UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
------------
FORM 10-Q
|X| Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2007
OR
| | Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of registrant in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Ave., Hillside, New Jersey 07205
(Address of principal executive offices) (Zip Code)
(888) 319-6962
(Registrant's telephone number, including Area Code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No | |
Indicate by check whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
Indicate by check whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
Yes | | No |X|
The number of shares outstanding of each of the Registrant's classes of common
equity, as of the latest practicable date:
Class Outstanding at April 30, 2007
Common Stock, $0.002 par value 13,793,981 Shares
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
FORM 10-Q QUARTERLY REPORT
For the Quarterly Period Ended March 31, 2007
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements: 2
Condensed Consolidated Statements of Operations
for the Nine and Three Months Ended
March 31, 2007 and 2006 (unaudited) 2
Condensed Consolidated Balance Sheets
as of March 31, 2007 (unaudited)
and June 30, 2006 3
Condensed Consolidated Statements of Changes
in Stockholders' Equity for the Nine Months
Ended March 31, 2007 (unaudited) 4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended
March 31, 2007 and 2006 (unaudited) 5
Notes to Condensed Consolidated Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 17
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
Item 4. Controls and Procedures 26
Part II. Other Information
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits 28
Signatures 29
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 Nine months ended
March 31, March 31,
---------------------------------- ---------------------------------
2007 2006 2007 2006
--------------- ---------------- --------------- --------------
Sales, net $ 16,425,672 $ 12,936,092 $ 50,188,990 $ 40,691,493
Cost of sales 11,519,725 8,642,898 34,161,728 26,087,232
--------------- ---------------- --------------- --------------
Gross profit 4,905,947 4,293,194 16,027,262 14,604,261
Selling and administrative expenses 4,376,164 4,225,559 13,110,178 11,186,911
--------------- ---------------- --------------- --------------
Operating income 529,783 67,635 2,917,084 3,417,350
Other expense (179,271) (50,118) (372,584) (146,744)
--------------- ---------------- --------------- --------------
Income before income taxes 350,512 17,517 2,544,500 3,270,606
Federal and state income tax 228,528 30,155 1,194,120 95,769
--------------- ---------------- --------------- --------------
Income (loss) before minority interest 121,984 (12,638) 1,350,380 3,174,837
Minority interest - 22,149 37,590 139,265
--------------- ---------------- --------------- --------------
Net income 121,984 9,511 1,387,970 3,314,102
Deemed dividend from beneficial conversion feature
of Series B Preferred stock dividend (20,835) (671,143) (1,803,881) (1,837,143)
Series B Preferred stock dividends (4,316) (117,648) (1,553,518) (364,662)
--------------- ---------------- --------------- --------------
Net income (loss) applicable to common shareholders $ 96,833 $ (779,280) $ (1,969,429) $ 1,112,297
=============== ================ =============== ==============
Net income (loss) per common share:
Basic $ 0.01 $ (0.06) $ (0.15) $ 0.09
=============== ================ =============== ==============
Diluted $ 0.01 $ (0.06) $ (0.15) $ 0.07
=============== ================ =============== ==============
Weighted average common shares outstanding 13,684,381 # 12,798,048 13,512,830 12,745,815
Dilutive potential shares:
Warrants and options 3,066,833 - - 2,635,497
Convertible preferred stock - - - -
Weighted average common share outstanding
--------------- ---------------- --------------- --------------
- assuming dilution 16,751,214 12,798,048 13,512,830 15,381,312
=============== ================ =============== ==============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2007 2006
---------------- ---------------
(Unaudited)
Assets
Current Assets:
Cash and cash equivalents $ 1,307,509 $ 5,746,836
Restricted cash 2,000,000 -
Accounts receivable, net 7,200,949 5,717,012
Inventories, net 16,708,122 10,972,843
Deferred income taxes 3,127,000 2,976,000
Other current assets 1,623,650 1,531,988
---------------- ---------------
Total current assets 31,967,230 26,944,679
Property and equipment, net 4,167,945 4,173,357
Goodwill 145,410 145,410
Intangible assets, net 5,385,340 4,015,596
Deferred income taxes 1,753,000 2,182,000
Security deposits and other assets 191,255 143,822
---------------- ---------------
