remove our management.
Our Board of Directors is divided into three classes, each of which serves for a
staggered term of three years. This division of our Board of Directors could
have the effect of impeding an attempt to take over our company or change or
remove management, since only one class will be elected annually. Thus, only
approximately one-third of the existing Board of Directors could be replaced at
any election of directors.
Our product liability insurance may be insufficient to cover possible claims
against us.
Our company, like other manufacturers, wholesalers and distributors of
vitamin and nutritional supplement products and APIs, faces an inherent risk of
exposure to product liability claims if, among other things, the use or
ingestion of our products, result in sickness or injury. We currently maintain a
product liability insurance policy that provides a total of $5.0 million of
coverage per occurrence and $5.0 million of coverage in the aggregate. We also
maintain a professional liability policy to insure our contract research
services with similar insurance coverage. However, there can be no assurance
that existing or future insurance coverage will be sufficient to cover any
possible product liability risks or that such insurance will continue to be
available to us on economically feasible terms.
Our nutraceutical products are manufactured using various raw materials
consisting of vitamins, minerals, herbs, fruit extracts and other ingredients
that we regard as safe when taken as recommended by us and that various
scientific studies have suggested may provide health benefits. We could be
adversely affected if any our products or any similar products distributed by
other companies should prove or be asserted to be harmful to consumers or should
scientific studies provide unfavorable findings regarding the effectiveness of
our products.
There is no assurance that we will be able to produce Paclitaxel on a commercial
scale.
Our InB:Paxis Pharmaceuticals, Inc. subsidiary uses botanical materials
derived from the yew tree, or taxus canadensis, to produce Paclitaxel, a cancer
therapy drug. Yew trees are in limited supply. Paxis has formed a joint venture
with Chatham Biotec, Ltd. to produce extract and intermediate precursor
Paclitaxel from Canadian Taxus trees. We can give no assurance that the joint
venture will be successful in producing such Paclitaxel or that we can locate
alternate sources of yew trees.
We may not be able to obtain raw materials used in certain of our manufactured
products.
The principal raw materials used in the manufacturing process in the company's
nutraceutical segment are natural and synthetic vitamins, minerals, herbs,
related nutritional supplements, gelatin capsules, coating materials, fruit
extracts, fruit juices and the necessary components for packaging the finished
products. The raw materials are available from numerous sources within the
United States and abroad. The gelatin capsules, coating materials and packaging
materials are similarly widely available. The principal raw materials used in
our pharmaceutical segment are made up of a variety of materials used to develop
and manufacture Paclitaxel. We entered into a joint venture agreement with a raw
material supplier for our Paxis subsidiary. We generally purchase our raw
materials, on a purchase order basis, without long-term commitments.
Our principal suppliers in our Nutraceutical Segment are JD Moody Marketing
Services, Inc., Triarco Industries, Inc., and DSM Nutritional Products, Inc. In
connection with our Pharmaceutical Segment, botanical materials derived from the
Canadian yew tree, or Taxus canadensis, are used to produce Paclitaxel. Canadian
yew trees are in limited supply. Paxis has entered into a joint venture with
Chatham Biotec, Ltd. to produce extract and intermediate precursor Paclitaxel
from Canadian yew trees. We can give no assurance that the joint venture will be
successful in producing such Paclitaxel extracts or intermediates, or that we
can locate alternate sources of yew trees.
11
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2. Properties
On January 10, 1997, the Company entered into a lease agreement for
approximately 75,000 square feet of factory, warehouse and office facilities in
Hillside, New Jersey. The facilities are leased from Vitamin Realty Associates,
L.L.C., a limited liability company, which is 90% owned by the Company's
Chairman of the Board, and principal stockholder and certain family members and
10% owned by an employee of the Company. The lease expires May 31, 2015 and
provides for a base annual rental of $323,559 plus increases in real estate
taxes and building expenses. At its option, the Company has the right to renew
the lease for an additional five-year period.
The Company owns a 40,000 square foot manufacturing facility in Hillside, New
Jersey. The space is utilized for Manhattan Drug's tablet manufacturing
operations.
Paxis presently leases a manufacturing facility in Boulder, Colorado. The
facility is comprised of 22,483 square feet located at 5555 Airport Blvd., Suite
200, Boulder, Colorado 80301. The lease expires in March 2007. Paxis is in
discussions with its landlord to extend the lease.
InB:Hauser Pharmaceutical Services, Inc. leases two office facilities
aggregating approximately 22,800 square feet used for both scientific
laboratories and general office space. The office facilities are located at
6880 North Broadway Units A-L, Denver, Colorado 80221 and 6820 North Broadway
Units R-S, Denver Colorado 80221. Both office facilities are leased through
December 31, 2012.
On March 6, 2004, AgroLabs, Inc. entered into a two-year lease agreement for
approximately 10,000 square feet of warehouse space in Grapevine, Texas. In June
2004, the Company modified the lease to increase the warehouse space to 16,000
square feet and in April 2005, the Company modified the lease to increase the
warehouse space to 26,000 square feet and extended the expiration date of the
lease term to March 2007. The facility is used for the storage and distribution
of inventory for its liquid nutraceutical products, with approximately 4,500
square feet used for office space. The Company is currently evaluating its
leasing options relating to this lease. In September 2006, the Company leased
22,000 square feet of additional warehouse space in a second location in
Grapevine, Texas for a three-year period.
In October 2005, the Company sub-leased 466 square feet of office space in
Dover, Delaware, which expires on September 30, 2006. Upon its one year
anniversary, the lease converts to a month-to-month lease. The space is used to
house the Company's InB:Biotechnologies, Inc. offices.
Item 3. Legal Proceedings
NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B. Kay, E. Gerald Kay,
Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc., Dean P. Stull and
Integrated BioPharma, Inc., pending in the Supreme Court for the State of New
York, 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 provide information necessary for NatEx to
perform under the parties' agreements by which NatEx had agreed to supply
Paclitaxel extract. The complaint seeks damages of more than $5.0 million. By
order dated January 6, 2006, the Court granted in part Defendants' motion to
dismiss. The Court dismissed all of the claims against all defendants, except
for the breach of contract claim against Paxis. Plaintiffs have filed a notice
of appeal of that decision. Paxis plans to defend vigorously the remaining
claim.
12
Pom Wonderful LLC v. Agrolabs, Inc., pending in the United States District Court
for the Central District of California. Plaintiff commenced this action in
December 2005 against us alleging trademark infringement of its "POM Wonderful"
and related trademarks by our use of its supplier's registered trademark for
"Pomella," which is the name of a pomegranate extract ingredient used in our
"Naturally Pomegranate" nutritional supplement. We had purchased the pomegranate
extract ingredient from a third party supplier, Geni Herbs, Inc. against whom
the Plaintiff had filed a similar infringement action in June 2005 (Pom
Wonderful LLC v. Geni Herbs, Inc., also pending in the Central District of
California). We filed counterclaims against the Plaintiff for cancellation of
its various trademarks. As the case was entering the early phases of discovery
and we were seeking to consolidate the two actions and to file cross-claims
against Geni Herbs, we learned that the Plaintiff and Geni Herbs were engaged in
a mediation. As a result of our participation in the negotiations, both cases
have been settled in principle. The parties are currently finalizing settlement
agreements. The Company does not believe that there will be a material impact on
the Company's financial position.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 2006.
13
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Registrant
Purchases of Equity Securities
Market Information
On April 16, 2003, the Company's common stock began trading on the American
Stock Exchange under the symbol INB.
Set forth below are the high and low closing prices of the Common Stock as
reported on the American Stock Exchange:
COMMON STOCK [INB] HIGH LOW
FISCAL YEAR ENDED JUNE 30, 2005
First Quarter $ 9.34 $ 4.78
Second Quarter $ 9.30 $ 6.60
Third Quarter $ 7.50 $ 5.30
Fourth Quarter $ 5.72 $ 3.79
FISCAL YEAR ENDED JUNE 30, 2006
First Quarter $ 3.50 $ 1.60
Second Quarter $ 4.69 $ 2.50
Third Quarter $ 8.50 $ 3.90
Fourth Quarter $ 9.17 $ 6.70
Holders
As of June 30, 2006, there were approximately 1,000 holders of record of the
Company's common stock.
Dividends
The Company has not declared or paid a dividend with respect to its common stock
during the fiscal years ended June 30, 2006, 2005 or June 30, 2004 nor does the
Company anticipate paying dividends in the foreseeable future.
The Company has paid dividends of $482,463, $490,000 and $101,692 with respect
to its Series B Redeemable Convertible Preferred Stock during the fiscal years
ended June 30, 2006, 2005 and 2004, respectively.
14
The following table provides information as of June 30, 2006 about the Company's
equity compensation plans:
Equity Compensation Plan Information
Number of Weighted average Number of
securities exercise price of securities
to be issued upon outstanding remaining
exercise of options, warrants available for
outstanding and rights future
options, (b) issuance
warrants and under equity
rights compensation plans
(a) (excluding
securities
reflected
in column (a))
----------------- ------------------ ------------------
Equity compensation
plans approved by
security holders 6,085,177 $ 3.37 2,952,552
Equity compensation
plans not approved
by security holders - - -
----------------- ------------------ ------------------
Totals 6,085,177 $ 3.37 2,952,552
================= ================== ==================
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data
The following table presents selected financial data for each of the five years
in period ended June 30, 2006. The selected financial data was derived from the
consolidated financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Results of Operations" and "Liquidity
and Capital Resources" and the consolidated financial statements and notes
thereto.
For the fiscal years ended June 30,
-------------------------------------------------------------------------------
2006 2005 2004 2003 2002
------------- -------------- ------------- ------------- -------------
Statements of Operations:
Net sales $ 57,820,466 $ 32,735,813 $ 25,282,790 $ 22,235,306 $ 23,546,630
============= ============== ============= ============= =============
Operating Income $ 21,840,661 $ 1,991,966 $ 5,982,133 $ 1,296,296 $ 798,049
============= ============== ============= ============= =============
Net income (loss) $ 8,431,752 $ (8,580,233) $ (5,340,147) $ 894,117 $ 1,393,045
Deemed dividend from beneficial conversion
of Series B Preferred stock 2,399,643 2,332,000 960,000 - -
Series B Preferred stock dividend 482,463 490,000 101,692 - -
------------- -------------- ------------- ------------- -------------
Net income (loss) applicable to
common shareholders $ 5,549,646 $ (11,402,233) $ (6,401,839) $ 894,117 $ 1,393,045
============= ============== ============= ============= =============
Financial Position:
Total Assets $ 37,604,864 $ 26,242,471 $ 31,813,426 $ 20,827,237 $ 10,006,835
============= ============== ============= ============= =============
Notes and loan payable $ 4,669,550 $ 4,672,260 $ 4,672,260 $ - $ 3,568
============= ============== ============= ============= =============
Working Capital $ 15,072,408 $ 7,436,071 $ 12,913,661 $ 14,804,546 $ 4,899,564
============= ============== ============= ============= =============
Stockholders' Equity $ 20,634,925 $ 12,828,896 $ 23,937,038 $ 18,255,435 $ 7,284,775
============= ============== ============= ============= =============
Other Data:
Capital expenditures $ 351,026 $ 1,655,137 $ 3,519,586 $ 397,604 $ 318,541
============= ============== ============= ============= =============
Weighted-average shares outstanding 12,832,737 12,610,975 11,107,520 7,765,051 6,228,720
============= ============== ============= ============= =============
Weighted-average shares outstanding -
assuming dilution 16,231,365 12,610,975 11,107,520 10,420,964 7,114,970
============= ============== ============= ============= =============
Net income (loss) per common share:
Basic $ 0.43 $ (0.90) $ (0.58) $ 0.12 $ 0.22
============= ============== ============= ============= =============
Diluted $ 0.34 $ (0.90) $ (0.58) $ 0.09 $ 0.20
============= ============== ============= ============= =============
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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.
Effective July 1, 2005, the Company no longer qualified as a small business
registrant 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.
During the fiscal year ended June 30, 2006, the Company changed its reporting
segments to Nutraceuticals, Pharmaceuticals and Biotechnologies from
Nutraceutical, Pharmaceutical and Technical Services. The Company currently
manages its business in these segments. The prior year reported data as been
reclassified to conform to the current year 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.
For the fiscal years ended June 30, 2006, our Pharmaceuticals segment incurred
net losses of approximately $5.0 million, and $10.2 million, which included
impairment charges of $3.6 million, in the fiscal year ended June 30, 2005. 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. We continue to monitor the ongoing costs of operating
the Paxis facility. In the fiscal year ended June 30, 2006, we hired a director
of marketing for our Pharmaceuticals segment 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 in our Pharmaceutical segment since implementing this strategic sales and
marketing plan. In the fourth quarter of fiscal year ended June 30, 2006, our
Paxis subsidiary entered into a supply agreement with a European generics
manufacturing company with extensive sales, marketing, and distribution channels
in the European Community, Eastern Europe, the United Kingdom and the United
States. The agreement provides for minimum purchases during the first year of at
least $2.4 million of Paxis' API product. Paxis made its first shipment under
the supply agreement in August 2006. The Company can give no assurance that
Paxis can be operated profitably.
16
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;
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 allowances 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.
