UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2006
OR
| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of small business registrant in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip Code)
(888) 319-6962
(Registrant's telephone number, including Area Code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Indicate by check whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Applicable only to Corporate Issuers:
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at October 30, 2006
Common Stock, $0.002 par value 13,537,419 Shares
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Three Months Ended September 30, 2006
INDEX
Page
Part I. Financial Information
Item 1. Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2006 and 2005 (unaudited) 2
Condensed Consolidated Balance Sheets as of September 30, 2006
(unaudited) and June 30, 2006 3
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the three months ended September 30, 2006 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 2006 and 2005 (unaudited) 5
Notes to Condensed Consolidated Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits 23
Other
Signatures 24
Disclosure Regarding Forward-Looking Statements
Certain statements in the Quarterly Report on Form 10-Q may constitute
"forward-looking" statements as defined in Section 27A of the Securities Act of
1933 (the "Securities Act"), Section 21E of the Securities Act of 1934 (the
"Exchange Act"), the Private Securities Litigation Reform Act of 1995 (the
"PSLRA") or in releases made by the Securities and Exchange Commission, all as
may be amended from time to time. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of Integrated BioPharma, Inc. or industry
results, to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Statements
that are not historical fact are forward-looking statements. Forward-looking
statements can be identified by, among other things, the use of forward-looking
language, such as the words, "plan", "believe", "expect", "anticipate",
"intend", "estimate", "project", "may", "will", "would", "could", "should",
"seeks", or "scheduled to", or other similar words, or the negative of these
terms or other variations of these terms or comparable language, or by
discussion of strategy or intentions. These cautionary statements are being made
pursuant to the Securities Act, the Exchange Act and the PSLRA with the
intention of obtaining the benefits of the "safe harbor" provisions of such
laws. The Company cautions investors that any forward-looking statements made by
the Company are not guarantees or indicative of future performance. Important
assumptions and other important factors that could cause actual results to
differ materially from those forward-looking statements with respect to the
Company, include, but are not limited to, the risks and uncertainties affecting
its businesses described in Item 1 of the Company's Annual Report filed on Form
10-K for the year ended June 30, 2006 and in registration statements and other
securities filings by the Company.
Although the Company believes that its plans, intentions and expectations
reflected in or suggested by such forward-looking statements are reasonable,
actual results could differ materially from a projection or assumption in any of
its forward-looking statements, are subject to change and inherent risks and
uncertainties. The forward-looking statements contained in this Quarterly Report
on Form 10-Q are made only as of the date hereof and the Company does not have
or undertake any obligation to update or revise any forward-looking statements
whether as a result of new information, subsequent events or otherwise, unless
otherwise required by law.
1
ITEM 1. FINANCIAL STATEMENTS
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
September 30,
-----------------------------------------
2006 2005
------------------ ------------------
Sales, net $ 12,911,238 $ 14,787,107
Cost of sales 8,531,587 9,392,762
------------------ ------------------
Gross profit 4,379,651 5,394,345
Selling and administrative expenses 4,011,635 3,410,645
------------------ ------------------
Operating income 368,016 1,983,700
Other expense, net (27,336) (59,596)
------------------ ------------------
Income before income taxes 340,680 1,924,104
Federal and state income tax, net 210,182 44,738
------------------ ------------------
Income before minority interest 130,498 1,879,366
Minority interest 37,590 33,200
------------------ ------------------
Net income 168,088 1,912,566
Deemed dividend from beneficial conversion feature
of Series B Preferred stock dividend (562,500) (583,000)
Series B Preferred stock dividend (119,096) (123,507)
------------------ ------------------
Net (loss) income applicable to common shareholders $ (513,508) $ 1,206,059
================== ==================
Net (loss) income per common share:
Basic $ (0.04) $ 0.09
================== ==================
Diluted $ (0.04) $ 0.09
================== ==================
Weighted average common shares outstanding 13,288,078 12,713,842
Dilutive potential shares:
Warrants and options - 1,132,699
Convertible preferred stock - -
------------------ ------------------
Weighted average common share outstanding - assuming dilution 13,288,078 13,846,541
================== ==================
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
2006 2006
---------------- ---------------
Assets
Current Assets:
Cash and cash equivalents $ 2,200,867 $ 5,746,836
Restricted cash 2,000,000 -
Accounts receivable, net 5,682,562 5,717,012
Inventories, net 14,903,383 10,972,843
Deferred income taxes 3,079,540 2,976,000
Other current assets 1,744,052 1,531,988
---------------- ---------------
Total current assets 29,610,404 26,944,679
Property and equipment, net 4,065,415 4,173,357
Goodwill 145,410 145,410
Intangible assets, net 3,965,290 4,015,596
Deferred income taxes 2,190,000 2,182,000
Security deposits and other assets 178,080 143,822
---------------- ---------------
Total Assets $ 40,154,599 $ 37,604,864
================ ===============
Liabilities and Stockholders' Equity:
Current Liabilities:
Revolving credit facility $ 5,000,000 $ -
Note payable - bank - 4,497,290
Accounts payable 5,913,267 4,123,646
Accrued expenses and other current liabilities 2,336,035 2,505,390
State income taxes payable 650,649 573,685
Loan payable - Trade Investment Services, LLC, related party - 172,260
---------------- ---------------
Total Current Liabilities 13,899,951 11,872,271
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 and 675 outstanding liquidation preference $6,750,000 5,504,143 4,941,643