Total Assets $ 43,610,180 $ 37,604,864
================ ===============
Liabilities and Stockholders' Equity:
Current Liabilities:
Revolving credit facility $ 13,500,000 $ -
Note payable - bank - 4,497,290
Accounts payable 3,557,652 4,123,646
Accrued expenses and other current liabilities 2,898,085 2,505,390
State income taxes payable 910,661 573,685
Loan payable - Trade Investment Services, LLC, related party - 172,260
---------------- ---------------
Total Current Liabilities 20,866,398 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; 25 shares issued and outstanding at March 31, 2007 and 675 shares
issued and outstanding at June 30, 2006; liquidation preference
of $250,000 at March 31, 2007 and $6,750,000 at June 30, 2006 245,524 4,941,643
Minority Interest - 156,025
Stockholders' Equity:
Common Stock, $0.002 par value; 25,000,000 shares authorized; 13,793,981 shares
issued at March 31, 2007 and 13,200,961 at June 30, 2006; 13,759,081 shares
outstanding at March 31, 2007 and 13,166,061 at June 30, 2006 27,588 26,402
Additonal paid-in-capital 34,412,180 30,580,604
Accumulated deficit (11,842,171) (9,872,742)
Less: Treasury stock, at cost, 34,900 shares (99,339) (99,339)
---------------- ---------------
Total Stockholders' Equity 22,498,258 20,634,925
---------------- ---------------
Total Liabilities and Stockholders' Equity $ 43,610,180 $ 37,604,864
================ ===============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED MARCH 31, 2007
Total
Common Stock Additional Accumulated Treasury Stock 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 385,800 772 751,959 - - - 752,731
Restricted stock issued in
connection with asset - - -
acquistition 185,000 370 1,092,420 1,092,790
Restricted stock award 22,220 44 167,579 - - - 167,623
Compensation expense for
employee stock options - - 260,218 - - - 260,218
Income tax benefit from exercise
of stock options - - 381,102 - - - 381,102
Dividends paid on Series B
preferred stock - - - (375,220) - - (375,220)
Deemed preferred dividends
from issuance of warrants - - 1,178,298 (1,178,298) - - -
Deemed dividend from
beneficial conversion
feature of Series B
preferred stock - - - (1,803,881) - - (1,803,881)
Net income - - - 1,387,970 - - 1,387,970
----------- -------- ------------- ------------- ------- --------- ------------
Balance, March 31,
2007 (Unaudited) 13,793,981 $ 27,588 $ 34,412,180 $(11,842,171) 34,900 $ (99,339) $22,498,258
=========== ======== ============= ============= ======= ========= ============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended
March 31,
-----------------------------------------
2007 2006
------------------- -------------------
Cash flows from operating activities:
Net income $ 1,387,970 $ 3,314,102
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Depreciation and amortization 938,928 845,482
Deferred income taxes 659,100 (39,000)
Loss on investment in Micro Nutrition, Inc. 171,529 -
Allowance for inventory 37,500 7,500
Allowance for doubtful accounts (recoveries) (22,341) 8,300
Issuance of common stock for consulting services 245,219 43,875
Compensation expense for employee stock options 260,218 316,413
Minority interest (37,590) (139,291)
Changes in assets and liabilities (excludes impact of acquistions):
(Increase) decrease in:
Accounts receivable (1,441,798) (1,731,887)
Inventories (5,780,030) (1,176,623)
Prepaid expenses and other current assets (153,747) (209,954)
Security deposits and other assets (41,183) (49,827)
(Decrease) increase in:
Accounts payable (565,994) 1,217,704
Income taxes payable 336,976 -
Accrued expenses and other liabilities 72,901 (255,708)
------------------- -------------------
Net cash (used in) provided by operating activities (3,932,342) 2,151,086
------------------- -------------------
Cash flows from investing activities:
Purchase of property and equipment (656,263) (167,567)
Purchase of intangible assets (523,026) (436,969)
Cash acquired in asset acquisition 2,569 -
Loss on disposal of investment in Micro Nutrition, Inc. (38,226) -
------------------- -------------------
Net cash used in investing activities (1,214,946) (604,536)
------------------- -------------------
Cash flows from financing activities:
Proceeds from the exercise of stock options 752,731 128,340
Repayments of notes payable-bank (4,497,290) -
Repayments of notes payable-TIS (172,260) -
Proceeds from revolving credit facility 18,000,000 -
Repayments under revolving credit facility (4,500,000) -
Funding of restricted cash under revolving credit facility (2,000,000) -
Redemption of Preferred Stock Series B (6,500,000) -
Dividends paid (375,220) (364,662)
------------------- -------------------
Net cash provided by (used in) financing activities 707,961 (236,322)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents (4,439,327) 1,310,228