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 amounts. We continuously monitor payments from our customers and
maintain allowances for doubtful accounts for estimated losses in the period
they become known.
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.
17
The Company performed a sensitivity analysis to determine the impact of
fluctuations in our estimates for our allowance for doubtful accounts. As of
June 30, 2006, the allowance for doubtful accounts was $125,000. If this amount
were in error by plus or minus one percent of the account receivable balance,
the impact would be an additional $58,400 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 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. If our estimates used to
value inventory were off by one percent of the total inventory balance, the
impact would be an additional $110,000 of income or 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.
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 142"). SFAS 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
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.
18
Deferred Taxes
The Company accounts for income taxes pursuant to SFAS No. 109, "Accounting for
Income Taxes" (SFAS 109"). SFAS 109 is an asset-and-liability approach that
requires the recognition of deferred tax assets and liabilities for the expected
tax consequences and events that have been recognized in the Company's financial
statements or tax returns. In the fiscal year ended June 30, 2006, the Company
recognized an income tax benefit, net of approximately $3.4 million. The income
tax benefit was primarily the result of the change in the Company's valuation
reserve of $3.2 million on its deferred tax assets. In the fourth quarter ended
June 30, 2006, the Company, based on current factors relating to its business
environment, including among other factors, the Company securing a supply
agreement and increasing its marketing activities in its contract services
business in its Pharmaceutical segment and the continued expansion and proven
success in its branded propriety nutraceutical product line, the Company had
reasonable belief that it will have future federal taxable income which will
allow the Company to realize its deferred tax assets in the near future and
consequently, it released the portion of its valuation allowance relating to
those assets.
General Litigation
From time to time, the Company is a defendant or plaintiff in various legal
actions which arise in the normal course of business. As such the Company is
required to assess the likelihood of any adverse outcomes to these matters as
well as potential ranges of probable losses. A determination of the amount of
the provision required for these commitments and contingencies, if any, which
would be charged to earnings, is made after careful analysis of each matter. The
provision may change in the future due to new developments or changes in
circumstances. Changes in the provision could increase or decrease the Company's
earnings in the period the changes are made. In the opinion of management, after
consultation with legal counsel, the ultimate resolution of these matters will
not have a material adverse effect on the Company's financial condition or
results of operations.
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 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.
19
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 Fiscal Year Ended June 30,
-------------------------------------------
2006 2005 2004
------------- ------------- ------------
Sales, net 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 62.2% 93.9% 76.7%
------------- ------------- ------------
Selling and administrative:
Impairment charge - 3.4% -
INB:Paxis Phamaceuticals, Inc. start up costs - - 24.5%
Selling and administrative 28.9% 36.6% 21.0%
------------- ------------- ------------
Total selling and administrative 28.9% 40.0% 45.5%
------------- ------------- ------------
Total costs and expenses 91.2% 133.9% 122.2%
------------- ------------- ------------
Income (loss) from operations 8.8% (33.9%) (22.2%)
------------- ------------- ------------
Other income (expense):
Gain on settlement of lawsuit - 7.6% -
Interest expense (0.6%) (0.5%) (0.4%)
Other income 0.1% 0.4% 1.5%
Interest and investment income 0.1% 0.2% 0.3%
------------- ------------- ------------
(0.4%) 7.7% 1.4%
------------- ------------- ------------
Income (loss) before income taxes 8.4% (26.3%) (20.8%)
Federal and state income tax (benefit) expense (5.8%) (0.1%) 0.3%
------------- ------------- ------------
Income (loss) before minority interest 14.2% (26.2%) (21.1%)
Minority interest 0.3% 0.0% -
------------- ------------- ------------
Net income (loss) 14.6% (26.2%) (21.1%)
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (4.2%) (7.1%) (3.8%)
Series B Preferred Stock dividend (0.8%) (1.5%) (0.4%)
------------- ------------- ------------
Net income (loss) allocable to common
shareholders 9.6% (34.8%) (25.3%)
============= ============= ============
20
Year ended June 30, 2006 Compared to the Year ended June 30, 2005
Sales, net. Net Sales for the fiscal year ended June 30, 2006 and 2005 were
$57.8 million and $32.7 million, respectively, an increase of $25.1 million or
76.6%. The increase is comprised of the following:
Fiscal Year Ended Dollar Increase Percentage
June 30, (Decrease) Change
------------------------------------- ----------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
----------------- ---------------- ----------------- --------------
Nutraceutical - US Customers $ 45,642,071 $ 25,744,762 $ 19,897,309 77.3%
Nutraceutical - International Customers 9,936,896 5,807,611 4,129,285 71.1%
----------------- ---------------- ----------------- --------------
Total Nutraceutical 55,578,967 31,552,373 24,026,594 76.1%
Pharmaceutical 2,222,819 1,162,358 1,060,461 91.2%
Biotechnologies 18,680 21,082 (2,402) (11.4%)
----------------- ---------------- ----------------- --------------
Total $ 57,820,466 $ 32,735,813 $ 25,084,653 76.6%
================= ================ ================= ==============
Our increase in net sales is primarily attributable to the increase in
sales in our branded proprietary nutraceutical products. Net sales of such
products increased from $14.3 million in the fiscal year ended June 30, 2005 to
$36.2 million in the fiscal year ended June 30, 2006, an increase of
approximately $21.9 million or 153.3%. 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 proprietary nutraceutical
product line. We spent $3.3 million on this type of advertising in the fiscal
year ended June 30, 2006 as compared to approximately $1.1 million for the
comparable 2005 period. These trade promotional and marketing costs were
recorded as a reduction to net sales. Net sales in our other nutraceutical
business lines increased to $19.3 million in the fiscal year ended June 30, 2006
from $17.3 million in the fiscal year ended June 30, 2005, an increase of
approximately $2.0 million or 11.5%. This increase is primarily the result of
increased sales in our contract manufacturing business.
The increase in net sales in our Pharmaceutical business segment is a direct
result of us owning Hauser for the full fiscal year ended June 30, 2006 versus
nine 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. Additionally, our Paxis subsidiary contributed
approximately 50% to the Pharmaceutical segment in the fiscal year ended June
30, 2005 with substantially no sales in the fiscal year ended June 30, 2006.
Our gross profit of $21.8 million for the fiscal year ended June 30, 2006 was
$19.9 million higher than gross profit for the fiscal year ended June 30, 2005
of $2.0 million. Our Nutraceutical segment's gross profit increased from 25.1%
in the fiscal year ended June 30, 2005 to 40.8% in our fiscal year ended June
30, 2006 as our product mix shifted. Our branded propriety nutraceutical
products, which tend to contribute a higher gross profit than our contract
manufacturing business, represented 44.3% of our sales in the fiscal year ended
June 30, 2005, increased to 62.6% of our sales in the fiscal year ended June 30,
2006.
For the fiscal year ended June 30, 2006, our Pharmaceutical business
segment produced an operating loss of approximately $4.7 million, a significant
improvement ($5.5 million) from the fiscal year ended June 30, 2005 operating
loss of $10.2 million (gross profit loss of approximately $5.5 million). The
operating loss in our fiscal year ended June 30, 2005 included an impairment
charge of $2.5 million taken on the fixed assets of our Paxis subsidiary with no
comparable charge in the fiscal year ended June 30, 2006. The remaining decrease
of $2.6 million is comprised of cost reductions in the Paxis subsidiary of $1.4
million and increased gross profits of $1.2 million in our Hauser subsidiary.
Our Biotechnologies segment did not significantly contribute to our gross
profits in the fiscal years June 30, 2006 and 2005.
For the fiscal years ended June 30, 2006, approximately 86% of revenues were
derived from three customers as compared to two customers representing 76% of
revenues for the fiscal year ended June 30, 2005. The loss of any of these
customers would have an adverse affect on the Company's operations.
21
Cost of sales. Cost of sales increased to $36.0 million for the fiscal year
ended June 30, 2006, as compared to $30.7 million for the fiscal year ended June
30, 2005. Cost of sales decreased as a percentage of sales to 62% for the fiscal
year ended June 30, 2006 as compared to 94% for the fiscal year ended June 30,
2005. The decrease of 32% in cost of sales was due to the increase in sales of
the Company's branded proprietary nutraceutical products, which cost less than
our other product lines in our nutraceutical business segment. For the fiscal
year ended June 30, 2006, 9% of the cost of sales or $3.2 million was
attributable to sales of approximately $2.4 million in our Pharmaceutical
business segment; excluding this segment, our cost of sales would have been 59%.
For the fiscal year ended June 30, 2005, cost of sales would have been 75%,
excluding $7.1 million of cost of sales attributable to the Pharmaceutical
business segment on sales of approximately $1.2 million or approximately 4% of
total sales for that period.
Selling and Administrative Expenses. Selling and administrative expenses were
$16.7 million for the fiscal year ended June 30, 2006, an increase of $3.6
million or 27.7% as compared with $13.1 million for the fiscal year ended June
30, 2005. As a percentage of sales, net, selling and administrative expenses
were 28.9% for the fiscal year ended June 30, 2006 and 40.0% for the prior
comparable period. A tabular presentation of the changes in selling and
administrative expenses is as follows:
Fiscal Year Ended Dollar Increase Percentage
June 30, (Decrease) Change
--------------------------------- --------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
--------------- --------------- --------------- --------------
Advertising $ 3,400,621 $ 840,662 $ 2,559,959 304.5%
Salaries 2,885,935 2,652,400 233,535 8.8%
Consulting & Other Professional Fees 1,667,791 2,066,932 (399,141) (19.3%)
Indirect Expenses 1,237,344 746,931 490,413 65.7%
Insurance 934,243 220,646 713,597 323.4%
Office expense 864,492 348,577 515,915 148.0%
Commissions 784,612 377,224 407,388 108.0%
Auto, Travel & Entertainment 745,278 959,746 (214,468) (22.3%)
Employee Benefits 652,974 583,205 69,769 12.0%
Depreciation & Amortization 619,185 611,873 7,312 1.2%
Office Rent 577,539 514,117 63,422 12.3%
Research & Development 423,871 389,254 34,617 8.9%
Compensation expense for employee
stock options 413,082 - 413,082 100.0%
Bad debt expense 101,395 581,496 (480,101) (82.6%)
Loss on impairment - 1,122,247 (1,122,247) (100.0%)
Other 1,429,157 1,089,157 340,000 31.2%
--------------- --------------- --------------- --------------
Total $ 16,737,519 $ 13,104,467 $ 3,633,052 27.7%
=============== =============== =============== ==============
Advertising expense represented approximately 5.9% of net sales in the fiscal
year ended June 30, 2006 or $3.4 million, compared to 2.6% of net sales for the
fiscal year ended June 30, 2005 or $841,000, an increase of $2.6 million or
304.5%. 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. We also introduced new medias of
advertisement in the fiscal year ended June 30, 2006, such as radio, with no
comparable expenditure in the fiscal year ended June 30, 2005.
Salaries increased by approximately $233,500 or 8.8%, primarily as the
result of increased salaries aggregating approximately $262,000 with the
addition of two corporate officers added to the payroll; and salary increases,
incentive bonus payments and hiring of additional staff of approximately $73,400
for the fiscal year ended June 30, 2006 in our Nutraceutical segment, with no
comparable expenses in the fiscal year ended June 30, 2005. These increases were
offset in part by a net decrease in salaries in the Pharmaceutical segment of
$96,000 resulting from an increase of $213,000 from our Hauser subsidiary being
included in our results of operations for the full fiscal year in 2006 versus
only nine and one-half months in the fiscal year ended June 30, 2005, offset by
savings of $309,000 from the reduction in work force from our Paxis subsidiary
occurring in the fiscal year ended June 30, 2006. Employee benefits increased by
approximately $70,000 or 12% and represented approximately 22% of total salaries
in both fiscal years ended June 30, 2006 and 2005.
Consulting fees and other professional fees decreased by an aggregate amount of
approximately $399,000 or 19.3%. The decrease is primarily attributable to our
decreased use in outside business consultants of approximately $151,700 in the
fiscal year of June 30, 2006; secondarily, as a result of the termination of
an agreement made on July 8, 2004 in the fiscal year ended June 30, 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; and thirdly, a decrease of
$50,000 in management fees in our Pharmaceutical segment.
22
Indirect expenses increased by approximately $490,000 mostly as the result of
our Hauser subsidiary having a full year of results in the 2006 period and nine
and a half months in the comparable 2005 period. Indirect expenses include costs
that are not billable to clients, including non-billable time, laboratory
expenses and other related costs.
Insurance costs increased to approximately $934,000 in the fiscal year ended
June 30, 2006 from approximately $221,000 in the fiscal year ended June 30,
2005, or approximately $713,600. The significant portion of our insurance costs
is product liability insurance, which increased in the fiscal year ended June
30, 2006 by approximately $367,000, a direct result from increased sales. The
remaining increases are the result of a change in allocation between
manufacturing costs and general and administrative costs of approximately
$292,000 and general premium increases of approximately $55,000.