Minority Interest 118,434 156,025
Stockholders' Equity:
Common Stock, $0.002 par value; 25,000,000 shares authorized; 13,397,550 shares
issued at September 30, 2006 and 13,200,961 at June 30, 2006; 13,362,650 shares
outstanding at September 30, 2006 and 13,166,061 at June 30, 2006 26,795 26,402
Additonal paid-in-capital 31,090,865 30,580,604
Accumulated deficit (10,386,250) (9,872,742)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
---------------- ---------------
Total Stockholders' Equity 20,632,071 20,634,925
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 40,154,599 $ 37,604,864
================ ===============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
(Unaudited)
Common Stock Treasury Stock Total
----------------------- Additional Accumulated ------------------- Stockholders'
Shares Par Value Paid-in-Capital Deficit Shares Cost Equity
----------- --------- --------------- ------------- ------ ---------- ------------
Balance, June 30, 2006 13,200,961 $ 26,402 $ 30,580,604 $ (9,872,742) 34,900 $ (99,339) $ 20,634,925
Exercise of stock
options for cash 182,200 364 133,507 - - - 133,871
Restricted stock award 14,389 29 107,596 - - - 107,625
Compensation expense for
employee stock options - - 88,618 - - - 88,618
Income tax benefit from exercise
of stock options - - 180,540 - - - 180,540
Dividends paid on Series B
preferred stock - - - (119,096) - - (119,096)
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - (562,500) - - (562,500)
Net Income - - - 168,088 - - 168,088
----------- --------- --------------- ------------- ------ ---------- ------------
Balance, September 30,
2006 (Unaudited) 13,397,550 $ 26,795 $ 31,090,865 $(10,386,250) 34,900 $ (99,339) $ 20,632,071
=========== ========= =============== ============= ======= ========== ============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended
September 30,
-----------------------------------------
2006 2005
------------------- ------------------
Cash flows from operating activities:
Net income $ 168,088 $ 1,912,566
Adjustments to reconcile net income to net cash used for
operating activities:
Depreciation and amortization 308,625 274,764
Deferred income taxes 69,000 (14,000)
Allowance for inventory 12,500 2,500
Allowance for doubtful accounts 600 2,500
Issuance of common stock for consulting services 74,821 -
Compensation expense for employee stock options 88,618 151,517
Minority interest (37,590) (33,200)
Changes in assets and liabilities (excludes impact of acquistions):
(Increase) decrease in:
Accounts receivable 33,850 (1,133,630)
Inventories (3,943,040) (1,437,689)
Prepaid expenses and other assets (179,260) 185,518
Security deposits and other assets (34,258) 35,567
(Decrease) increase in:
Accounts payable 1,789,621 (84,740)
Income taxes payable 76,964 -
Accrued expenses and other liabilities (169,355) (158,652)
------------------- ------------------
Net cash used in operating activities (1,740,816) (296,979)
------------------- ------------------
Cash flows from investing activities:
Purchase of intangible assets (43,321) -
Purchase of property and equipment (107,057) (48,544)
------------------- ------------------
Net cash used in investing activities (150,378) (48,544)
------------------- ------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 133,871 57,450
Repayment of note payable - bank (4,497,290) -
Repayment of loan payable - TIS (172,260) -
Proceeds from revolving credit facility 5,000,000 -
Funding of restricted cash under revolving credit facility (2,000,000) -
Dividends paid (119,096) (123,507)
------------------- ------------------
Net cash used in financing activities (1,654,775) (66,057)
------------------- ------------------
Net decrease in cash and cash equivalents (3,545,969) (411,580)
Cash and cash equivalents at beginning of period 5,746,836 2,427,553
------------------- ------------------
Cash and cash equivalents at end of period $ 2,200,867 $ 2,015,973
=================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 59,783 $ 74,014
=================== ==================
Income taxes $ 102,105 $ 3,762
=================== ==================
Supplemental disclosures of non-cash transactions:
Deemed dividend from beneficial conversion feature of Series B Preferred stock $ (562,500) $ (583,000)
=================== ==================
Restricted stock awards $ 107,625 $ -
=================== ==================
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Principles of Consolidation and Basis of Presentation
The accompanying financial statements for the interim periods are unaudited and
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned or majority owned with an offset to minority interest. All
significant intercompany transactions and balances have been eliminated. The
interim financial statements have been prepared in conformity with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission ("SEC") and therefore
do not include information or footnotes necessary for a complete presentation of
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.
However, all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto, together with Management's Discussion
and Analysis of Financial Condition and Results of Operations, contained in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2006
("10-K"), as filed with the SEC. The June 30, 2006 balance sheet was derived
from audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the United States of America. The
results of operations for the three months ended September 30, 2006 are not
necessarily indicative of the results for the full fiscal year ending June 30,
2007 or for any other period.
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; and pharmaceutical
technical services through its contract research organization, and the
biotechnologies business that uses its patented plant-based technology to
produce vaccines and therapeutic antibodies. The Company's customers are located
primarily throughout the United States.
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. Nothing has come to our attention which would cause a change in these
estimates.
6
Earnings Per Share. In accordance with FASB Statement No. 128, "Earnings Per
Share," basic earnings per common share are based on weighted average number of
common shares outstanding. Diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, plus the incremental
shares that would have been outstanding upon the assumed exercise of all
potentially dilutive stock options, warrants and convertible preferred stock,
subject to antidilution limitations.