Cash and cash equivalents at beginning of period 5,746,836 2,427,553
------------------- -------------------
Cash and cash equivalents at end of period $ 1,307,509 $ 3,737,781
=================== ===================
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 472,734 $ 193,746
=================== ===================
Income taxes $ 203,000 $ 122,914
=================== ===================
Supplemental disclosures of Non-cash transactions:
Deemed dividend from beneficial conversion feature of Series B Preferred stock $ (1,803,881) $ (1,837,143)
=================== ===================
Deemed preferred dividends from issuance of warrants $ (1,178,298) $ -
=================== ===================
Conversion of Series B Preferred Stock to Common Stock $ - $ 250,000
=================== ===================
Restricted stock issued in connection with asset acquisition $ 1,092,790 $ -
=================== ===================
Restricted stock awards $ 167,623 $ 351,000
=================== ===================
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended March 31, 2007 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
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 nine months ended March 31, 2007 and the three month period ended
March 31, 2006, options and warrants to purchase 4,379,518 and 5,623,548 shares
of common stock, respectively, 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 March 31, 2007 and the nine month period ended March 31,
2006, 4,379,518 and 5,623,548 options and warrants to purchase shares of common
stock with exercise prices below average market price were included in the
computation of diluted earnings per share.
During the three and nine months ended March 31, 2007, Convertible Series B
Preferred Stock in the amount of 250,000 common share equivalents 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 three and nine months ended March 31, 2006, 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.
During the three and nine months ended March 31, 2007 and 2006, options and
warrants to purchase 1,629,500 shares of common stock and 1,369,500 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 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.
Note 2. Acquisition
On March 5, 2007, we entered into an Asset Purchase Agreement (the "Agreement")
with our wholly-owned subsidiary Bioscience Technologies, Inc. ("BTI"), BevSpec,
Inc., a Texas corporation ("BevSpec"), the shareholders of BevSpec (the
"Shareholders") and certain other parties (together with the Shareholders, the
"Seller Parties") pursuant to which BTI acquired substantially all of the assets
of BevSpec (the "Transferred Assets") and assumed certain payment obligations of
BevSpec (the "Payment Obligations"). We paid approximately $307,600 to specified
parties to satisfy the Payment Obligations. In addition, we issued 185,000
shares of our common stock (the "Share Consideration") to the Seller Parties.
The Agreement was effective as of February 28, 2007. The Share Consideration is
subject to a twelve-month lock-up and shall be held in escrow for such time to
satisfy any indemnification obligations of the Seller Parties. The Seller
Parties indemnification obligations for any breach of the Seller Parties
representations and warranties in the Agreement are limited to the aggregate
value of the Share Consideration held in escrow. The Seller Parties
representations and warranties shall survive for a period of one year following
the date of the Agreement.
7
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The purchased assets include trademarks, copyrights, trade secrets, artwork,
graphics, marketing materials, formulas for the acquired product lines, labels,
customer lists, websites, goodwill, inventories and certain books and records.
Pursuant to the terms of the Agreement the purchase price for the Transferred
Assets was valued at approximately $1.4 million and was paid with the issuance
of 185,000 shares of the Company's common stock valued at $1.1 million and the
assumption of approximately $342,000 in assumed liabilities and associated costs
of the acquisition. As of March 31, 2007, the Company anticipates that a
substantial portion of the purchase price allocation will be allocated to the
various intangible assets acquired.
The sales for the acquired product lines for the nine months ended March 31,
2007 and 2006, were approximately $160,000 and 170,000, respectively, and were
distributed primarily through grocery store outlets.
Subsequent to the acquisition BTI changed its name to The Organic Beverage
Company.
Note 3. 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 fourth quarter of fiscal 2006.