Office expenses increased by approximately $516,000 or 148.0% in the fiscal
year ended June 30, 2006 as compared to the comparable 2005 period. The primary
increase in office expense is the result of an increase of approximately
$468,000 in printing and marketing expenses for our branded propriety
nutraceutical business. Office rent was approximately $577,600 in the fiscal
year ended June 30, 2006 compared to approximately $514,200 in the fiscal year
ended June 30, 2005, an increase of approximately $63,000 or 12.3% primarily as
a result of the addition of Hauser for the full fiscal year ended June 30, 2006
compared to nine and a half months for the fiscal year ended June 30, 2005,
offset in part by an decrease in energy costs in the Company's headquarters in
Hillside, New Jersey due to certain energy rebates received from the utility
companies for installing energy efficient heating and lighting fixtures. Our
utility costs in our Hillside facility are included in our monthly rent charges
from our landlord.
Commission expense increased in both absolute dollars and as a percentage of
sales, net. For the fiscal year ended June 30, 2006, commissions represented
1.4% of sales, net compared to 1.2% for the fiscal year ended June 30, 2005, the
increase as a percentage of sales of 0.2% 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 $214,000 in
the fiscal year ended June 30, 2006 compared to the fiscal year ended June 30,
2005 primarily as a result of decreased travel from our corporate headquarters
in New Jersey to our Paxis and Hauser facilities in Colorado.
Our research and development costs increased by approximately $35,000 from
the fiscal year ended June 30, 2005 compared to the fiscal year ended June 30,
2006 primarily as a result of reaching several milestones in our flu vaccine
studies and our ongoing Anthrax study, which triggered additional research and
development payments of approximately $258,500 in the fiscal year ended June 30,
2006, offset by the downsizing of our Paxis subsidiary which incurred
approximately $202,000 less in research and development cost in fiscal year
ended June 30, 2006 compared to the fiscal year ended June 30, 2005.
Pursuant to SFAS No. 123(R), adopted as of July 1, 2005, the Company recognized
$413,082 in compensation expense for employee stock options in the fiscal year
ended June 30, 2006 with no comparable cost for the fiscal year ended June 30,
2005.
Bad debt expense decreased by $480,000 to approximately $101,000 in the fiscal
year ended June 30, 2006 from approximately $581,000 in the fiscal year ended
June 30, 2005 or 82.6%. In the fiscal year ended June 30, 2005, the
Nutraceutical segment had an isolated customer with an accounts receivable
balance of approximately $575,000, whereby it was determined that the customer
was unable to pay for the products it purchased from us. Absent this unusual
occurrence, the Company has not incurred any substantial bad debt expense.
In the fiscal year ended June 30, 2005, the Company incurred an impairment
charge of $1.1 million relating to its Paxis subsidiary. The impairment charges
consisted of write-offs relating to its carrying amount of the Paxis
intellectual property, license fee and goodwill with no related charge in the
fiscal year ended June 30, 2006.
Other income (expense). Other income (expense) was a net expense of
$221,616 for the fiscal year ended June 30, 2006 as compared to net income of
$2.5 million for the comparable period a year ago. Absent a cash payment
settlement on a lawsuit received 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 $192,000. The decrease of approximately
$192,000 was attributable to an increase in interest expense of $190,000 due to
the ongoing increase in the LIBOR rate, a decrease in consulting fee income of
$70,000 resulting from a decrease in the time spent on consulting for an
unrelated third party and an increase in investment income of $8,400.
23
Income tax (benefit). In the fiscal year ended June 30, 2006, the Company
recognized an income tax benefit of $3.4 million compared to approximately
$27,300 of income tax benefit in the fiscal year ended June 30, 2005. The
significant increase in the income tax benefit was the result of a change in the
Company's valuation allowance on its deferred tax assets of approximately $5.0
million. In the fourth quarter ended June 30, 2006, the Company, based on
current factors relating to its business environment, including among other
factors, the Company securing a supply agreement and increasing its marketing
activities in its contract services business in its Pharmaceutical segment and
the continued expansion and proven success in its branded propriety
nutraceutical product line, the Company had reasonable belief that it would
realize its deferred tax assets in the near future and consequently, it released
the portion of its valuation allowance relating to those assets.
Year ended June 30, 2005 Compared to the Year ended June 30, 2004
The Company's net loss for the year ended June 30, 2005 was $(8.6) million as
compared to net loss of $(5.3) million for the year ended June 30, 2004. This
increase in net loss of approximately $3.3 million is primarily the result of a
decrease in gross profit of approximately $3.9 million, an increase in selling
and administrative expenses of approximately $1.6 million, and an increase in
other income of approximately $2.5 million and a decrease in federal income and
state income taxes of approximately $115,000.
Sales for the years ended June 30, 2005 and 2004 were $32.7 million and $25.3
million, respectively, an increase of approximately $7.4 million or 29%. This
increase was due to the introduction of new nutraceutical products and the
increase in sales related to the InB:Paxis Pharmaceuticals, Inc. and InB:Hauser,
Inc. subsidiaries. Gross profit for the year ended June 30, 2005 was $3.9
million lower than gross profit for the year ended June 30, 2004. This decrease
in gross profit was attributable to the inclusion of Paxis manufacturing
expenses of $4.4 million and an impairment loss of $2.5 million. Exclusive of
the Paxis subsidiary, the gross profit percentage for the year ended June 30,
2005 was 26% and 23% for the year ended June 30, 2004. For the years ended June
30, 2005 and 2004, approximately 76% and 71% of revenues were derived from two
customers. The loss of these customers would have an adverse affect on the
Company's operations.
Nutraceutical sales for the year ended June 30, 2005 and 2004 were $31.1 million
and $25.3 million, respectively, an increase of $5.8 million or 23%.
On September 16, 2004, the Company completed the purchase of substantially all
of the assets of Hauser Technical Services, Inc. and Hasuer, Inc. Sales for the
ten months ended June 30, 2005 were approximately $1.1 million.
Paxis completed setting up its manufacturing facilities and operations and began
production in the fourth quarter of 2004. In anticipation of fulfilling orders,
Paxis built up raw material and work in process inventories of approximately
$3.2 million. Sales for the year ended June 30, 2005 totaled $550,007.
Cost of sales increased to $30.7 million in fiscal 2005 as compared to $19.4
million for fiscal 2004. Cost of sales increased as a percentage of sales to 94%
for the year ended June 30, 2005 as compared to 77% for the year ended June 30,
2004. The increase in cost of sales was due to the inclusion of approximately
$5.0 million attributable to both Paxis and Hauser. Exclusive of Paxis and
Hauser, cost of sales would have been 74% for the year ended June 30, 2005.
24
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Year Ended June 30,
2005 2004 Change
--------------- --------------- ----------------
Advertising Expense $ 840,662 $ 175,728 $ 664,934
Bad Debt Expense 581,496 5,858 575,638
Royalty & Commission Expense 377,224 141,132 236,092
Officers Salaries 469,548 455,609 13,939
Auto, Travel & Entertainment 959,746 808,979 150,767
Office Salaries 2,182,852 995,681 1,187,171
Depreciation & Amortization 611,873 306,426 305,447
Consulting Fees 867,642 287,055 580,587
Regulatory Fees 43,834 65,762 (21,928)
Professional Fees 860,847 679,200 181,647
Research & Development Expense 389,254 37,672 351,582
Indirect labor 746,931 -- 746,931
Office rent 514,117 146,615 367,502
Employee benefits 465,042 188,391 276,651
Other 2,071,152 1,010,126 1,061,026
Paxis Pharmaceuticals, Inc. -- 6,197,244 (6,197,244)
Impairment charge 1,122,247 -- 1,122,247
--------------- --------------- ----------------
Total $ 13,104,467 $ 11,501,478 $ 1,602,989
=============== =============== ================
The increase in advertising expense is due to an increase in print advertising
relating to the sales in the company's Agrolabs, Inc. subsidiary. The increase
in bad debt expense is due to certain accounts receivable balances that were
determined to be uncollectible. Royalty and commission expense increased as a
result of increased sales in the company's nutraceutical segment. Office
salaries have increased due to the inclusion of Paxis and Hauser salary expenses
reflected in the twelve months. The increase in depreciation and amortization
expense was a result of the inclusion of Paxis expenses. Consulting fees
increased as a result of the termination of the agreement made on July 8, 2004,
which resulted with the issuance of 27,000 shares of common stock and an
increase in sales promotion costs. The increase in research and development
expense was attributable to the inclusion of Paxis expenses reflected in the
twelve months and the acquisition of NuCycle Therapy, Inc. in February of 2003.
The increase in indirect labor, office rent and employee benefits is due to the
InB:Hauser Pharmaceutical Services, Inc acquisition on September 16, 2004.
Other income (expense) was $(2.5) million for the year ended June 30, 2005 as
compared to $356,886 for the same period a year ago, a decrease of $2.1 million.
The increase was primarily attributable to a $2.5 million cash payment in
connection with a multidistrict 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
anticompetitive conduct violation of various federal and state laws and a
decrease in other income of approximately $240,000.
Seasonality
The Company's results of operations in its Pharmaceuticals and Biotechnologies
segments are not significantly affected by seasonal factors. The Nutraceutical
business segment tends to be seasonal. The Company has found that in its first
fiscal quarter ending in September, orders for its branded proprietary
nutraceutical products slow (absent the addition of new customers with a
significant first time order), as buyers in their markets may have purchased
sufficient inventory to carry them through the summer months. Conversely, in the
Company's second fiscal quarter, ending in December, orders for its products
increase as the demand for the Company's branded nutraceutical products seems to
increase in late December to early January as consumers become health
conscious as they enter the new year.
25
The Company believes that there are other non-seasonal factors that also
may also influence the variability of quarterly results including, but not
limited to, general economic and industry conditions that affect consumer
spending, changing consumer demands and current news on nutritional supplements.
In addition, our recent growth has caused additional variability in our
quarterly results. 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 periods.
Liquidity and Capital Resources
The Company's primary sources of liquidity and capital resources are cash
generated from operations. The Company also has a $15.0 million credit facility
available through August 31, 2007, with a one year renewal option at the
lender's discretion. 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
primary 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:
For the fiscal year ended June 30,
-----------------------------------------------------
2006 2005 2004
--------------- --------------- ----------------
Net cash provided by (used in) operating activities $ 4,677,885 $ (4,538,126) $ (7,216,690)
=============== =============== ================
Net cash used in investing activities $ (1,217,898) $ (2,180,503) $ (5,811,334)
=============== =============== ================
Net cash (used in) provided by financing activities $ (140,704) $ (401,864) $ 12,169,680
=============== =============== ================
Cash and cash equivalents at end of year $ 5,746,836 $ 2,427,553 $ 9,548,046
=============== =============== ================
Days sales in inventory 84 107 87
=============== =============== ================
Inventory turnover 4.3 3.4 4.2
=============== =============== ================
At June 30, 2006, the Company's working capital was $15.1 million, an increase
of $7.6 million over working capital of $7.4 million at June 30, 2005. Cash and
cash equivalents were $5.7 million at June 30, 2006, an increase of $3.3 million
from June 30, 2005. In the fiscal year ended June 30, 2006, we provided $4.7
million of cash from our operating activities compared to using $4.5 million of
cash in operations in the fiscal year ended June 30, 2005, an increase of $9.2
million. Our improved cash position is directly attributable to having net
income, as adjusted for non-cash items, of approximately $5.9 million in the
fiscal year ended June 30, 2006 compared to a net loss, as adjusted for non-cash
items, of approximately $3.1 million an increase of $9.0 million. Non-cash items
include deferred taxes, impairment charges, depreciation and amortization and
compensation expense for employee stock options. The Company believes that
anticipated sales for next year, current cash balances and our existing credit
facility should meet our cash needs for operations and contractual commitments
in fiscal 2007.
The increase in cash generated from investing activities of approximately
$963,000 is primarily due to the decrease in the purchase of property and
equipment from the fiscal year ended June 30, 2005 to 2006 of $1.3 million.
The increase in cash generated from financing activities of approximately
$261,000 is primarily due to the increase in proceeds from the exercise of stock
options of $166,000 from the fiscal year ended June 30, 2005 to 2006.
The Company's total annual commitments at June 30, 2006 for long term
non-cancelable leases of approximately $989,200 consists of obligations under
operating leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
26
The following table sets forth the Company's future commitments as of June 30,
2006:
Obligation
---------------------------------------------------------------------------
Non-cancellable
Year ending Lease Contractual Credit
June 30, Obligations Commitments Facility Total
--------------- ---------------- ---------------- ---------------- ----------------
2007 $ 989,200 $ 1,575,000 $ - $ 2,564,200
2008 696,600 1,150,000 5,000,000 6,846,600
2009 681,000 100,000 - 781,000
2010 550,100 100,000 - 650,100
2011 519,700 - - 519,700
Thereafter 1,556,800 - - 1,556,800
---------------- ---------------- ---------------- ----------------
Total $ 4,993,400 $ 2,925,000 $ 5,000,000 $ 12,918,400
================ ================ ================ ================
The Company believes it 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. If any of the Company's Series B preferred shares are outstanding on
April 20, 2007 (the maturity date), the Company will have to either (i) convert
such preferred shares at a conversion rate determined by dividing 115% of the
conversion amount being converted by the applicable conversion price as of the
maturity date for such preferred shares or (ii) redeem such preferred shares for
an amount in cash per preferred share equal to the conversion amount. The
Company is required to give sixty (60) days written notice to each holder of
Series B shares, which shall state our election. The Company can redeem (a
current liquidiation value of $6,750,000) or cause a conversion of all or a
portion of the Series B shares. The Company is permitted to use its $15.0
million credit facility to redeem the Series B preferred shares if it so elects.