During the three months ended September 30, 2006, options and warrants to
purchase 4,877,144 shares of common stock were outstanding but were not included
in the computation of diluted earnings per share as they were antidilutive as a
result of net losses available to common shareholders during the period. During
the three months ended September 30, 2005, 3,892,998 options with exercise
prices below average market price were included in the computation of diluted
earnings per share.
During the periods ended September 30, 2006 and 2005, Convertible Series B
Preferred Stock in the amount of 675,000 and 700,000 common share equivalents
were not included in the computation of diluted earnings per share as their
conversion price was greater than the average market price of the common shares
for the 2005 period and for the 2006 period, they were antidilutive as a result
of net losses available to common shareholders.
During the three months ended September 30, 2006 and 2005, options and warrants
to purchase 1,480,500 shares and 2,941,930 shares of common stock, respectively,
were outstanding but were not included in the computation of diluted earnings
per share because their exercise price was greater than the average market price
of the common shares.
Recent Accounting Pronouncements
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.
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. SFAS 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.
7
Note 2. Goodwill and other Intangible Assets
Goodwill and intangibles with indefinite lives 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 third quarter of fiscal 2006. As
of September 30, 2006 and June 30, 2006, goodwill consisted of $145,410 from the
Aloe Acquisition.
Other definite lived intangibles are amortized on a straight-line basis over
periods not exceeding 20 years. The carrying amount of acquired intangible
assets as of September 30, 2006 and June 30, 2006 is as follows:
September 30, 2006 June 30, 2006
----------------------------------------- ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Net Amount Amortization Net
----------- ------------ ------------ ----------- ------------ -----------
Intellectual property $ 1,850,000 $ 317,917 $ 1,532,083 $ 1,850,000 $ 271,667 $ 1,578,333
Trade names and patents 1,792,456 241,639 1,550,817 1,749,135 216,139 1,532,996
Unpatented technology 547,000 189,999 357,001 547,000 179,999 367,001
License agreement 637,467 112,078 525,389 637,467 100,201 537,266
----------- ------------ ------------ ----------- ------------ -----------
Total $ 4,826,923 $ 861,633 $ 3,965,290 $ 4,783,602 $ 768,006 $ 4,015,596
=========== ============ ============ ============ ============ ===========
Amortization expense recorded on the intangible assets for the three months
ended September 30, 2006 and 2005 was $93,627 and $71,973, respectively.
Amortization expense is recorded on the straight-line method of periods ranging
from 10 years to 20 years.
The estimated annual amortization expense for intangible assets for the five
succeeding fiscal years is as follows:
Year Ending Amortization
June 30, Expense
----------------- ---------------
2007, remaining $ 284,900
2008 378,500
2009 378,500
2010 378,500
2011 378,500
Thereafter 2,166,390
---------------
Total $ 3,965,290
===============
Note 3. 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 September 30, 2006 and June
30, 2006:
September 30, June 30,
2006 2006
---------------- ----------------
Raw materials $ 7,848,226 $ 5,484,485
Work-in-process 2,556,197 1,803,532
Finished goods 4,498,960 3,684,826
---------------- ----------------
Total $ 14,903,383 $ 10,972,843
================ ================
8
Note 4. Property and Equipment
Property and equipment consists of the following as of September 30, 2006 and
June 30, 2006:
September 30, June 30,
2006 2006
--------------- ---------------
Land and building $ 1,250,000 $ 1,250,000
Leasehold improvements 2,157,321 2,157,321
Machinery and equipment 6,651,153 6,544,096
Transportation equipment 37,714 37,714
--------------- ---------------
10,096,188 9,989,131
Less: Accumulated depreciation
and amortization 6,030,773 5,815,774
--------------- ---------------
Total $ 4,065,415 $ 4,173,357
=============== ===============
Note 5. Note and Loan Payable
Note payable is a promissory note provided by Bank of America dated August 6,
2003 in the amount of $4.5 million with interest at a variable rate based on
1.25% over the current LIBOR rate. The loan 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 the interest rate was 6.60%. As of September 30, 2006, the note was paid in
full.
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 had accrued and unpaid interest of
$45,661 as of June 30, 2006.
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
6. Revolving Credit Facility.)
Note 6. Revolving Credit Facility and Restricted Cash
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. As of September 30, 2006, the interest rate was 6.95% and the
Company had accrued and unpaid interest of approximately $28,600. The facility
also has a commitment fee equal to 0.50% per annum calculated on the unused
amount of the facility. As of September 30, 2006, the Company had approximately
$4,200 in accrued and unpaid commitment fees.
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.
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).
On September 1, 2006, the Company deposited $2.0 million with the lender to
satisfy this covenant.
9
The credit facility also provides for customary events of default, including
non-payment defaults and covenant defaults. The Company was in compliance with
its loan covenants as of September 30, 2006.
Note 7. Significant Risks and Uncertainties
(a) Concentrations of Credit Risk-Cash. The Company maintains balances at
several financial institutions. Deposits at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 2006, the
Company's uninsured cash balances were approximately $3.5 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 at September
30, 2006 and June 30, 2006 is $125,613 and $125,013, respectively.
(c) Major Customers. For the three months ended September 30, 2006,
approximately 42% or $5.4 million, 20% or $2.5 million and 15% or $1.9 million
of revenues were derived from three customers. For the three months ended
September 30, 2005 approximately 36% or $5.3 million, 35% or $5.3 million and
24% or $3.5 million of revenues were derived from three customers. The loss of
any of these customers would have an adverse affect on the Company's operations.