As of March 31, 2007 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 March 31, 2007 and June 30, 2006 is as follows:
March 31, 2007 June 30, 2006
----------------------------------------- ----------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------ ----------- ------------ ------------ ---------- -----------
Intellectual property $ 2,200,000 $ 424,582 $ 1,775,418 $ 1,850,000 $ 271,667 $ 1,578,333
Trade names and patents 3,293,510 295,735 2,997,775 1,749,135 216,139 1,532,996
Unpatented technology 547,000 210,000 337,000 547,000 179,999 367,001
License agreement 347,000 71,853 275,147 637,467 100,201 537,266
------------ ----------- ------------ ------------ ---------- -----------
Total $ 6,387,510 $ 1,002,170 $ 5,385,340 $ 4,783,602 $ 768,006 $ 4,015,596
============ =========== ============ ============ ========== ===========
During the nine month period ended March 31, 2007, the Company made payments of
$350,000 under its intellectual property agreement with the Center for Molecular
Biotechnology of Fraunhofer USA, Inc. entered into in January 2004, and
subsequent amendments thereto. Amortization expense, recorded on other
intangible assets for the three and nine months ended March 31, 2007 and 2006,
was $97,314 and $87,584, and $284,905 and $235,693, respectively. Amortization
expense is recorded on the straight-line method over periods ranging from 10
years to 20 years. During the nine months ended March 31, 2007, the Company
disposed of license agreements owned by Micro Nutrition, Inc. in the amount of
$239,728 in connection with its disposition of Micro Nutrition, Inc.
8
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $ 154,200
2008 488,000
2009 488,000
2010 488,000
2011 488,000
Thereafter 3,279,140
---------------
Total $ 5,385,340
===============
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 March 31, 2007 and June 30,
2006:
March 31, June 30,
2007 2006
--------------- --------------
Raw materials $ 8,060,678 $ 5,484,485
Work-in-process 1,787,957 1,803,532
Finished goods 6,859,487 3,684,826
--------------- --------------
Total $ 16,708,122 $ 10,972,843
=============== ==============
Note 5. Property and Equipment
Property and equipment consists of the following as of March 31, 2007 and June
30, 2006:
March 31, June 30,
2007 2006
---------------- -----------------
Land and building $ 1,250,000 $ 1,250,000
Leasehold improvements 2,194,881 2,157,321
Machinery and equipment 7,094,662 6,544,096
Transportation equipment 67,847 37,714
---------------- -----------------
10,607,390 9,989,131
Less: Accumulated depreciation
and amortization (6,439,445) (5,815,774)
---------------- -----------------
Total $ 4,167,945 $ 4,173,357
================ =================
Note 6. 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%.
9
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Loan payable-Trade Investment Services was 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 repaid the Note and Loan Payable with proceeds
from a $15.0 million revolving credit facility it secured with a bank. (See Note
7. Revolving Credit Facility.)
Note 7. Revolving Credit Facility and Restricted Cash
On September 1, 2006, the Company entered into a loan agreement with Amalgamated
Bank, (the "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 repaid 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 (See Note 6. Note and Loan Payable). As of March
31, 2007, the Company borrowed net additional funds aggregating $8.5 million
under this facility and as of March 31, 2007 had $13.5 million outstanding under
this facility. In April 2007, the Company entered into a separate $10.0 million
five-year term note with the Bank and extended the maturity date under this
facility to October 31, 2007. See Note 13. Subsequent Event.
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 March 31, 2007, the weighted average interest rate was
6.90% and the Company had accrued and unpaid interest of approximately $126,000.
The facility also has a commitment fee equal to 0.50% per annum calculated on
the unused amount of the facility. As of March 31, 2007, the Company had
approximately $11,100 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.
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 from inception (September 1, 2006) through March 31, 2007.
Note 8. Significant Risks and Uncertainties
(a) Concentrations of Credit Risk-Cash. The Company maintains balances at
several financial institutions. Deposits at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At March 31, 2007, the
Company's uninsured cash balances were approximately $2.8 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 March 31,
2007 and June 30, 2006 is $102,672 and $125,013, respectively.
10
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(c) Major Customers. For the nine months ended March 31, 2007, approximately 28%
or $14.1 million, 27% or $13.6 million and 20.5% or $10.3 million of revenues
were derived from three customers. For the nine months ended March 31, 2006,
approximately 44% or $19.4 million, 24% or $10.6 million and 20% or $8.7 million
of revenues were derived from three customers. For the three months ended March
31, 2007, approximately 28% or $4.6 million, 27.6% or $4.5 million and 19% or
$3.1 million of revenues were derived from three customers. For the three months
ended March 31, 2006, approximately 64% or $9.1 million, 24% or $3.4 million and
8% or $1.2 million of 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 46% of
total accounts receivable at March 31, 2007.