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 during the fiscal year ended 2006, 2005 and
2004 were $351,026, $1,649,756 and $3,519,586, respectively. The capital
expenditures during these periods are primarily attributable to the purchase of
machinery and equipment in its Paxis and Hauser subsidiary.
The Company has budgeted approximately $500,000 for capital expenditures for
fiscal 2007. The total amount is expected to be funded from cash provided from
its operations.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Accounting Pronouncement
Refer to Note 2 in our consolidated financial statements in Item 8, which can be
found at page F-1, herein.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
Item 7A. 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 on
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.
27
Item 8. Financial Statements
For a list of financial statements filed as part of this report, see the index
to financial statements at page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. 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.
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.
There have been no changes in our internal controls over financial reporting
during the year ended June 30, 2006, that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
Item 9B. Other Information
None.
28
PART III
Item 10. Directors and Executive Officers of the Registrant.
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2006.
Item 11. Executive Compensation
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2006.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2006.
Item 13. Certain Relationships and Related Transactions
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2006.
Item 14. Principal Accountant Fees and Services
Incorporated by reference from the Company's Proxy Statement for Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission within
120 days after the close of the fiscal year ended June 30, 2006.
29
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Exhibits and Index
(1) A list of the financial statements filed as part of this report is set
forth in the index to financial statements at Page F-1 and is
incorporated herein by reference.
(2) An index of exhibits incorporated by reference or filed with this
Report is provided below.
Number Description
2.1 Purchase Agreement dated as of February 1, 2003 by and between
Integrated Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.)
and Trade Investment Services, L.L.C. re: Natex Georgia, LLC. (1)
2.2 Purchase Agreement dated as of February 1, 2003 by and between
Integrated Health Technologies, Inc. (n/k/a Integrated BioPharma, Inc.)
and Trade Investment Services, L.L.C. re: TisorEx, Inc. (n/k/a Paxis
Pharmaceuticals, Inc.). (1)
2.3 Assignment Agreement dated as of July 1, 2003 by and between
Integrated BioPharma, Inc., Trade Investment Services L.L.C., Vasili
Patarkalishvili, VAP LLC, The James S. Friedlander Revocable Trust,
Aqela LLC and Natela Patarkalishvili (2)
2.4 Assignment and Assumption Agreement dated as of July 1, 2003 by and among
Integrated BioPharma, Inc., Trade Investment Services L.L.C., and Paxis
Pharmaceuticals, Inc. (2)
2.5 Agreement and Plan of Merger dated as of February 21, 2003 between and
among Integrated BioPharma, Inc. (f/k/a Integrated Health
Technologies, Inc.), NAC-NJ Acquisition Corp. and NuCycle
Acquisition Corp. (3)
3.1 Certificate of Incorporation of Integrated BioPharma, Inc.,
as amended (4)
3.2 By-Laws of Registrant (5)
4.1 Certificate of Designation of Series and Determination of Rights and
Preferences of Series A Convertible Preferred Stock of Integrated
BioPharma, Inc. dated June 25, 2003 (4).
4.2 Certificate of Designations, Preferences and Rights of Series B
Redeemable Convertible Preferred Stock of Integrated BioPharma, Inc.
dated April 20, 2004 (6).
4.3 Form of Warrant for Series B Redeemable Convertible Preferred Stock
investors (6).
10.1 Lease Agreement, dated August 3, 1994, between the Company and Hillside
22 Realty Associates, L.L.C. (7)
10.2 Lease Agreement between the Company and Vitamin Realty Associates, dated
January 10, 1997 (8)
10.3 Manufacturing Agreement between Chem International, Inc. and Herbalife
International of America, Inc. dated April 9, 1998 (9)
10.4 Integrated Health Technologies, Inc. 2001 Stock Option Plan (10)
10.5 Subscription Agreement dated June 25, 2003 by and between
Integrated BioPharma, Inc. and Carl DeSantis re: Series A Convertible
Preferred Stock Offering (4)
10.6 Investor Rights Agreement dated as of June 25, 2003 by and between
Integrated BioPharma, Inc. and Carl DeSantis re: Series A Convertible
Preferred Stock Offering (4)
30
10.7 Warrant Agreement by and between Integrated BioPharma, Inc. and Carl
DeSantis dated June 30, 2003 (4)
10.8 Promissory Note dated August 6, 2003 by and between Integrated
BioPharma, Inc. and Bank of America (4)
10.9 Securities Purchase Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6)
10.10 Registration Rights Agreement dated April 19, 2004 by and between
Integrated BioPharma, Inc. and the Buyers listed therein re: Series B
Redeemable Convertible Preferred Stock Offering (6)
10.11 Loan Agreement, dated September 1, 2006, between Integrated
BioPharma, Inc. and Amalgamated Bank (12)
14 Code of Ethics (11)
21 Subsidiaries of the Registrant (13)
31.1 Certification of Periodic Report by Chief Executive Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (13).
31.2 Certification of Periodic Report by Chief Financial Officer Pursuant to
Rule 13a-14 and 15d-14 of the Securities Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (13).
32.1 Certification of Periodic Report by Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (13).
32.2 Certification of Periodic Report by Chief Financial Officer Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (13).
31
--------------------------
(1) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on February 26, 2003.
(2) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on August 6, 2003.
(3) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on February 24, 2003.
(4) Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2003, filed with the SEC
on September 29, 2003.
(5) Incorporated herein by reference to the Company's Registration Statement
on Form SB-2, Registration No. 333-5240-NY.
(6) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on April 21, 2004.
(7) Incorporated herein by reference to Amendment No. 1 to the Company's
Registration Statement on Form SB-2, Registration No. 333-5240-NY.
(8) Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1997, filed with the SEC
on September 29, 1997.
(9) Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 1998, filed with the SEC
on September 24, 1998.
(10) Incorporated herein by reference to the Company's Registration Statement
on Form S-8, filed with the SEC on May 1, 2002.
(11) Incorporated herein by reference to the Company's Annual Report on
Form 10-KSB for the fiscal year ended June 30, 2004, filed with the SEC
on September 28, 2004, as amended on November 10, 2004.
(12) Incorporated herein by reference to the Company's Current Report on
Form 8-K filed with the SEC on September 7, 2006.
(13) Filed herewith.
32
Item 8: Financial Statements
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND
FOR THE FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
INDEX
Report of Independent Registered Public Accounting Firm......................F-2
Consolidated Statements of Operations for the fiscal years
ended June 30, 2006, 2005 and 2004...........................................F-3
Consolidated Balance Sheets as of June 30, 2006 and 2005 ....................F-4
Consolidated Statements of Stockholders' Equity for the fiscal years
ended June 30, 2006, 2005 and 2004...................................F-5 ... F-6
Consolidated Statements of Cash Flows for the fiscal years ended
ended June 30, 2006, 2005 and 2004...........................................F-7
Notes to Consolidated Financial Statements .........................F-8 ... F-28
F-1
INTEGRATED BIOPHARMA, INC. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND
FOR THE FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Integrated
Biopharma, Inc. and its Subsidiaries as of June 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended June 30, 2006, 2005 and 2004. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Integrated
Biopharma, Inc. and its Subsidiaries as of June 30, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
period ended June 30, 2006, 2005 and 2004 in conformity with U.S. generally
accepted accounting principles.
s/ Amper, Politziner, & Mattia P.C.
September 18, 2006
Edison, New Jersey
F-2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
2006 2005 2004
--------------- ---------------- ----------------
Sales, net $ 57,820,466 $ 32,735,813 $ 25,282,790
Cost of sales, including impairment charge of $2,542,885 in 2005 35,979,805 30,743,847 19,390,657
--------------- ---------------- ----------------
Gross profit 21,840,661 1,991,966 5,892,133
--------------- ---------------- ----------------
Selling and administrative expenses:
Impairment charge - 1,122,247 -
INB:Paxis Pharmaceuticals, Inc. Start up Costs - - 6,197,244
Selling and administrative expenses 16,737,519 11,982,220 5,304,234
--------------- ---------------- ----------------
Total Selling and Administative Expenses 16,737,519 13,104,467 11,501,478
--------------- ---------------- ----------------
Operating income (loss) 5,103,142 (11,112,501) (5,609,345)
--------------- ---------------- ----------------
Other income (expense):
Gain on Settlement of lawsuit - 2,475,322 -
Other Income 66,307 135,903 376,120
Interest Expense (354,157) (164,292) (94,632)
Interest and Investment Income 66,234 57,814 75,398
--------------- ---------------- ----------------
Total Other income (expense) (221,616) 2,504,747 356,886
--------------- ---------------- ----------------
Income (loss) before income tax (benefit) expense and minority interest 4,881,526 (8,607,754) (5,252,459)
Income tax (benefit) expense, net (3,356,447) (27,325) 87,688
--------------- ---------------- ----------------
Income (loss) before minority interest 8,237,973 (8,580,429) (5,340,147)
Minority interest 193,779 196 -
--------------- ---------------- ----------------
Net income (loss) 8,431,752 (8,580,233) (5,340,147)
Deemed dividend from beneficial conversion feature
of Series B Preferred stock dividend (2,399,643) (2,332,000) (960,000)
Series B Preferred stock dividend (482,463) (490,000) (101,692)
--------------- ---------------- ----------------
Net income (loss) applicable to common shareholders $ 5,549,646 $ (11,402,233) $ (6,401,839)
=============== ================ ================
Net income (loss) per common share:
Basic $ 0.43 $ (0.90) $ (0.58)
=============== ================ ================
Diluted $ 0.34 $ (0.90) $ (0.58)
=============== ================ ================
Weighted average common shares outstanding 12,832,737 12,610,975 11,107,520
Dilutive potential shares:
Warrants and options 3,398,628 - -
Convertible preferred stock - - -
--------------- ---------------- ----------------
Weighted average common share outstanding
- assuming dilution 16,231,365 12,610,975 11,107,520
=============== ================ ================
See accompanying notes to consolidated financial statements.
F-3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2006 AND 2005
2006 2005
------------------ ------------------
Assets
Current Assets:
Cash and cash equivalents $ 5,746,836 $ 2,427,553
Accounts receivable, net 5,717,012 4,470,927
Inventories, net 10,972,843 9,987,288
Deferred income taxes 2,976,000 107,000
Other current assets 1,531,988 715,074
------------------ ------------------
Total current assets 26,944,679 17,707,842
Property and equipment, net 4,173,357 4,664,306
Goodwill 145,410 145,410
Intangible assets, net 4,015,596 3,473,366
Deferred income taxes 2,182,000 70,000
Security deposits and other assets 143,822 181,547
------------------ ------------------
Total Assets $ 37,604,864 $ 26,242,471
================== ==================
Liabilities and Stockholders' Equity:
Current Liabilities:
Note payable - bank $ 4,497,290 $ 4,500,000
Accounts payable 4,123,646 3,986,607
Accrued expenses and other current liabilities 2,505,390 1,612,904
State income taxes payable 573,685 -
Loan payable - Trade Investment Services, LLC, related party 172,260 172,260
------------------ ------------------
Total Current Liabilities 11,872,271 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
June 30, 2006 and June 30, 2005, liquidation preference of $6,750,000
at June 30, 2006 and $7,000,000 at June 30, 2005 4,941,643 2,792,000
------------------ ------------------
Minority Interest 156,025 349,804
------------------ ------------------
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; 13,200,961
and 12,685,690 shares issued at June 30, 2006 and 2005, respectively;
13,166,061 and 12,650,790 shares outstanding at June 30, 2006 and
2005, respectively 26,402 25,371
Additional paid-in-capital 30,580,604 28,325,252
Accumulated deficit (9,872,742) (15,422,388)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
------------------ ------------------
Total Stockholders' Equity 20,634,925 12,828,896
------------------ ------------------
Total Liabilities and Stockholders' Equity $ 37,604,864 $ 26,242,471
================== ==================
See accompanying notes to consolidated financial statements.
F-4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004
Series A Retained
Convertible Common Stock Additional Earnings Total
Preferred Par Paid-in- (Accumulated Treasury Stock Stockholders'
Stock Shares Value Capital Deficit) Shares Cost Equity
----------- ---------- ------- ----------- ------------ ------ --------- -------------
Balance, July 1, 2003 $ 19 10,241,439 $20,483 $15,882,080 $ 2,381,684 25,800 $(28,831) $ 18,255,435
Exercise of stock
options for cash - 262,000 524 363,796 - - - 364,320
Issuance of common stock
for cash - 500,000 1,000 4,988,000 - - - 4,989,000
Reduction of paid in capital
due to common control
accounting relating to
acquisition of 47% of
Paxis Pharmaceuticals, Inc. - - - (2,956,068) - - - (2,956,068)
Stock issued for acquisition
of 3% of Paxis
Pharmaceuticals, Inc. - 66,666 133 542,595 - - - 542,728
Stock issued for acquisition
of new product lines - 203,085 406 1,725,004 - - - 1,725,410
Beneficial conversion, warrants
and additional investment
rights in connection with
issuance of Series B
Redeemable Convertible
Preferred Stock net of
issuance costs of $581,948 - - - 6,918,052 - - - 6,918,052
Conversion of Series A Preferred
Stock to Common Stock (19) 1,187,500 2,375 (2,356) - - - -
Conversion of Series B Preferred
Stock to Common Stock - 50,000 100 499,900 - - - 500,000
Dividends paid on Series B
preferred stock - - - - (101,692) - - (101,692)
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - (960,000) - - (960,000)
Net Loss - - - - (5,340,147) - - (5,340,147)
----------- ---------- ------- ----------- ------------ ------ --------- -------------
Balance, June 30, 2004 $ - 12,510,690 $25,021 $27,961,003 $(4,020,155) 25,800 $(28,831) $ 23,937,038
=========== ========== ======= =========== ============ ====== ========= =============
See accompanying notes to consolidated financial statements.