Accounts receivable from these three customers comprised approximately 59% of
total accounts receivable at September 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.
Approximately 35% 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 8. Commitments and Contingencies
(a) Leases
Related Party Leases- Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's chairman, president and principal stockholder and certain family
members and 10% owned by an employee of the Company. The lease provides for
minimum annual rental of $323,559 through May 31, 2015 plus increases in real
estate taxes and building operating expenses. On July 1, 2004, the Company
leased an additional 24,810 square feet of warehouse space on a month-to month
basis. Rent expense for the three months ended September 30, 2006 and 2005 on
this lease was $186,700 and $163,000 respectively, and is included in both
manufacturing and selling and administrative expenses.
10
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five-year period. On August 27,
2002, the lease was amended reducing the square footage from approximately
32,500 to 22,500 and reducing the monthly rent to $22,483 per month for the
balance of the lease. Rent expense for the three months ended September 30, 2006
and 2005 was $92,000 and $98,588, respectively and is included in manufacturing
expenses.
The Company leases warehouse and office facilities through March 31, 2007. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. In September 2006, the Company leased additional warehouse space
under a three-year lease commitment with minimum monthly rental payments of
$12,008. The Company leases additional office space on a month-to-month basis;
minimum monthly rental payments are $1,126. 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 $18,611. The Company leases warehouse equipment for a five (5) year
period with an annual rental of $15,847 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, remaining $ 488,000 $ 242,700 $ 730,700
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 $ 1,930,700 $ 2,804,200 $ 4,734,900
=============== =============== ===============
Total rent expense, including real estate taxes and maintenance charges, was
approximately $411,000 and $425,000 for the three months ended September 30,
2006 and 2005, respectively.
(b) Intellectual Property Agreement - In connection with the acquisition in
January 2004, and subsequent amendments thereto; of intellectual property
developed by the Center for Molecular Biotechnology of Fraunhofer USA, Inc., the
Company will pay up to a maximum of $3.7 million for certain technology
developed by Fraunhofer USA, Inc. over a five-year period. As of September 30
and June 30, 2006, $1.8 million has been paid and is being amortized on a
straight-line basis over a ten-year period.
(c) 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. Certain of the Defendants,
including the Company, have filed counter-claims against Plaintiffs for breach
of a July 2003 agreement with NatEx and to collect on an $1.3 million note,
though the Company is doubtful of collection on that note. Paxis plans to defend
vigorously the remaining claim and prosecute its claims.
11
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 settlement agreements have been distributed
for execution by the parties. The Company does not believe that there will be a
material impact on the Company's financial position.
Note 9. Related Party Transactions
The Company has a consulting agreement with Eugene Kay, a former employee of the
Company and a brother of E. Gerald Kay, the Company's Chairman of the Board.
This agreement is on a month-to-month basis for $1,100 per month. The total
consulting expense recorded per this verbal agreement for the three months
September 30, 2006 and 2005 was $3,300. 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 $30,000 for the three months ended
September 30, 2006 and 2005.
Note 10. Equity Transactions
(a) Stock Option Plan and Warrants - There were no stock options or warrants
issued in the quarter ended September 30, 2006.
(b) Restricted Stock Award - on August 3, 2006, the Company entered into a
separate one-year financial services agreement whereby it is to issue an initial
12,500 shares of its common stock and will issue additional shares worth
$15,000, on a monthly basis, calculated on the third day of each month by
dividing $15,000 by the prior ten (10) day volume-weighted average closing share
price of the common stock of the Company.
As of September 30, 2006, the Company was obligated to issue 14,389 shares of
its common stock under this agreement.
12
Note 11. Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with Financial Accounting Standard Board Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information," which
establishes standards for reporting information about a company's operating
segments.
The Company has divided its operations into three reportable segments as
follows: Nutraceuticals, Pharmaceuticals and Biotechnologies. The international
sales, concentrated primarily in Europe, for the three months ended September
30, 2006 and 2005 were $3.9 million and $2.1 million respectively.