(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 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 32% of 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 9. 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 and nine months ended March 31, 2007 and
2006, on these leases were $193,000 and $226,000 and $550,000 and $547,000,
respectively, and is included in both manufacturing and selling and
administrative expenses.
Other Lease Commitments- The Company leases manufacturing and office facilities
through March 31, 2012. 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. 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. The Company exercised its option to renew
its lease for another five years with minimum monthly rent of $19,673 through
March 31, 2008 with annual increases equal to cost of living adjustments as
defined in the lease. The Company also extended its rights to renew the lease
for an additional five-year period through March 2017. Rent expense, for the
three and nine months ended March 31, 2007 and 2006, was $81,000 and $93,000 and
$265,000 and $290,000, respectively and is included in manufacturing expenses.
11
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company leases warehouse and office facilities through March 31, 2007. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. The Company extended this lease through May 2007 and entered into a
new lease which provides for a minimum monthly rental of $15,500 for warehouse
and office space of 39,038 square feet through August 2012. 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 $17,000 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, Commitments Commitments Total
------------------- --------------- --------------- --------------
2007, remaining $ 206,300 $ 80,900 $ 287,200
2008 839,000 323,600 1,162,600
2009 801,600 323,600 1,125,200
2010 657,700 323,600 981,300
2011 627,300 323,600 950,900
Thereafter 748,200 1,267,100 2,015,300
--------------- --------------- --------------
Total $ 3,880,100 $ 2,642,400 $ 6,522,500
--------------- --------------- --------------
Total rent expense, including real estate taxes and maintenance charges, was
approximately $408,000 and $399,000 and $1.2 million and $1.3 million for the
three and nine months ended March 31, 2007 and 2006, 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 $3.2 million for certain technology
developed by Fraunhofer USA, Inc. over a five-year period. As of March 31, 2007
and June 30, 2006, $2.2 million and $1.9 million, respectively have 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
filed a notice of appeal of that decision. On April 17, 2007, the Supreme Court,
Appellate Division, First Department dismissed Plaintiffs' appeal for failure to
perfect. 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.
12
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 10. 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. Effective
January 1, 2007 this agreement was modified to provide for $1,200 per month. The
total consulting expense recorded per this verbal agreement for the three months
and nine months March 31, 2007 and 2006 was $3,600 and $10,200 and $3,300 and
$9,900, respectively. The Company has another consulting agreement with EVJ,
LLC, a limited liability company controlled by Robert Kay, a director of the
Company, the Chairman of its subsidiary, InB: Paxis, and a brother of E. Gerald
Kay and Eugene Kay. This agreement was assumed by and became a liability of the
Company as a part of the Company's acquisition of Paxis Pharmaceuticals Inc. in
fiscal year ended June 30, 2004. The total consulting expense under this
agreement was $30,000 for the three months ended March 31, 2007 and 2006 and
$90,000 for the nine months ended March 31, 2007 and 2006.
Note 11. Equity Transactions
(a) Stock Option Plan and Warrants - On February 7, 2007, the Company granted
124,000 incentive stock options for a period of ten years, vesting over three
years, at an exercise price equal to the market price ranging from $6.80 to
$7.48. The Company did not grant any stock options in the three month period
ended March 31, 2006.
Additionally, on February 7, 2007, the Company granted Restricted Stock Unit
Awards ("RSU") representing 341,647 shares of the Company's common stock. The
RSUs vest equally over a three-year period on their vesting anniversary date and
are subject to forfeiture and were valued at $6.80 each.
(b) Restricted Stock Award - On August 3, 2006, the Company entered into a
separate one-year financial services agreement with a financial advisor 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 March 31, 2007, the Company issued 22,220 shares of its common stock under
this agreement. This Agreement was terminated in January 2007.
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.
(c) Series B Redeemable Convertible Preferred Stock - 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, resulted in additional
non-cash dividends on the Preferred Stock of approximately $1.2 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. These remaining shares were redeemed for $250,000.
13
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 12. 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 Mexico and Europe, for the three and nine
months ended March 31, 2007 and 2006, were $2.2 million and $3.3 million and
$10.7 million and $7.6 million, respectively.