F-5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(CONCLUDED)
FOR THE YEARS ENDED JUNE 30, 2006, 2005 AND 2004
Series A Retained
Convertible Common Stock Additional Earnings Total
Preferred Par Paid-in- (Accumulated Treasury Stock Stockholders'
Stock Shares Value 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
Exercise of stock
options for cash - 400,271 801 343,668 - - - 344,469
Series B preferred stock
converted to common - 25,000 50 249,950 - - - 250,000
Restricted stock award - 90,000 180 350,820 - - - 351,000
Dividends paid on Series B
preferred stock - - - - (482,463) - - (482,463)
Compensation expense
for employee stock
options - - - 413,082 - - - 413,082
Income tax benefit from exercise
of options - - - 897,832 - - - 897,832
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - - (2,399,643) - - (2,399,643)
Net Income - - - - 8,431,752 - - 8,431,752
----------- ---------- ------- ----------- ------------ ------ --------- -------------
Balance, June 30, 2006 $ - 13,200,961 $26,402 $30,580,604 $(9,872,742) 34,900 $(99,339) $ 20,634,925
=========== ========== ======= =========== ============ ====== ========= =============
See accompanying notes to consolidated financial statements.
F-6
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
2006 2005 2004
------------------ ------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 8,431,752 $ (8,580,233) $ (5,340,147)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Impairment charges - 3,122,404 -
Impairment - Goodwill - 542,728 -
Investment in Joint Venture - 121,388 -
Depreciation and amortization 1,166,617 1,585,026 952,531
Deferred income taxes (4,083,168) (48,000) 8,000
Allowance for inventory - 10,000 10,000
Allowance for doubtful accounts 68,466 10,000 10,000
Issuance of common stock for consulting services 87,750 186,300 -
Compensation expense for employee stock options 413,082 - -
Minority interest (193,779) (196) -
Write off of deposit on inventory - - 1,348,507
Changes in assets and liabilities (excludes impact of acquistions):
(Increase) decrease in:
Accounts receivable (1,314,551) (2,055,573) (485,112)
Inventories (985,555) (2,848,488) (2,376,112)
Due from Paxis Pharmaceuticals, Inc. - related party - - (908,000)
Prepaid expenses and other assets (553,664) 490,045 260,907
Security deposits and other assets 37,725 51,433 6,548
(Decrease) increase in:
Accounts payable 137,039 2,049,574 (756,153)
Income taxes payable 573,685 (75,525) 21,756
Accrued expenses and other liabilities 892,486 900,991 30,585
------------------ ------------------ ------------------
Net cash provided by (used in) operating activities 4,677,885 (4,538,126) (7,216,690)
------------------ ------------------ ------------------
Cash flows from investing activities:
Purchase of intangible assets (866,872) (500,000) (750,000)
Purchase of property and equipment (351,026) (1,655,137) (3,519,586)
Investment in joint venture - (25,366) (96,022)
Acquisition of product line - - (872,470)
Acquisition of Paxis, less cash received - - (483,256)
License fee - - (90,000)
------------------ ------------------ ------------------
Net cash used in investing activities (1,217,898) (2,180,503) (5,811,334)
------------------ ------------------ ------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 344,469 178,299 364,320
Dividends paid (482,463) (490,000) (101,692)
Repayments of notes payable (2,710) (19,655) -
Purchase of treasury stock - (70,508) -
Issuance of Series B Redeemable Preferred Stock - - 6,918,052
Issuance of Common Stock - - 4,989,000
------------------ ------------------ ------------------
Net cash (used in) provided by financing activities (140,704) (401,864) 12,169,680
------------------ ------------------ ------------------
Net increase (decrease) in cash and cash equivalents 3,319,283 (7,120,493) (858,344)
Cash and cash equivalents at beginning of period 2,427,553 9,548,046 10,406,390
------------------ ------------------ ------------------
Cash and cash equivalents at end of period $ 5,746,836 $ 2,427,553 $ 9,548,046
================== ================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 326,495 $ 173,684 $ 85,241
================== ================== ==================
Income taxes $ 192,252 $ 87,015 $ 98,625
================== ================== ==================
Supplemental disclosures of Non-cash transactions:
Deemed dividend from beneficial conversion
feature of Series B Preferred stock $ (2,399,643) $ (2,332,000) $ (960,000)
================== ================== ==================
Conversion of Series B Preferred stock to Common Stock $ 250,000 $ - $ -
================== ================== ==================
Issuance of restricted stock award $ 351,000 $ - $ -
================== ================== ==================
Common stock issued for acquisition of Paxis Pharmaceuticals, Inc.$ - $ - $ 542,728
================== ================== ==================
Common stock issued for acquisition of new product line $ - $ - $ 1,725,410
================== ================== ==================
See accompanying notes to consolidated financial statements.
F-7
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Note 1. Business
Integrated BioPharma, Inc., a Delaware corporation (together with its
subsidiaries, the "Company" or "INB"), is engaged primarily in 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, pharmaceutical
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 in the United States. The Company was previously known as Integrated
Health Technologies, Inc. and, prior to that, as Chem International, Inc. The
Company was reincorporated in its current form in Delaware in 1995. The Company
is registered on the American Stock Exchange and its common stock trades using
the symbol "INB". The Company continues to do business as (DBA) Chem
International, Inc. with its customers and certain vendors.
InB:Paxis Pharmaceuticals, Inc. ("Paxis"), the Company's paclitaxel
manufacturing and distribution subsidiary, completed setting up its
manufacturing facilities just prior to the end of our fiscal year ended June 30,
2004; accordingly, the results of the Paxis operations were accounted for as
start up costs for the fiscal year ended June 30, 2004. The operating results of
Paxis, for the fiscal years ended June 30, 2006 and 2005, are included in the
consolidated sales, gross profit, and selling and administrative expenses.
In fiscal year ended June 30, 2005, the Company acquired a 51% interest in Micro
Nutrition Inc. for a cash payment of $362,486. The accounts of Micro Nutrition
are consolidated with those of the Company since its acquisition date. Micro
Nutrition, Inc. is a California corporation in the mail order business selling
primarily nutritional specialty food items.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries, and any
majority-owned investment. Intercompany transactions and accounts are eliminated
in consolidation.
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;
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.
F-8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Revenue Recognition. The Company recognizes revenue upon shipment of the
product. The Company's Paxis subsidiary has completed its renovation of the
manufacturing facilities and has not recognized any substantial income to date.
The Company believes that recognizing revenue at shipment is appropriate because
the Company's sales policies meet the four criteria of SAB 101 which are: (i)
persuasive evidence that an arrangement exists, (ii) delivery has occurred,
(iii) the seller's price to the buyer is fixed and determinable and (iv)
collectability is reasonably assured. The Company's sales policy is to require
customers to provide purchase orders establishing selling prices and shipping
terms. The Company evaluates the credit risk of each customer and establishes an
allowance of doubtful accounts for any credit risk. Sales returns and allowances
are estimated upon shipment. The Company recognizes income in its Hauser
subsidiary upon monthly customer invoicing. The invoice amount is based upon on
time and materials spent in the month.
The Company realized fee income from managing warehouse and office operations
for an unrelated company of $60,000, $130,000 and $240,000 in the fiscal years
ended June 30, 2006, 2005 and 2004 respectively. These amounts are included in
"Other income."
Shipping and Handling Costs. Shipping and handling costs are included in
cost of sales.
Trade Marketing and Merchandising. In order to support the Company's propriety
nutraceutical product lines, various promotional activities are conducted
through the retail trade, distributors or directly with consumers, including
in-store display and product placement programs, feature price discounts,
coupons, and other similar activities. The Company regularly reviews and
revises, when it deems necessary, estimates of costs to the Company for these
promotional programs based on estimates of what will be redeemed by the retail
trade, distributors, or consumers. These estimates are made using various
techniques, including historical data on performance of similar promotional
programs. Differences between estimated expense and actual performance are
generally not material and are recognized as a change in management's estimate
in a subsequent period. The Company's total promotional expenditures, including
amounts classified as a reduction of net sales, represent approximately 11.6%,
5.6% and 0.7% of fiscal year 2006, 2005 and 2004 sales, respectively.
Advertising. Advertising costs are expensed as incurred. Advertising expense was
approximately $3.4 million, $841,000 and $176,000 for the fiscal years ended
June 30, 2006, 2005 and 2004.
Research and Development Costs. Research and Development costs are expensed as
incurred. The Company incurred approximately $424,000, $389,000 and $37,700 in
the fiscal years ended June 30, 2006, 2005 and 2004, respectively. In the fiscal
year ended June 30, 2004, research and development expenses incurred by Paxis
were included in the Paxis Pharmaceuticals, Inc. start up costs.
Stock-Based Compensation. As of June 30, 2006, the Company has two stock-based
compensation plans.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123(R), "Share-Based
Payment," ("SFAS 123(R)") which is a revision of SFAS 123, "Accounting for
Stock-Based Compensation". SFAS 123(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 $413,082 of compensation for the fiscal year ended June 30, 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 June 30, 2006, the unvested portion of previously granted
awards that were outstanding as of the date of adoption of SFAS 123(R) have been
expensed. For the fiscal years ended June 30, 2005 and 2004, 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.
F-9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
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)):
Year Ended June 30,
----------------------------------
2005 2004
---------------- ----------------
Net loss available to
common stockholders, as reported $ (11,402,233) $ (6,401,839)
Add: Stock-based employee compensation
expense included in net 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 (895,421) (4,075,449)
---------------- ----------------
Pro forma net loss available to
common stockholders $ (12,297,654) $ (10,477,288)
================ ================
Earnings per share:
Basic - as reported $ (0.90) $ (0.58)
================ ================
Basic - pro forma $ (0.98) $ (0.94)
================ ================
Diluted - as reported $ (0.90) $ (0.58)
================ ================
Diluted - pro forma $ (0.98) $ (0.94)
================ ================
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 June 30,
2006 2005 2004
---- ---- ----
Risk-free interest rate 4.0% 4.0% 4.0%
Expected volatility 98% 110% 110%
Dividend yield -- -- --
Expected life 10 years 10 years 10 years
F-10
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
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.
Income Taxes. The Company accounts for income taxes using the liability method.
Accordingly, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in the tax rate is recognized in income or
expense in the period that the change is effective. Tax benefits are recognized
when it is probable that the deduction will be sustained. A valuation allowance
is established when it is more likely than not that all or a portion of a
deferred tax asset will not be realized.
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.
For the fiscal year ended June 30, 2006, options and warrants to purchase
5,167,677 shares of common stock with exercise prices below the market price
were included in the computation of diluted earnings per share and options and
warrants to purchase 907,500 shares of common stock were excluded from the
computation of diluted earnings per share as their exercise prices were greater
than the market price of the common shares as of June 30, 2006.
For the fiscal years ended June 30, 2005 and 2004, options and warrants to
purchase 4,356,569 and 4,962,621 shares of common stock with exercise prices
below the market price, respectively, were outstanding but were not included in
the computation of diluted earnings per share as they are antidilutive as a
result of net losses during the period and options and warrants to purchase
1,636,859 and 1,321,000 shares of common stock were outstanding but were not
included in the computation of diluted earnings per share as their exercise
prices were greater than the market price of the common shares as of June 30,
2005 and 2004, respectively.
Convertible Series B Preferred Stock common stock equivalents in the amount of
6,750,000 shares in the fiscal year ended June 30, 2006 and 7,000,000 shares in
the fiscal years ended June 30, 2005 and 2004, 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 and/or they were antidilutive as a
result of net losses for the periods presented.
Fair Value of Financial Instruments. Generally accepted accounting principles
require disclosing the fair value of financial instruments to the extent
practicable for financial instruments which are recognized or unrecognized in
the balance sheet. The fair value of the financial instruments disclosed herein
is not necessarily representative of the amount that could be realized or
settled, nor does the fair value amount consider the tax consequences of
realization or settlement.
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, and
accrued expenses, it was estimated that the carrying amount approximated fair
value because of the short maturities of these instruments. All debt is based on
current rates at which the Company could borrow funds with similar remaining
maturities and approximates fair value.
F-11
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Cash and Cash Equivalents. Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Accounts Receivable. In the normal course of business, the Company extends
credit to customers. Accounts receivable, less allowance for doubtful accounts,
reflect the net realizable value of receivables, and approximate fair value. The
Company believes there is no concentration of credit risk with any single
customer whose failure or nonperformance would materially affect the Company's
results other than as discussed in Note 10(c) - Significant Risks and
Uncertainties - Major Customers. On a regular basis, the Company evaluates its
accounts receivables and establishes an allowance for doubtful accounts based on
a combination of specific customer circumstances, credit conditions, and
historical write-off and collections. The allowance for doubtful accounts as of
June 30, 2006 and 2005, was $125,013 and $56,547, respectively. Accounts
receivable are charged off against the allowance after management determines the
potential for recovery is remote.