Financial information relating to the three months ended September 30, 2006 and
2005 operations by business segment is as follows:
For the Three Months Ended
September 30,
--------------------------------------------------------------------------------------------------------------
2006 2005
----------------------------------------------------- ------------------------------------------------------
Nutra- Pharma- Biotech- Nutra- Pharma- Biotech-
ceuticals ceuticals nologies Total ceuticals ceuticals nologies Total
------------- ---------- ---------- ----------- ------------ ------------ ---------- -----------
Sales, net
U.S. customers $ 7,755,030 $1,180,286 $ 116,547 9,051,863 $ 11,917,850 $ 794,775 $ 5,575 $12,718,200
International
customers 3,464,443 394,932 - 3,859,375 2,046,722 22,185 - 2,068,907
------------- ---------- ---------- ----------- ------------ ------------ ---------- -----------
Total Sales, net $ 11,219,473 $1,575,218 $ 116,547 $12,911,238 $ 13,964,572 $ 816,960 $ 5,575 $14,787,107
============= ========== ========== =========== ============ ============ ========== ===========
Segment operating
profit (loss) $ 838,757 $(257,744) $(212,997) $ 368,016 $ 3,542,483 $(1,472,041) $ (86,742) $ 1,983,700
============= ========== ========== =========== ============ ============ ========== ===========
Depreciation $ 95,134 $ 119,865 $ - $ 214,999 $ 88,718 $ 114,073 $ - $ 202,791
============= ========== ========== =========== ============ ============ ========== ===========
Capital
expenditures $ 83,662 $ 23,395 $ - $ 107,057 $ 41,023 $ 7,521 $ - $ 48,544
============= ========== ========== =========== ============ ============ ========== ===========
As of September 30, As of June 30,
----------------------------------------------------- ------------------------------------------------------
2006 2005
----------------------------------------------------- ------------------------------------------------------
Total Assets $ 31,659,930 $6,533,543 $1,961,126 $40,154,599 $ 29,911,297 $ 5,868,804 $1,824,763 $37,604,864
============= ========== ========== =========== ============ ============ ========== ===========
Note 12. Subsequent Event
On October 16, 2006, the Company redeemed 650 shares of its Series B Redeemable
Convertible Preferred Stock ("Preferred Stock") at a redemption price of $6.7
million. In addition to the cash consideration, equal to the face amount of the
Preferred Stock and the related dividend, the Company also agreed to issue to
the holder 100,000 additional Warrants to purchase common stock of the Company
at a purchase price of $12 per share exercisable until October 2011 and agreed
to adjust the Warrants issued in 2004 in connection with the initial purchase of
the Preferred Stock to conform to the new Warrants. The amended Warrants issued
in 2004, along with the additional Warrants issued in October 2006, will result
in additional non-cash dividends on the Preferred Stock of approximately $1.5
million.
The early redemption of the Preferred Stock extinguished all rights and
preferences pertinent to the 650 shares of Preferred Stock, including actual
dividends, deemed dividends (which are required to be deducted in the
calculation of net income attributable to common shareholders and resulted in
decreases in net income of approximately $2.3 million in each of the last two
fiscal years), liquidation preferences and the right to convert the Preferred
Stock into 650,000 shares of the Company's common stock at $10 per share.
Subsequent to this redemption, only 25 shares of Preferred Stock held by another
party remain outstanding.
13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANICAL CONDITION
AND RESULTS OF OPERATION
Certain statements set forth under this caption constitute "forward-looking
statements." See "Disclosure Regarding Forward-Looking Statements" on page 1 of
this Report for additional factors relating to such statements. The following
discussion should also be read in conjunction with the Condensed Consolidated
Financial Statements of the Company and Notes thereto included elsewhere herein
and the Company's Annual Report on Form 10-K.
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; and pharmaceutical
technical services through its contract research organization. The Company's
customers are located primarily throughout the United States.
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 allowance on deferred income taxes, and;
o accruals for, and the probability of, the outcome of current
litigation.
On a continual basis, management reviews its estimates utilizing currently
available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those
estimates are adjusted accordingly. Actual results could differ from those
estimates. There have been no material changes in the calculation of these
estimates since the audited financial statements at June 30, 2006.
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains 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 the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses 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.
We preformed a sensitivity analysis to determine the impact of fluctuations in
our estimates for our allowance for doubtful accounts. As of September 30, 2006
the allowance was $125,613. If this number were in error by plus or minus one
percent of the account receivable balance, the impact would be an additional
$58,100 of income or expense.
14
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. 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 preformed a sensitivity analysis to determine the impact of
fluctuations in our estimates for inventory allowances. As of September 30, 2006
the allowance was $12,500. If this number were in error by plus or minus one
percent of the total inventory balance, the impact would be an additional
$149,200 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 indicated 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 ("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.
Goodwill and Other Intangible Assets - The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets". 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.
15
General - The Company recognizes revenue in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin 104. The Company recognizes
product sales revenue when title and risk of loss have transferred to the
customer, when estimated provisions for product returns, rebates, chargebacks
and other sales allowances are reasonably determinable, and when collectibility
is reasonably assured. Accruals for these items are presented in the condensed
consolidated financial statements as reductions to sales. The Company's net
sales represent gross sales invoiced to customers, less certain related charges
for discounts, returns, rebates, chargebacks 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.