14
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Financial information relating to, the three and nine months ended March 31,
2007 and 2006, operations by business segment is as follows:
For the Three Months Ended
March 31,
---------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------ -------------------------------------------------------
Nutra- Pharma- Biotech- Nutra- Pharma- Biotech-
ceuticals ceuticals nologies Total ceuticals ceuticals nologies Total
------------- ------------ ---------- ------------ ------------- ------------ ---------- -----------
Sales, net
U.S. customers $ 13,044,807 $ 846,999 $ 309,435 $ 14,201,241 $ 9,001,556 $ 600,199 $ 5,071 $ 9,606,826
International
customers 1,843,477 380,954 - 2,224,431 3,310,934 18,332 - 3,329,266
------------- ------------ ---------- ------------ ------------- ------------ ---------- -----------
Total Sales, net $ 14,888,284 $ 1,227,953 $ 309,435 $ 16,425,672 $ 12,312,490 $ 618,531 $ 5,071 $12,936,092
============= ============ ========== ============ ============= ============ ========== ===========
Segment operating
profit (loss) $ 1,550,289 $ (837,441) $(183,065) $ 529,783 $ 1,409,165 $ (983,661) $(357,869) $ 67,635
============= ============ ========== ============ ============= ============ ========== ===========
Depreciation $ 90,375 $ 122,048 $ 148 $ 212,571 $ 116,421 $ 117,183 $ - $ 233,604
============= ============ ========== ============ ============= ============ ========== ===========
Capital
expenditures $ 237,216 $ 46,173 $ 8,850 $ 292,239 $ 72,728 $ 6,977 $ - $ 79,705
============= ============ ========== ============ ============= ============ ========== ===========
For the Nine Months Ended
March 31,
---------------------------------------------------------------------------------------------------------------
2007 2006
------------------------------------------------------ -------------------------------------------------------
Nutra- Pharma- Biotech- Nutra- Pharma- Biotech-
ceuticals ceuticals nologies Total ceuticals ceuticals nologies Total
------------- ------------ ---------- ------------ ------------- ------------ ---------- -----------
Sales, net
U.S. customers $ 35,466,080 $ 3,364,143 $ 664,321 $ 39,494,544 $ 31,070,527 $ 2,023,203 $ 14,042 $33,107,772
International
customers 9,786,695 907,751 - 10,694,446 7,537,465 46,256 - 7,583,721
------------- ------------ ---------- ------------ ------------- ------------ ---------- -----------
Total Sales, net $ 45,252,775 $ 4,271,894 $ 664,321 $ 50,188,990 $ 38,607,992 $ 2,069,459 $ 14,042 $40,691,493
============= ============ ========== ============ ============= ============ ========== ===========
Segment operating
profit (loss) $ 5,805,214 $(2,085,907) $(802,223) $ 2,917,084 $ 7,482,407 $(3,422,502) $(642,555) $ 3,417,350
============= ============ ========== ============ ============= ============ ========== ===========
Depreciation $ 291,359 $ 362,518 $ 148 $ 654,025 $ 262,864 $ 346,925 $ - $ 609,789
============= ============ ========== ============ ============= ============ ========== ===========
Capital
expenditures $ 558,567 $ 88,846 $ 8,850 $ 656,263 $ 128,226 $ 39,341 $ - $ 167,567
============= ============ ========== ============ ============= ============ ========== ===========
As of March 31, As of June 30,
------------------------------------------------------ -------------------------------------------------------
2007 2006
------------------------------------------------------ -------------------------------------------------------
Total Assets $ 34,051,523 $ 7,169,523 $2,389,134 $ 43,610,180 $ 29,911,297 $ 5,868,804 $1,824,763 $37,604,864
============= ============ ========== ============ ============= ============ ========== ===========
Note 13. Subsequent Event
On April 3, 2007, we entered into a loan agreement with Amalgamated Bank. The
loan agreement provides for a five-year secured term credit facility in the
amount of $10.0 million. Borrowings under the facility were used to refinance
$5,000,000 under our existing $15.0 million revolving credit facility with
Amalgamated Bank and the balance for working capital purposes. The initial
interest rate on borrowings under the term facility is equal to 3.00% 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 $1.0
million semi-annual payments beginning October 4, 2007. The facility is secured
by a first priority lien on our accounts receivable, equipment, inventory and
deposit accounts. The obligations under the term credit facility are also
guaranteed by each of our current and future subsidiaries.