Inventories. Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Allowances for obsolete and
overstock inventories are estimated based on "expiration dating" of inventory
and projection of sales.
Property and Equipment. Property and equipment are recorded at cost, except for
its Paxis subsidiary, which, in fiscal year ended June 30, 2005 recorded an
adjustment to reflect an impairment loss on its long lived-assets and are
depreciated over the following estimated useful lives:
Building 15 Years
Leasehold Improvements 8 to 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Leasehold improvements are amortized over various periods not to exceed its
useful lives or the lease terms whichever is shorter.
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense, including capital leases, was $841,975, $1,268,368 and $753,389 for the
fiscal years ended June 30, 2006, 2005 and 2004, respectively.
Impairment of Long-Lived Assets. In accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets, long-lived assets, except goodwill and indefinite-lived
intangible assets, are reviewed for impairment when circumstances indicate that
the carrying value of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of the
assets to the future net cash flows estimated by the Company to be generated by
such assets. If such assets are considered to be impaired, the impairment to be
recognized is the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of by sale are recorded as held
for sale at the lower of carrying value or estimated net realizable value.
In the fourth quarter of its fiscal year ended June 30, 2005, the Company
recorded a non-cash pre-tax charge for the impairment of long-lived assets of
$3,122,404. This loss resulted from the difference between the carrying amount
of assets in the Company's Paxis Pharmaceuticals, Inc. subsidiary and the fair
value of the assets. The assets were made up of intellectual property, license
fees, machinery and equipment and leasehold improvements. The value of the fixed
assets was determined by appraisal. The intellectual property and license fees
were deemed to have no value and were written off. Charges of $2,542,885 are
included in cost of sales and charges of $1,122,247 are included in selling and
administrative expenses.
F-12
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Investment in Joint Venture. Paxis has entered into a joint venture, as of July
16, 2003, with Chatham Biotec, Ltd. ("Chatham"), a Canadian company which
harvests and dries biomass, to form a Canadian-based joint venture to produce
extract and intermediate precursor Paclitaxel from Canadian Taxus biomass.
Chatham supplies the Canadian bio-mass and the joint venture processes it, using
Paxis' extraction expertise in a facility currently controlled by the joint
venture. The joint venture supplies Paxis' requirements for extract at cost,
from which Paxis produces its Paclitaxel and related products. The joint venture
may sell extract and intermediate products to third parties. The Company has a
50% interest in this joint venture. The management agreement provides for
profits and losses to be allocated based on the Company's 50% interest. The
Company wrote off its investment in the fiscal year ended June 30, 2005. The
results of operations for this joint venture were not significant for the fiscal
years ended June 30, 2006 and 2005. The Company can give no assurance that the
joint venture can be operated successfully. The investment in the joint venture
is reflected using the equity method and is not significant.
Goodwill and Other Intangible Assets. Goodwill is the excess of the purchase
price over the fair value of the net assets of the business acquired. In
accordance with Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets", goodwill and indefinite-lived intangible assets
are not amortized against earnings, but are reviewed at least annually for
impairment. The Company performs its annual test as of April 1, of each year.
The results of its annual test in fiscal year ended June 30, 2005 resulted in
the Company recording a goodwill impairment loss of $542,728 relating to its
acquisition of InB:Paxis Pharmaceuticals, Inc. There were no impairment issues
as a result of our testing in the fiscal year ended June 30, 2006.
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.
Other Intangible assets consist of intellectual property, trademarks, license
fees, and unpatented technology. Amortization is being recorded on the
straight-line basis over periods ranging from 10 years to 20 years based on
contractual or estimated lives.
Reclassifications. Certain reclassifications have been made to the prior year
data to conform with the current year presentation.
Recent Accounting Pronouncements. In November 2004, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs- an amendment of
ARB No. 43 ("SFAS 151"). SFAS 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs, and spoilage should be expensed as
incurred and not included in overhead absorbed and capitalized as an
inventoriable cost. Further, SFAS 151 requires that allocation of fixed
production overheads to conversion costs should be based on normal capacity of
the production facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005, however, early adoption of
this Statement is permitted. The Company adopted SFAS No. 151 in the quarter
ended September 30, 2005. There was no impact from the adoption of this
statement.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Non monetary
Assets, an Amendment of APB Opinion No. 29" ("SFAS 153"). SFAS 153 is effective
for non monetary asset exchanges occurring in our fiscal year beginning July 1,
2005. SFAS 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 153 did 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 154")". SFAS 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 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 154 shall be effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We are not able to assess at this time the future
impact of this statement on our consolidated financial position or results of
operations.
F-13
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
In July 2006, the FASB issue FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109" ("FIN
48"), which clarifies the accounting for uncertainty in income tax positions.
FIN 48 requires that we recognize in our financial statements, the impact of a
tax position that is more likely than not to be sustained upon examination based
on the technical merits of the position. The provisions of FIN 48 will be
effective for us as of the beginning of our fiscal year ending June 30, 2008,
with the cumulative effect of the change in accounting principle recorded as an
adjustment to opening retained earnings. We are currently evaluating the impact
of adopting FIN 48 on our financial statements.
In September 2006, the FASB issue SFAS No. 157, "Fair Value Measurement" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value and expands disclosures about fair value measurements. FAS 157 is
effective for financial statements issued for fiscal years beginning after
November 17, 2007 and interim periods within those fiscal years. We are
evaluating the impact of adopting SFAS 157 on our consolidated financial
position, results of operations and cash flows.
Note 3. 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 its fiscal
year ended June 20, 2006 and 2005. In the fiscal year ended June 30, 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. The results of the fiscal year ended June 30, 2006 annual
testing indicated that the Company's goodwill relating to its Aloe Acquisition
was not impaired. As of June 30, 2006 and 2005, goodwill consisted of $145,410
from the Aloe Acquisition.
The carrying amount of acquired other intangible assets as of June 30, 2006 and
2005 is as follows:
June 30,
--------------------------------------------------------------------------------------------
2006 2005
------------------------------------------ ------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Net Amount Amortization Net
----------- --------- ----------- ----------- --------- -----------
Intellectual property $ 1,850,000 $ 271,667 $ 1,578,333 $ 1,250,000 $ 125,002 $ 1,124,998
Trade names and patents 1,749,135 216,139 1,532,996 1,508,000 125,667 1,382,333
Unpatented technology 547,000 179,999 367,001 547,000 140,000 407,000
License agreement 637,467 100,201 537,266 611,730 52,695 559,035
----------- --------- ----------- ----------- --------- -----------
Total $ 4,783,602 $ 768,006 $ 4,015,596 $ 3,916,730 $ 443,364 $ 3,473,366
=========== ========= =========== =========== ========= ===========
During the fiscal years ended June 30, 2006 and 2005, the Company made payments
of $600,000 under an intellectual property acquisition agreement, as amended,
with the Center for Molecular Biotechnology of Fraunhofer USA, Inc. entered into
in January 2004, which has a maximum purchase price of $3.75 million.
Amortization expense recorded on other intangible assets for the fiscal years
ended June 30, 2006, 2005 and 2004 was $324,642, $316,658 and $200,200
respectively. Amortization expense is recorded on the straight-line method over
periods ranging from 10 years to 20 years and is included in selling and
administrative expenses.
F-14
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Year Ending Amortization
June 30, Expense
------------ ------------
2007 $ 374,600
2008 374,600
2009 374,600
2010 374,600
2011 374,600
Thereafter 2,142,596
-------------
Total $ 4,015,596
=============
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 SFAS 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.
Note 4. Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method and consist of the following as of June 30, 2006 and 2005:
June 30,
----------------------------------
2006 2005
---------------- --------------
Raw materials $ 5,484,485 $ 5,577,034
Work-in-process 1,803,532 1,330,855
Finished goods 3,684,826 3,079,399
---------------- --------------
Total $ 10,972,843 $ 9,987,288
================ ==============
F-15
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Note 5. Property and Equipment
Property and equipment consists of the following as of June 30, 2006 and 2005:
June 30,
----------------------------------
2006 2005
--------------- ---------------
Land and building $ 1,250,000 $ 1,250,000
Leasehold improvements 2,157,321 2,157,321
Machinery and equipment 6,544,096 6,218,463
Transportation equipment 37,714 37,714
--------------- ---------------
9,989,131 9,663,498
Less: Accumulated depreciation
and amortization 5,815,774 4,999,192
--------------- ---------------
Total $ 4,173,357 $ 4,664,306
=============== ===============
Note 6. 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 $4.5 million with interest at a variable rate
based on 1.25% over the current LIBOR rate. The Note was renewed through January
4, 2007 under the existing terms and conditions of the Note. The Note was
guaranteed by Mr. Carl DeSantis, a shareholder and director of the Company. As
of June 30, 2006 and June 30, 2005 the interest rate was 6.60% 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%. The Company has $45,661 and $30,157 of accrued and
unpaid interest as of June 30, 2006 and June 30, 2005, respectively.
In September 2006, the Company paid off the Note and Loan Payable with proceeds
from a $15.0 million revolving credit facility it secured with a bank. (See Note
17. Subsequent Events).
Note 7. 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 June 30, 2006, the
Company had not made any draw downs on the line of credit and expensed $96,000
in commitment and other fees associated with the line of credit. In July 2006,
the Company cancelled this revolving credit line, and in September 2006,
replaced it with a $15.0 million credit facility. (See Note 17. Subsequent
Events).
F-16
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Note 8. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial accounting purposes
and the amounts used for income tax reporting. Significant components of the
Company's deferred tax assets as of June 30, 2006 and 2005 follow:
June 30,
------------------------------------
2006 2005
---------------- ----------------
Deferred Tax Assets
Net operating loss $ 3,760,000 $ 3,218,000
Start-up expenses 1,065,000 823,000
Impairment loss 950,000 1,250,000
Depreciation 167,000 70,000
Inventory overhead capitalization 66,000 74,000
Other 50,000 33,000
Valuation allowance (900,000) (5,291,000)
---------------- ----------------
Total deferred tax asset 5,158,000 177,000
Less current portion 2,976,000 107,000
---------------- ----------------
Net long-term deferred tax asset $ 2,182,000 $ 70,000
================ ================
As of June 30, 2006 and 2005, certain tax benefits for option exercises
aggregating $46,521 and $634,200, respectively, are deferred and will be
credited to additional paid-in-capital when existing net operating losses are
used. In the fiscal year ended June 2006, $897,832 of income tax benefit
relating to stock option exercises were credited to additional paid-in-capital.
Net operating losses of approximately $8.4 million will expire beginning in 2024
for federal purposes. State net operating losses of approximately $24.2 million
will expire beginning in 2007 through 2024 depending on the state in which the
net operating losses were generated. These carryforwards could be subject to
certain limitations in the event there is a change in control of the Company.
The valuation allowance as of June 30, 2006 results from the uncertainties of
the future utilization of deferred tax assets relating to a portion of our net
operating loss carryforwards for state income tax purposes. In the fourth
quarter ended June 30, 2006, the Company, based on current factors relating to
its business environment, including among other factors, the Company securing a
supply agreement and increasing its marketing activities in its contract
services business in its Pharmaceutical segment and the continued expansion and
proven success in its branded propriety nutraceutical product line, the Company
had reasonable belief that it will have future federal taxable income which will
allow the Company to realize its deferred tax assets in the near future and
consequently, it released the portion of its valuation allowance relating to
those assets. The valuation allowance as of June 30, 2005 resulted from
providing reserves on the Company's deferred tax assets relating to net
operating loss carryforwards, start-up expenses and impairment losses resulting
from the uncertainties of future utilization based on the Company's financial
performance at the time.
The components of the provision for income taxes consists of the following:
For the fiscal year ended June 30,
-----------------------------------------------------
2006 2005 2004
---------------- --------------- ---------------
Current - State and local $ 726,721 $ 20,675 $ 79,688
Deferred - Federal 880,000 (48,000) 8,000
Change in valuation allowance (4,963,168) - -
---------------- --------------- ---------------
Income tax (benefit) expense $ (3,356,447) $ (27,325) $ 87,688
================ =============== ===============
F-17
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
A reconciliation of the statutory tax rate to the effective tax rate is as
follows:
For the fiscal years ended June 30,
--------------------------------------------
2006 2005 2004
------------- ------------- ------------
Statutory federal income tax rate 34 % (34)% (34)%
Change in valuation allowance (101)% 38 % 39 %
Preferred stock dividend (4)% (6)% 2 %
State tax benefit (net of federal benefit) 3 % (6)% (6)%
Non-deductible expenses 2 % 0 % 0 %
Other items, net (3)% 8 % 1 %
------------- ------------- ------------
Effective income tax rate (69)% 0 % 2 %
============= ============= ============
Note 9. Profit-Sharing Plan
The Company maintains a profit-sharing plan, which qualifies under Section
401(k) of the Internal Revenue Code, covering all nonunion employees meeting age
and service requirements. Contributions are determined by matching a percentage
of employee contributions. The total expense for the fiscal years ended June 30,
2006, 2005 and 2004 was $142,331, $118,163 and $99,858, respectively.