Results of Operations
The following table sets forth the income statement data of the Company as a
percentage of net sales for the periods indicated:
For the three months
ended September 30,
---------------------------
2006 2005
----------- -----------
Sales, net 100.0% 100.0%
Costs and expenses:
Cost of sales 66.1% 63.5%
Selling and administrative 31.0% 23.1%
----------- -----------
97.1% 86.6%
----------- -----------
Income from operations 2.9% 13.4%
----------- -----------
Other income (expense):
Interest expense (0.8%) (0.5%)
Other income 0.2% 0.1%
Interest and investment income 0.4% 0.0%
----------- -----------
(0.2%) (0.4%)
----------- -----------
Income before income taxes 2.6% 13.0%
Federal and state income taxes, net 1.6% 0.3%
----------- -----------
Income before minority interest 1.0% 12.7%
Minority interest 0.3% 0.2%
----------- -----------
Net income 1.3% 12.9%
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (4.4%) (4.0%)
Series B Preferred Stock dividend (0.9%) (0.8%)
----------- -----------
Net (loss) income allocable to common
shareholders (4.0%) 8.1%
=========== ===========
16
For the three month period ended September 30, 2006 compared to the three month
period ended September 30, 2005
Sales, net. Sales, net, for the first quarter ended September 30, 2006 and 2005
were $12.9 million and $14.8 million, respectively, a decrease of $1.9 million
or 12.7%. The decrease is comprised of the following:
Three months ended Dollar Increase Percentage
September 30, (Decrease) Change
------------------------------------- ----------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
----------------- ---------------- ----------------- --------------
Nutraceuticals - US Customers $ 7,755,030 $ 11,917,850 $ (4,162,820) (34.9%)
Nutraceuticals - International Customers 3,464,443 2,046,722 1,417,721 69.3%
----------------- ---------------- ----------------- --------------
Total Nutraceuticals 11,219,473 13,964,572 (2,745,099) (19.7%)
----------------- ---------------- ----------------- --------------
Pharmaceuticals - US Customers 1,180,286 794,775 385,511 48.5%
Pharmaceuticals - International Customers 394,932 22,185 372,747 1,680.2%
----------------- ---------------- ----------------- --------------
Total Pharmaceuticals 1,575,218 816,960 758,258 92.8%
----------------- ---------------- ----------------- --------------
Biotechnologies 116,547 5,575 110,972 1,990.5%
----------------- ---------------- ----------------- --------------
Total $ 12,911,238 $ 14,787,107 $ (1,875,869) (12.7%)
================= ================ ================= ==============
Sales, net. Sales, net for the three months ended September 30,
2006 and 2005 were $12.9 million and $14.8 million, respectively, a decrease of
approximately $1.9 million or 12.7%. This decrease is primarily the result of a
decrease in the Company's Nutraceuticals Segment of approximately 20%, offset by
increases in our other two business segments. For the quarter ended September
30, 2005, the Company introduced a new product in its propriety nutraceutical
product line and increased its distribution in one of its major customers from a
test market distribution to nation-wide distribution of all of its then existing
products. These factors resulted in an incremental increase in sales for the
quarter ended September 30, 2005 of approximately $4.0 million, with no similar
one-time factors existing in the quarter ended September 30, 2006.
Pharmaceuticals sales for the three months ended September 30, 2006 were $1.6
million compared to $817,000 for the comparable period. This increase is
primarily due to increased sales of approximately $300,000 of the Company's API
in the quarter ended September 30, 2006 compared to the quarter ended September
30, 2005. Additionally, our CRO business had increased sales of approximately
$500,000 in the quarter ended September 30, 2006 compared to the quarter ended
September 30, 2005. These increased sales are a result of the Segment
implementing its sales and marketing strategy in the fiscal year ended June 30,
2006.
Our Biotechnologies Segment did not significantly contribute to our net sales
and gross profits in the quarters ended September 30, 2006 and 2005.
For the three months ended September 30, 2006, approximately 61% of revenues
were derived from three customers as compared 95% of revenues for the three
months ended September 30, 2005. The loss of any of these customers would have
an adverse affect on the Company's operations. The Company continues to expand
its customer base by expanding from selling its propriety branded nutraceutical
products primarily to the "club" stores to the retail sales segment.
Cost of sales. Cost of sales decreased to $8.5 million for the three months
ended September 30, 2006 as compared to $9.4 million for the three months ended
September 30, 2005. Cost of sales increased as a percentage of sales to 66% for
the three months ended September 30, 2006 as compared to 64% for the three
months ended September 30, 2005. The increase of approximately two percent
(2.0%) in our cost of sales is primarily a result of our manufacturing expenses,
as a majority of our manufacturing costs are fixed, as sales volumes decrease,
the cost of sales as a percentage of sales will increase as there are fewer
sales to spread the fixed costs over.
17
Selling and Administrative Expenses. Selling and administrative expenses were
$4.0 million for the three months ended September 30, 2006, an increase of
$601,000 or 17.6% as compared with $3.4 million for the three months ended
September 30, 2005. As a percentage of sales, net, selling and administrative
expenses were 31.4% for the three months ended September 30, 2006 and 23.1% for
the prior comparable period. A tabular presentation of the changes in selling
and administrative expenses is as follows:
Three months ended Dollar increase Percentage
September 30, (Decrease) Change
------------------------------ --------------- --------------
2006 2005 2006 vs 2005 2006 vs 2005
-------------- ------------- --------------- --------------
Salaries $ 928,685 $ 670,291 $ 258,394 38.5%
Advertising 680,932 496,247 184,685 37.2%
Consulting and
other professional fees 349,936 447,287 (97,351) (21.8%)
Indirect expenses 334,666 262,663 72,003 27.4%
Marketing 207,179 29,457 177,722 603.3%
Employee Benefits 200,975 153,889 47,086 30.6%
Depreciation & Amortization 178,872 148,282 30,590 20.6%
Auto, Travel & Entertainment 151,630 149,715 1,915 1.3%
Commissions 150,281 286,116 (135,835) (47.5%)
Office Rent 147,290 184,778 (37,488) (20.3%)
Insurance 139,686 36,983 102,703 277.7%
Office 123,752 118,201 5,551 4.7%
Compensation expense for
employee stock options 88,618 151,517 (62,899) (41.5%)
Other 329,133 275,219 53,914 19.6%
-------------- ------------- --------------- --------------
Total $ 4,011,635 $ 3,410,645 $ 600,990 17.6%
============== ============= =============== ==============
Salaries increased approximately $258,000 in the three months ended September
30, 2006 or 38.5% as a result of hiring an investor relations officer at the end
of our last quarter. In addition to his base salary, in the three months ended
September 30, 2006, this employee earned a performance bonus based on a
transaction which occurred in the three months ended September 30, 2006, his
combined compensation was approximately $225,000 with no comparable expense in
the three months ended September 30, 2005. The balance of the increase or
$33,000 represents a 5.0% increase over salaries in the three months ended
September 30, 2005 as a result of net new employees and general salary
increases. A decrease in consulting and other professional fees of $97,400
offset the increase in salaries, in part.