15
INTEGRATED BIOPHARMA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The term credit facility contains the same covenants under our $15.0 million
revolving credit facility which restrict our ability to, among other things: (1)
incur or guarantee additional debt; (2) make any investments (other than in the
ordinary course); (3) engage in any asset sales or dispose of any assets (other
than in the ordinary course); (4) engage in transactions with affiliates; (5)
incur liens; and (6) declare or pay dividends. The credit facility also requires
us not to exceed a maximum total leverage ratio, to maintain a minimum
consolidated EBITDA, to maintain a minimum fixed charge coverage ratio and to
maintain minimum deposit balances 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.
Concurrently, the Company agreed with Amalgamated Bank to amend the term note
and loan agreement associated with the $15.0 million revolving credit facility
to, among other things, extend the maturity date of the facility to October 31,
2007.
16
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 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 for the year ended June 30, 2006.
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.
17
We performed a sensitivity analysis to determine the impact of fluctuations in
our estimates for our allowance for doubtful accounts. As of March 31, 2007 the
allowance was $102,672. If this number were in error by plus or minus one
percent of the account receivable balance, the impact would be an additional
$73,000 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. 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.
We performed a sensitivity analysis to determine the impact of fluctuations in
our estimates for inventory allowances. As of March 31, 2007 the allowance was
$37,500. If this number were in error by plus or minus one percent of the total
inventory balance, the impact would be an additional expense of $167,500.
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.
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.
18
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 For the nine months
ended March 31, ended March 31,
--------------------------------- -----------------------------
2007 2006 2007 2006
---------------- ------------- ------------- -------------
Sales, net 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales 70.1% 66.8% 68.1% 64.1%
Selling and administrative 26.6% 32.7% 26.1% 27.5%
---------------- ------------- ------------- -------------
96.8% 99.5% 94.2% 91.6%
---------------- ------------- ------------- -------------
Income from operations 3.2% 0.5% 5.8% 8.4%
---------------- ------------- ------------- -------------
Other income (expense):
Interest expense (1.3%) (0.6%) (1.0%) (0.5%)
Other income 0.0% 0.1% 0.1% 0.1%
Interest and investment income 0.1% 0.1% 0.2% 0.0%
---------------- ------------- ------------- -------------
(1.2%) (0.4%) (0.7%) (0.4%)
---------------- ------------- ------------- -------------
Income before income taxes 2.0% 0.1% 5.1% 8.0%
Federal and state income taxes 1.4% 0.2% 2.4% 0.2%
---------------- ------------- ------------- -------------
Income (loss) before minority interest 0.7% (0.1%) 2.7% 7.8%
Minority interest - 0.2% 0.1% 0.3%
---------------- ------------- ------------- -------------
Net income 0.7% 0.1% 2.8% 8.1%
Deemed dividend from beneficial conversion
feature of Series B Preferred Stock (0.1%) (5.2%) (3.6%) (4.5%)
Series B Preferred Stock dividend (0.0%) (0.9%) (3.1%) (0.9%)
---------------- ------------- ------------- -------------
Net income (loss) allocable to common
shareholders 0.5% (6.0%) (3.9%) 2.7%
================ ============= ============= =============
19
For the nine month period ended March 31, 2007 compared to the nine month period
ended March 31, 2006
Sales, net. Sales, net, for the nine months ended March 31, 2007 and 2006 were
$50.2 million and $40.7 million, respectively, an increase of $9.5 million or
23.3%. The increase is comprised of the following:
Nine months ended Dollar Increase Percentage
March 31, (Decrease) Change
------------------------------------- ------------------ --------------
2007 2006 2007 vs 2006 2007 vs 2006
----------------- ---------------- ------------------ --------------
Nutraceutical - US Customers $ 35,466,080 $ 31,070,527 $ 4,395,553 14.1%
Nutraceutical - International Customers 9,786,695 7,537,465 2,249,230 29.8%
----------------- ---------------- ------------------ --------------
Total Nutraceutical 45,252,775 38,607,992 6,644,783 17.2%
----------------- ---------------- ------------------ --------------
Pharmaceutical - US Customers 3,364,143 2,023,203 1,340,940 66.3%
Pharmaceutical - International Customers 907,751 46,256 861,495 N/M
----------------- ---------------- ------------------ --------------
Total Pharmaceutical 4,271,894 2,069,459 2,202,435 106.4%
----------------- ---------------- ------------------ --------------
Biotechnologies 664,321 14,042 650,279 N/M
----------------- ---------------- ------------------ --------------
Total $ 50,188,990 $ 40,691,493 $ 9,497,497 23.3%
================= ================ ================== ==============
---------------------------------
N/M = not meaningful
This increase is primarily the result of an increase in our Nutraceutical
Segment sales of approximately 17.2% or $6.6 million. Our international sales
increased by $2.2 million, representing 33.8% of the increased sales in our
Nutraceutical Segment, as a result of increased sales to Mexico from our
contract manufacturing business. Our sales to US Customers increased in our
Nutraceuticals Segment by $4.4 million and is offset, in part, by an increase in
our promotional advertising cost of $2.8 million, from $2.9 million in the nine
months ended March 31, 2006 to $5.7 million in the nine months ended March 31,
2007, absent these advertising costs, sales to US Customers increased by $6.3
million or 18.1%. Promotional advertising consists of participation in strategic
product placement programs, offering manufacturing coupons at point of sale and
other sales incentives in order to increase our brand awareness and increased
sales in the distribution outlets where our products are sold.