Note 10. Significant Risks and Uncertainties
(a) Concentrations of Credit Risk-Cash. The Company maintains balances at
several financial institutions. Deposit accounts at each institution are insured
by the Federal Deposit Insurance Corporation for deposits up to $100,000. As of
June 30, 2006, the Company's uninsured cash balances were approximately $5.9
million.
(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 as of June 30,
2006 and 2005 was $125,013 and $56,547, respectively. The Company's bad debt
expense for the years ended June 30, 2006, 2005 and 2004 were $101,395, $581,496
and $5,858, respectively.
(c) Major Customers. For the fiscal year ended June 30, 2006 approximately
45.5%, 23.7% and 16.9% of revenues were derived from three customers. For the
fiscal years ended June 30, 2005 and 2004 approximately 39% and 37% and 13% and
58% of revenues were derived from two customers, which are among the three in
fiscal year ended June 30, 2006, respectively. The loss of any of these
customers would have an adverse affect on the Company's operations. Accounts
receivable from these customers represented approximately 72% of total accounts
receivable as of June 30, 2006.
(d) Business Risks. The Company insures it business and assets against insurable
risks, to the extent that it deems appropriate, based upon an analysis of the
relative risks and costs. The Company believes that the risk of loss from
non-insurable events would not have a material adverse effect on the Company's
operations as a whole.
The raw materials used by the Company are primarily commodities and
agricultural-based products. Raw materials used by the Company in the
manufacture of its nutraceutical products are purchased from independent
suppliers. Raw materials are available from numerous sources and the Company
believes that it will continue to obtain adequate supplies.
F-18
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Approximately 65% the Company's employees, located in its New Jersey facility,
are covered by a union contract. The contract was renewed in August 2006 and
will expire in August 2010.
Note 11. 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 an employee of the Company. The lease provides
for minimum annual rental payments 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 fiscal years ended June 30, 2006,
2005 and 2004 on these leases were $630,000, $800,000 and $490,000 respectively,
and are included in both manufacturing and selling and administrative expenses.
Other Lease Commitments. The Company leases manufacturing and office facilities
through March 31, 2007. At the Company's 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 balance of the lease.
Rent expense for the fiscal years ended June 30, 2006, 2005 and 2004 was
approximately $386,000, $340,000 and $319,000, respectively, and is included in
manufacturing, selling and administrative expenses or start up costs.
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. In September 2006, the Company leased additional warehouse space
under a three-year lease commitment with minimum rental payments of $12,008. The
Company leases additional office space through September 30, 2006 and
month-to-month thereafter. 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 $15,372 and office equipment for a five (5) year period with an annual
rental of $8,400.
The Company leases automobiles under non-cancelable operating lease agreements,
which expire through 2009.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related Party
Year ending Lease Lease
June 30, Commitment Commitment Total
-------------- -------------- -------------- ---------------
2007 $ 665,600 $ 323,600 $ 989,200
2008 373,000 323,600 696,600
2009 357,400 323,600 681,000
2010 226,500 323,600 550,100
2011 196,100 323,600 519,700
Thereafter 289,700 1,267,100 1,556,800
-------------- -------------- ---------------
Total $ 2,108,300 $ 2,885,100 $ 4,993,400
============== ============== ===============
F-19
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Total rent expense, including real estate taxes and maintenance charges, was
approximately $1.6 million, $1.6 million and $956,000 for the years ended June
30, 2006, 2005 and 2004, respectively. Rent expense is stated net of sublease
income of approximately $2,600 and $9,500 for the fiscal years ended June 30,
2005 and 2004, respectively.
(b) Consulting Agreement. In the fiscal year ended June 30, 2004, 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 fiscal year ended June 30, 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
$2.7 million for certain technology developed by Fraunhofer USA, Inc. over a
five-year period. During the fiscal year ended June 30, 2006, the Company
amended their agreement with Fraunhofer USA, Inc. to expand the scope of the
intellectual property and increased the amount of the purchase commitment to a
maximum of $3.7 million. As of June 30, 2006 and 2005, the Company has made
payments of approximately $1.8 million and $1.2 million, respectively, under
this agreement, which are being amortized on a straight-line basis over a
ten-year period.
(d) Legal Proceedings. NatEx Georgia LLC and Vasili Patarkalishvili v. Robert B.
Kay, E. Gerald Kay, Trade Investment Services, LLC, Paxis Pharmaceuticals, Inc.,
Dean P. Stull and Integrated BioPharma, Inc., pending in the Supreme Court for
the State of New York, 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 provide information
necessary for NatEx to perform under the parties' agreements by which NatEx had
agreed to supply Paclitaxel extract. The complaint seeks damages of more than
$5.0 million. By order dated January 6, 2006, the Court granted in part
Defendants' motion to dismiss. The Court dismissed all of the claims against all
defendants, except for the breach of contract claim against Paxis. Plaintiffs
have filed a notice of appeal of that decision. Paxis plans to defend vigorously
the remaining claim.
Pom Wonderful LLC v. Agrolabs, Inc., pending in the United States District Court
for the Central District of California. Plaintiff commenced this action in
December 2005 against us alleging trademark infringement of its "POM Wonderful"
and related trademarks by our use of its supplier's registered trademark for
"Pomella," which is the name of a pomegranate extract ingredient used in our
"Naturally Pomegranate" nutritional supplement. We had purchased the pomegranate
extract ingredient from a third party supplier, Geni Herbs, Inc. against whom
the Plaintiff had filed a similar infringement action in June 2005 (Pom
Wonderful LLC v. Geni Herbs, Inc. also pending in the Central District of
California). We filed counterclaims against the Plaintiff for cancellation of
its various trademarks. As the case was entering the early phases of discovery
and we were seeking to consolidate the two actions and to file cross-claims
against Geni Herbs, we learned that the Plaintiff and Geni Herbs were engaged in
a mediation. As a result of our participation in the negotiations, both cases
have been settled in principle. The parties are currently finalizing settlement
agreements. The Company does not believe that there will be a material impact on
the Company's financial position.
Note 12. 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 fiscal years ended
June 30, 2006, 2005 and 2004 was $13,200 in each year. 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 fiscal year ended June 30, 2004. The total
consulting expense under this agreement was $130,000, $180,000 and $165,000 for
the fiscal years ended June 30, 2006, 2005 and 2004, respectively.
F-20
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
See Note 11(a) - Leases for related party lease transactions. See Note 6 - Loan
Payable Trade Investment Services, LLC, a related party demand note.
Note 13. Equity Transactions
(a) Stock Option Plan and Warrants. The Company has adopted a stock option plan
for the granting of options or restricted shares to employees, officers,
directors and consultants of the Company that originally provided to purchase up
to 7,000,000 shares of common stock, at the discretion of the Board of
Directors. During fiscal year 2004, the Board of Directors and stockholders
approved an additional 2,000,000 common stock shares available for grant, for a
total of 9,000,000 shares of common stock available for grant and during the
fiscal year ended June 30, 2006, the Board of Directors and stockholders
approved an increase in the number of shares of common stock reserved for
issuance under the Company's Stock Option Plan to 11,000,000. Stock option
grants may not be priced less than the fair market value of the Company's common
stock at the date of grant. Options granted are generally for ten-year periods,
except that options granted to a 10% stockholder (as defined) are limited to
five-year terms.
During the fiscal year ended June 30, 2006, the Company granted 75,561 incentive
stock options and 124,439 non-statutory stock options for a period of ten years
at an exercise price equal to the market price on the date of grant ranging from
$2.05 to $8.20.
During the fiscal year ended June 30, 2005, the Company granted 149,081
incentive stock options and 777,419 non-statutory stock options for a period of
ten years at an exercise price equal to the market price on the date of grant
ranging from $5.23 and $6.36 and 14,430 incentive stock options for a term of
five years at $6.93 representing 110% of the market price on the date of grant
and 110,570 non-statutory stock options for a period of ten years at $6.93
representing 110% of the market price on the date of grant.
During the fiscal year ended June 30, 2004, the Company granted 160,166
incentive stock options and 692,500 non-statutory stock options for a period of
ten years at an exercise price equal to the market price on the date of grant
ranging from $7.90 and $15.10 and 9,182 incentive stock options for a term of
five years at $10.89 representing 110% of the market price on the date of grant
and 90,818 non-statutory stock options for a period of ten years at $10.89
representing 110% of the market price on the date of grant.
All of the above options vest twelve months from the date of issuance, except
for 12,000 options, issued in the fiscal year ended June 30, 2006, which vest
over three years from the date of issuance.
F-21
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
A summary of the Company's stock option activity, and related information for
the years ended June 30, follows:
Weighted
Average
Exercise
Options Price
-------------- ------------
Outstanding as of July 1, 2003 5,118,201 $ 0.99
Granted 937,666 9.97
Exercised (262,000) 1.42
Terminated (110,606) 1.70
-------------- ------------
Outstanding as of June 30, 2004 5,683,261 2.41
Granted 1,051,500 6.23
Exercised (148,000) 1.20
Terminated (11,833) 8.19
Expired (167,000) 0.55
-------------- ------------
Outstanding as of June 30, 2005 6,407,928 3.13
Granted 200,000 4.61
Exercised (400,271) 0.86
Terminated (2,000) 8.13
Expired (120,480) 0.55
-------------- ------------
Outstanding as of June 30, 2006 6,085,177 $ 3.37
============== ============
Exercisable at June 30, 2004 4,745,595 $ 0.91
============== ============
Exercisable at June 30, 2005 5,357,428 $ 2.52
============== ============
Exercisable at June 30, 2006 5,900,177 $ 3.36
============== ============
The following table summarizes the range of exercise prices and weighted-average
exercise prices for stock options outstanding and exercisable as of June 30,
2006 under the Company's stock option plans:
Weighted
Average
Weighted Remaining Weighted
Range of Average Contractual Average
Exercise Price Outstanding Exercise Price Life (years) Exercisable Exercise Price
------------------------- ---------------- ----------------- --------------- ---------------- -----------------
$ 0.08 - $ 0.08 25,000 $ 0.08 5.3 25,000 $ 0.08
$ 0.33 - $ 0.36 980,000 0.34 6.3 980,000 0.34
$ 0.50 - $ 0.55 1,178,000 0.52 3.8 1,178,000 0.52
$ 0.75 - $ 0.85 1,025,320 0.78 5.2 1,025,320 0.78
$ 1.50 - $ 1.65 219,998 1.50 2.3 219,998 1.50
$ 2.05 $ 3.13 75,000 2.77 9.4 - -
$ 3.50 - $ 3.85 484,026 3.55 0.3 484,026 3.55
$ 3.86 - $ 4.10 98,000 3.98 9.3 - -
$ 5.23 - $ 5.29 130,000 5.23 8.8 130,000 5.23
$ 6.30 - $ 6.93 917,000 6.37 8.2 917,000 6.37
$ 7.90 - $ 7.90 33,333 7.90 7.3 33,333 7.90
$ 8.20 - $ 8.20 12,000 8.20 9.9 - -
$ 9.90 - $10.89 882,500 10.01 7.4 882,500 10.01
$14.90 - $14.90 10,000 14.90 7.8 10,000 14.90
$15.10 - $15.10 15,000 15.10 1.3 15,000 15.10
------------------------- ---------------- ----------------- --------------- ---------------- -----------------
$ 0.08 - $15.10 6,085,177 $ 3.37 6.5 5,900,177 $ 3.36
========================= ================ ================= =============== ================ =================
F-22
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
As of June 30, 2006 and 2005, the Company has 636,000 warrants outstanding to
purchase shares of common stock at prices ranging from $5.40 to $14.00. All
outstanding warrants are currently exercisable.
(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 were issued in a private placement pursuant to
Section 4(2) of the Securities Act of 1933, upon 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 fiscal year ended June 30, 2006,
the Company recognized consulting fee expense of approximately $88,000 in
connection with this agreement.
(c) Treasury Stock Purchases. On June 25, 2004, Integrated BioPharma, Inc.
adopted a stock repurchase plan giving management authority to purchase up to $3
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
during July 2004. The Company has no current plans to purchase shares under this
plan.
(d) Series B Redeemable Convertible Preferred Stock and Private Placement. On
April 20, 2004, the Company raised $7,500,000 in gross proceeds from the sale of
750 shares of the Company's Series B Redeemable Convertible Preferred Stock, par
value $.002 per share (`the "Series B Preferred Shares'), at a purchase price of
$10,000 per share.
Dividends of the Series B Preferred Shares are 7% per annum, payable by the
Company in cash or, in certain instances, in shares of the Company's Common
Stock, par value $.002 per share (the "Common Stock"). Accordingly, the Company
paid approximately $482,500, $490,000 and $102,000 in dividends in the fiscal
years ended June 30, 2006, 2005, 2004, respectively. The Series B Preferred
Shares are convertible at the option of each Investor into shares of Common
Stock at a conversion price of $10.00 per share, subject to anti-dilution and
other customary adjustments. Upon conversion, the Investors would receive an
aggregate of 750,000 shares of Common Stock. The Company also has the option to
force such conversion in the event that it meets certain performance milestones.
The Investors can also force redemption upon the occurrence of certain events of
default.