Advertising expense increased approximately $185,000 or 38.5% in the three
months ended September 30, 2006 as part of our marketing plan to increase
advertising to support our proprietary branded nutraceutical products. We spent
$74,250 in media advertisements such as radio and newspaper ads in the three
months ended September 30, 2006 with no comparable expense in the prior period
and an additional $110,000 on other trade advertising.
We also incurred additional marketing expenses of $178,000 in the three months
ended September 30, 2006 on the design and printing of new marketing materials
used in the general marketing of our products as compared to the three months
ended September 30, 2005.
Commissions decreased approximately $136,000 or 47.5%. Commissions as a
percentage of sales that commissions are owed was 3.2% of such sales in the
three months ended September 30, 2006 compared to 2.9% of such sales in the
three months ended September 30, 2005. Our commission payout ranges from three
to five percent of qualifying sales, the increase in the payout rate from the
three months ended September 30, 2005 to the three months ended September 30,
2006 is a result of an increase in sales qualifying for a five percent
commission payment.
Insurance cost increased by approximately $103,000 primarily as a result of a
change in allocation between manufacturing costs and general and administrative
costs.
18
Other expense, net. Other expense, net was $27,336 for the three months ended
September 30, 2006 as compared to $59,596 for the comparable period a year ago.
The decrease of $32,260 was primarily attributable to, an increase in interest
expense of $21,130 due to the ongoing increase in the Libor rate, offset in
part, by an increase in interest income of approximately $42,000.
Federal and state income tax, net. Federal and state income tax increased from
$44,700 in the three months ended September 30, 2005 to $210,000 in the three
months ended September 30, 2006. Our effective tax rate increased from 2.3% to
61.7%. The dollar amount increase and the increase in our effective tax rates
are primarily a result of increased state taxes owed in certain states where our
subsidiaries file separate tax returns and do not have operating losses from our
other subsidiaries to offset their taxable income in such states. Additionally,
in the three months ended September 30, 2006, we had a deferred federal tax
expense of approximately $76,000 with no federal tax expense in the three months
ended September 30, 2005 as a result of offsetting valuation allowances recorded
in such period.
Net income. The Company's net income for the three months ended September 30,
2006 was $168,100 as compared to net income of $1.9 million for the three months
ended September 30, 2005. This decrease in net income of approximately $1.7
million is primarily the result of a decrease in gross profit of approximately
$982,500, an increase in selling and administrative expenses of $633,000, a
decrease in other expense of approximately $32,000, and an increase in federal
and state income taxes of approximately $165,000.
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.
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 revolving line
of credit available through September 1, 2007 with a one-year renewal option
available at the lender's option. The Company's principal uses of cash have been
to finance working capital, acquisitions, capital expenditures and Preferred
Series B Stock dividend payments and the redemption of its Preferred Series B
Stock. The Company anticipates these uses will continue to be its principal uses
of cash in the future, except that subsequent to October 2006, the Company's use
for Preferred Series B Stock dividend payments will not be a significant use as
it redeemed 650 shares in October 2006 and the cash dividends on the remaining
25 shares will be approximately $9,700 for the remainder of fiscal 2007 and none
thereafter as the shares will be either converted or redeemed by its maturity
date of April 20, 2007.
19
The following table sets forth, for the periods indicated, the Company's net
cash flows used in operating, investing and financing activities, its period end
cash and cash equivalents and other operating measures:
For the three months ended
September 30,
---------------------------------------
2006 2005
---------------- -----------------
Net cash used in operating acitivites $ (1,740,817) $ (296,979)
================ =================
Net cash used in investing acitivites $ (150,377) $ (48,544)
================ =================
Net cash used in financing acitivites $ (1,654,775) $ (66,057)
================ =================
Cash and cash equivalents at end of period $ 2,200,867 $ 2,015,973
================ =================
Days sales in inventory 91 80
================ =================
Inventory turnover 4.0 4.5
================ =================
At September 30, 2006, the Company's working capital was $15.7 million, an
increase of $638,000 over working capital at June 30, 2006 of $15.1 million.
Cash and cash equivalents were $2.0 million at September 30, 2006, a decrease of
$3.5 million from June 30, 2006. The Company utilized $1.7 million and $297,000
of net cash for operations for the three months ended September 30, 2006 and
2005, respectively. The primary reason for the increase in cash used in
operating activities is the increase in cash used in inventories. Our inventory
levels increased by $3.9 million in the three months ended September 30, 2006
based on our increased sales orders for future shipments. The Company believes
that anticipated sales for next year, current cash balances and its revolving
credit facility should meet its cash needs for operations for fiscal 2007.
The Company utilized $150,400 and $48,500 of cash in investing activities for
the three months ended September 30, 2006 and 2005, respectively. The Company
utilized $1.7 million and $66,100 of cash from financing activities for the
three months ended September 30, 2006 and 2005, respectively. The significant
use of cash in financing activities was a required deposit of $2.0 million, in
an interest bearing certificate of deposit, with our lender in connection with
our $15.0 million revolving credit facility.