If any Series B preferred shares remain outstanding on the maturity date (April
20, 2007), the Company will either (i) convert such preferred shares at a
conversion rate determined by dividing 115% of the conversion amount being
converted by the applicable conversion price as of the maturity date for such
preferred shares or (ii) redeem such preferred shares for an amount in cash per
preferred share equal to the conversion amount. The Company is required to give
sixty (60) days written notice to each holder of Series B shares, which shall
state its election. The Company can redeem or cause a conversion of all or a
portion of the Series B shares.
The Company also issued to the Investors warrants (the "Warrants") to purchase
an aggregate of 375,000 shares of Common Stock, exercisable over a five-year
period. The exercise price is $14.00 per share, subject to anti-dilution and
other customary adjustments. Assuming no such adjustments, the exercise of all
Warrants could result in additional gross proceeds to the Company of $5,250,000.
The Warrants are callable by the Company in the event that it meets certain
performance milestones.
F-23
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Finally, the Company issued Additional Investment Rights to the Investors,
entitling them over the next 18 months to purchase an aggregate of 375
additional Series B Preferred Shares (convertible into 375,000 shares of Common
Stock) and Warrants to purchase an additional 187,500 shares of Common Stock.
The Series B Preferred Shares and Warrants issuable upon exercise of the
Additional Investment Rights have the same terms as the securities issued at
closing. Assuming no anti-dilution or other adjustments, the exercise of all
Additional Investment Rights followed by the exercise of all Warrants issuable
upon exercise of the Additional Investment Rights could result in additional
gross proceeds to the Company of $6,375,000. In October 2005, the Additional
Investment Rights granted to the holders of the Series B Preferred Shares
expired unexercised.
The Company recorded the relative fair value of all of the warrants and
Additional Investment Rights in connection with this transaction of $2,904,400
against the amount of the redeemable convertible preferred stock as of April 20,
2004, which was calculated using the Black-Scholes valuation method, as well as
$4,595,600 of a beneficial conversion feature in accordance with EITF 00-27 and
such amounts are being accreted over the three year period until the mandatory
redemption date of the Preferred Stock, the third anniversary of closing. The
Company recorded accretion of $2.4 million, $2.3 million and $960,000 in fiscal
years ended June 30, 2006, 2005 and 2004, respectively.
The Company registered the Common Stock underlying the Series B
Preferred Shares and the Warrants, including the Series B Preferred Shares and
the Warrants issuable upon exercise of the Additional Investment Rights, for
resale under the Securities Act of 1933 and applicable state securities laws.
In the fiscal year ended June 30, 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.
(e) Common Stock Private Placement. On May 3, 2004, the Company raised
$5,000,000 in net proceeds from the sale of 500,000 shares of the Company's
common stock, par value $.002 per share, to one Investor, at a purchase price of
$10.00 per share. The Company also issued to the Investor a warrant to purchase
50,000 shares of common stock, exercisable over the next five-year period with
an exercise price of $14.00 per share.
(f) Paxis Acquisition. On July 22, 2003 the Company completed its acquisition of
ninety-seven (97%) percent of the shares of common stock of Paxis
Pharmaceuticals, Inc. a Delaware corporation ("Paxis") based in Boulder,
Colorado. Paxis was organized to manufacture and distribute cGMP API Paclitaxel,
a leading cancer therapy drug. The Company acquired 47% of the shares of Paxis
in exchange for its 50% interest in Natex Georgia LLC, a company organized in
the Republic of Georgia to harvest from Georgian government lands organic
biomass from which Paclitaxel is made. The Company acquired 50% of the shares of
Paxis from Trade Investment Services, LLC, which funded Paxis' and Natex's
development pursuant to the terms of a certain Purchase Agreement dated as of
February 1, 2003 (the "Purchase Agreement"), in consideration for TIS receiving
from the Company $500,000 and twenty-five (25%) of the after-tax profits of
Paxis until TIS has received an additional $49,500,000.
In addition, TIS assigned to the Company a loan receivable from Paxis, and the
Company assumed Paxis' loan payable in the principal amount of $4,500,000 to the
Bank of America, pursuant to an Assignment and Assumption Agreement dated as of
July 1, 2003 by and among the Company, TIS and Paxis. The Company also assumed
an obligation of $172,260 advanced by TIS to Paxis.
The accounting for the Paxis acquisition followed controlled related party
carryover basis accounting. The excess of the debt of $4,500,000 assumed plus
the $500,000 cash paid plus the $172,260 obligation assumed totaling
($5,172,260) over the net assets acquired of $2,216,171 was recorded as a
reduction of additional paid-in capital of $2,956,068. At this time, the Company
is unable to estimate the amount or timing of any potential contingent payments.
F-24
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
On October 8, 2003, the Company acquired the remaining three (3%) percent of
Paxis Pharmaceuticals, Inc. ("Paxis") in exchange for 66,666 shares of its
common stock valued at $542,728. The stock was valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after.
E. Gerald Kay, the Chief Executive Officer and a majority shareholder of
INB; Robert Kay, the brother of E. Gerald Kay a director and shareholder of INB;
and Carl DeSantis, a director and shareholder of INB, each own one-third (1/3)
of the equity of TIS.
(g) Acquisitions-Agrolabs, Inc. Transaction. On October 22, 2003, the Company
completed the acquisition of various assets related to the Naturally Aloe(TM),
Naturally Noni(TM) and Avera Sport(TM) product lines from Aloe Commodities
International, Inc. ("Aloe"). The assets included trademarks, copyrights, art
work, formula for the products, labels, customer lists, goodwill, inventories
and books and records. Pursuant to the terms of a purchase agreement dated
October 22, 2003 by and between the Company and Aloe, the purchase price for the
Transferred Assets was $2,597,880, with $872,470 paid at closing and $1,725,410
paid in 203,085 shares of the Company's common stock valued on the basis of the
average closing price as reported on the American Stock Exchange for the five
(5) trading days immediately preceding the closing date and five (5) trading
days after. Such shares were held in escrow for a period of one (1) year from
the closing date and released pursuant to the terms of and Escrow Agreement
between and among the Company, Aloe and Vial, Hamilton, Koch & Knox, L.L.P.
The allocation of the purchase price was as follows:
Inventory, Trade Receivables and Prepaid Items $ 597,470
Trade Names 1,508,000
Goodwill 145,410
License Agreement 347,000
-----------------
Total $ 2,597,880
=================
Note 14. Gain on Settlement of Lawsuit.
In January 2005, the Company received a $2,475,322 cash payment in connection
with a multidistrict class action brought on behalf of direct purchases of
vitamin products, in which the plaintiffs alleged violations of Section 1 of the
Sherman Antitrust Act and other wrongful anti-competitive conduct violations of
various federal and state laws.
F-25
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Note 15. Quarterly Results.
The following is a summary of the unaudited quarterly results of operations for
the fiscal years ended June 30, 2006 and 2005:
Net Income Earnings
(Loss) (Loss) per
Operating Available to Earnings Common Share
Gross Profit Income Common (Loss) per Assuming
Quarter Ended Net Sales (Loss) (Loss) Shareholders Common Share Full Dilution
---------------------------- ------------ ------------ ----------- ------------ ------------ -------------
2006 September 30, 2005 $ 14,787,107 $ 5,394,345 $1,983,700 $ 1,206,059 $ 0.09 $ 0.09
December 31, 2005 12,968,294 4,979,124 1,366,015 685,518 0.05 0.05
March 31, 2006 12,936,092 4,293,194 67,635 (779,280) (0.06) (0.06)
June 30, 2006 17,128,973 7,173,998 1,685,792 4,437,349 (1) 0.34 0.32
2005 September 30, 2004 6,116,036 516,525 (1,786,412) (2,458,119) (0.20) (0.20)
December 31, 2004 6,310,908 309,975 (2,558,218) (3,257,758) (0.26) (0.26)
March 31, 2005 8,868,295 2,118,462 (920,901) 792,861 0.06 0.05
June 30, 2005 11,440,574 (952,996) (5,846,970) (6,479,217) (0.51) (0.51)
----------------------------
(1) Includes approximately $5.0 million of income relating to an income
tax benefit that was the result of a change in the Company's valuation allowance
on its deferred tax assets. (See Note 8. Income Taxes).
Note 16. 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: Nutraceuticals, Pharmaceuticals and Biotechnologies. The international
sales, concentrated primarily in Europe, for the fiscal years ended June 30,
2006, 2005 and 2004 were $9.9 million, $5.8 million and $4.4 million,
respectively.
F-26
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
Financial information relating to the fiscal years ended June 30, 2006, 2005 and
2004 operations by business segment are as follows:
For the Fiscal Year Ended
June 30,
----------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- ---------------------------------------------------------
Nutra- Pharma- Bio- Nutra- Pharma- Bio-
ceutical ceutical technologies Total ceutical ceutical technologies Total
----------- ------------ ------------ ------------ ------------ ------------- ------------ --------------
Sales, net
U.S. customers $45,642,071 $ 2,222,819 $ 18,680 $47,883,570 $25,744,762 $ 1,162,358 $ 21,082 $ 26,928,202
International
customers 9,936,896 - - 9,936,896 5,807,611 - - 5,807,611
----------- ------------ ------------ ------------ ------------ ------------- ------------ --------------
Total Sales, net $55,578,967 $ 2,222,819 $ 18,680 $57,820,466 $31,552,373 $ 1,162,358 $ 21,082 $ 32,735,813
=========== ============ ============ ============ ============ ============= =========== ==============
Segment operating
profit (loss) $11,216,779 $(4,738,598) $(1,375,039) $ 5,103,142 $ (183,557) $(10,219,988) $ (708,956) $ (11,112,501)
=========== ============ ============ ============ ============ ============= =========== ==============
Depreciation $ 367,676 $ 474,296 $ - $ 841,972 $ 433,644 $ 834,725 $ - $ 1,268,369
=========== ============ ============ ============ ============ ============= =========== ==============
Capital
expenditures $ 285,403 $ 65,623 $ - $ 351,026 $ 84,614 $ 1,576,669 $ - $ 1,661,283
=========== ============ ============ ============ ============ ============= =========== ==============
As of June 30, As of June 30,
----------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- ---------------------------------------------------------
Total Assets $29,911,297 $5,868,804 $1,824,763 $37,604,864 $18,247,068 $ 6,859,727 $1,135,676 $ 26,242,471
=========== ============ ============ ============ ============ ============= =========== ==============
For the Fiscal Year Ended
June 30,
-----------------------------------------------------
2004
-----------------------------------------------------
Nutra- Pharma- Bio-
ceutical ceutical technologies Total
----------- ------------ ------------ ------------
Sales, net
U.S. customers $20,697,014 $ - $ 163,024 $20,860,038
International
customers 4,422,752 - - 4,422,752
----------- ------------ ------------ ------------
Total Sales, net $25,119,766 $ - $ 163,024 $25,282,790
=========== ============ ============ ============
Segment operating
profit (loss) $ 767,273 $(6,197,244) $ (179,374) $(5,609,345)
=========== ============ ============ ============
Depreciation $ 488,787 $ 304,602 $ - $ 793,389
=========== ============ ============ ============
Capital
expenditures $ 754,167 $ 2,765,419 $ - $ 3,519,586
=========== ============ ============ ============
Note 17. Subsequent Events
On September 1, 2006, the Company entered into a loan agreement with Amalgamated
Bank, a financial institution. The loan agreement provides for a one-year
secured revolving credit facility of up to $15.0 million. Concurrently, the
Company paid off its $4.5 million note to the Bank of America, its obligation to
Trade Investments Services, LLC and other miscellaneous obligations, including
the costs associated with securing the facility with $5.0 million of borrowings
under the facility.
The interest rate under the credit facility is equal to, at the Company's
option, either (1), the lender's publicly announced base rate, or (2) 1.5% plus
the applicable LIBOR rate. Interest is payable monthly, quarterly or
semi-annually, at the Company's election, in arrears not later than the end of
each such period.
The credit facility requires that all principal be repaid in full on the first
anniversary of the closing date, which may be extended for up to one year at the
lender's option. The facility is secured by a first priority lien on our
accounts receivable, equipment, inventory and certain deposit accounts.
F-27
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006 AND 2005 AND FOR THE
FISCAL YEARS ENDED JUNE 30, 2006, 2005 AND 2004
-----------------------------------------------
The credit facility contains covenants restricting our ability to, among other
things: (1) incur or guarantee additional debt; (2) make any investments (other
than in the ordinary course of business); (3) engage in any asset sales or
dispose of any assets (other than in the ordinary course of business); (4)
engage in transactions with affiliates; (5) incur liens; and (6) declare or pay
dividends on its common stock. The credit facility also requires us not to
exceed a maximum total leverage ratio, to maintain a minimum consolidated
earnings before income taxes and depreciation and amortization ("EBITDA"), to
maintain a minimum fixed charge coverage ratio and to maintain a minimum deposit
balance with the lender (unless certain revenue and EBITDA thresholds are met).
The credit facility also provides for customary events of default, including
non-payment defaults and covenant defaults.
F-28
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: September 28, 2006 By: /s/ E. Gerald Kay
----------------------
E. Gerald Kay
Chief Executive Officer
Date: September 28, 2006 By: /s/ Dina L. Masi
----------------------
Dina L. Masi
Chief Financial Officer
33