The Company's total annual commitments at September 30, 2006 for long term
non-cancelable leases of approximately $731,000 consists of obligations under
operating leases for facilities and lease agreements for the rental of warehouse
equipment, office equipment and automobiles.
On October 20, 2006, the Company borrowed an additional $8.5 million on its
$15.0 million revolving credit facility increasing its borrowings under the line
to $13.5 million. The proceeds were used to redeem 650 shares of the Series B
Preferred Stock and for general corporate purposes.
The Company believes its sources of cash will be sufficient to fund its
operations and meet its cash requirements to satisfy its working capital needs,
capital expenditure needs, outstanding commitments, and other liquidity
requirements associated with its existing operations over the next twelve
months. The Company's ability to fund these requirements will depend on its
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond the Company's control. In addition, as part of the Company's strategy, it
may pursue acquisitions and investments that are complementary to its business.
Any material future acquisitions or investments will likely require additional
capital and therefore, the Company cannot predict or assure that additional
funds from existing sources will be sufficient for such future events.
20
Capital Expenditures
The Company's capital expenditures for the three months ended September 30, 2006
and 2005 were $107,100 and $48,500, respectively. 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.
Recent Accounting Pronouncement - refer to footnote 1 of the condensed
consolidated financial statements for the three months ended
September 30, 2006 included in Part I - Item 1.
Impact of Inflation
The Company does not believe that inflation has significantly affected its
results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is party to financial instruments
that are subject to market risks arising from changes in interest rates and
foreign currency exchange rates, primarily with respect to the Canadian Dollar
in its customer receivables. The Company's use of derivative instruments is very
limited and it does not enter into derivative instruments for trading purposes.
We performed a sensitivity analysis to determine the impact of fluctuations 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 $50,000 per annum.
Item 4. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to provide
reasonable assurance that information required to be disclosed in our reports
filed under the Securities Exchange Act of 1934, or the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
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 process, or
related assessment in the process of evaluation and testing 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.
21
PART II - OTHER INFORMATION
Item 1. 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. Certain of the Defendants, including the Company,
have filed counter-claims against Plaintiffs for breach of a July 2003 agreement
with NatEx and to collect on an $1.3 million note, though the Company is
doubtful of collection on that note. Paxis plans to defend vigorously the
remaining claim and prosecute its claims.
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 settlement agreements have been distributed
for execution by the parties. The Company does not believe that there will be a
material impact on the Company's financial position
Item 1A. Risk Factors
The risks described in Item 1A, Risk Factors, in our Annual Report on Form 10-K
for the year ended June 30, 2006, could materially and adversely affect our
business, financial condition and results of operations. The risk factors
discussed in that Form 10-K do not identify all risks that we face because our
business operations could also be affected by additional factors that are not
presently known to us or that we currently consider to be immaterial to our
operations.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On August 3, 2006, the Company entered into a one-year financial services
agreement whereby it agreed to issue to a financial advisor an initial 12,500
shares of its common stock and will issue additional shares worth $15,000, on a
monthly basis, calculated on the third day of each month by dividing $15,000 by
the prior ten (10) day volume-weighted average closing share price of the common
stock of the Company.
As of September 30, 2006, the Company was obligated to issue 14,389 shares of
its common stock under this agreement.
The shares of common stock have not been registered under the Securities Act of
1933, as amended (the "Securities Act"), and were issued and sold in reliance
upon the exemption from registration contained in Section 4(2) of the Securities
Act and Regulation D promulgated thereunder. These shares of common stock may
not be offered or sold in the United States in the absence of an effective
registration statement or exemption from the registration requirements under the
Securities Act.
22
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number
31.1 Certification of pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
31.2 Certification of pursuant to Section 302 of Section 302 of the
Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
32.1 Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.
32.2 Certification of periodic financial report pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.
23
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: November 13, 2006 By:/s/ E. Gerald Kay
E. Gerald Kay,
Chief Executive Officer
Date: November 13, 2006 By:/s/ Dina L. Masi
Dina L. Masi,
Chief Financial Officer &
Senior Vice President
24
Exhibit 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, E. Gerald Kay certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
BioPharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2006 By: /s/ E. Gerald Kay
Name: E. Gerald Kay
Title: Chief Executive Officer
Exhibit 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Dina L. Masi, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Integrated
BioPharma, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant's ability
to record, process, summarize and report financial information;
and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: November 13, 2006 By: /s/ Dina L. Masi
Name: Dina L. Masi
Title: Chief Financial Officer &
Senior Vice President
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
As adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the first quarter ended
September 30, 2006 of Integrated BioPharma, Inc. (the "Company") as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), E.
Gerald Kay, the Chief Executive Officer of Integrated BioPharma, Inc. certifies,
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350, that to his knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
This certification accompanies the Report pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
Dated: November 13, 2006 By: /s/ E. Gerald Kay
E. Gerald Kay
Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
As adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q for the first quarter ended
September 30, 2006 of Integrated BioPharma, Inc. (the "Company") as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), Dina
L. Masi, the Senior Vice President and Chief Financial Officer of Integrated
BioPharma, Inc. certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that to her knowledge:
(1) the Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
This certification accompanies the Report pursuant to Section 906 of
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
Dated: November 13, 2006 By:/s/ Dina L. Masi
Dina L. Masi
Chief Financial Officer &
Senior Vice President