Pharmaceuticals sales for the nine months ended March 31, 2007 were $4.3 million
compared to $2.1 million for the comparable period. This increase is primarily
due to increased sales of approximately $331,000 of our API in the nine months
ended March 31, 2007 compared to the nine months ended March 31, 2006.
Additionally, our CRO business had increased sales of approximately $1.9 million
in the nine months ended March 31, 2007 compared to the nine months ended March
31, 2006. These increased sales are a result of the Segment implementing its
sales and marketing strategy that it adopted in the fiscal year ended June 30,
2006.
Our Biotechnologies Segment did not significantly contribute to our net sales
and gross profits in the nine month periods ended March 31, 2007 and 2006.
For the nine months ended March 31, 2007, approximately 76% of revenues were
derived from three customers as compared 88% of revenues for the nine months
ended March 31, 2006. The loss of any of these customers would have an adverse
affect on our operations. We continue to expand our customer base by expanding
from selling our propriety branded nutraceutical products primarily to "club"
stores to the retail sales segment and expanding our sales in the international
market.
Cost of sales. Cost of sales increased to $34.2 million for the nine months
ended March 31, 2007 as compared to $26.1 million for the nine months ended
March 31, 2006. Cost of sales increased as a percentage of sales to 68% for the
nine months ended March 31, 2007 as compared to 64% for the nine months ended
March 31, 2006. The increase of approximately four percent (4.0%) in our cost of
sales is primarily a result of our increased promotional advertising costs of
$2.8 million in the nine months ended March 31, 2007 to $5.7 million from $2.9
million in the nine months ended March 31, 2006, which are netted against sales.
If these advertising costs were not netted in sales, our costs of sales as a
percentage of sales, as adjusted, would have been 61.1% for the nine months
ended March 31, 2007 compared to 59.8% for the nine months ended March 31, 2006.
20
Selling and Administrative Expenses. Selling and administrative expenses were
$13.1 million for the nine months ended March 31, 2007, an increase of $1.9
million or 17.2% as compared with $11.2 million for the nine months ended March
31, 2006. As a percentage of sales, net, selling and administrative expenses
were 26.1% for the nine months ended March 31, 2007 and 27.5% for the prior
comparable period. A tabular presentation of the changes in selling and
administrative expenses is as follows:
Nine months ended Dollar Increase Percentage
March 31, (Decrease) Change
----------------------------------- --------------- ---------------
2007 2006 2007 vs 2006 2007 vs 2006
---------------- ---------------- --------------- ---------------
Salaries and employee benefits $ 3,150,607 $ 2,713,960 436,647 16.1%
Advertising 2,695,646 1,789,979 905,667 50.6%
Consulting and other professional fees 1,102,789 1,131,799 (29,010) (2.6%)
Indirect expenses 946,132 880,319 65,813 7.5%
Commissions 903,995 707,408 196,587 27.8%
Depreciation & Amortization 523,250 459,683 63,567 13.8%
Insurance 498,486 444,458 54,028 12.2%
Marketing 476,099 73,161 402,938 550.8%
Auto, Travel & Entertainment 471,694 568,248 (96,554) (17.0%)
Office 322,361 415,398 (93,037) (22.4%)
Office Rent 316,910 440,637 (123,727) (28.1%)
Compensation expense for
employee stock options 260,218 316,413 (56,195) (17.8%)
Research & Development 224,071 244,477 (20,406) (8.3%)
Loss on investment in Micro Nutrition, Inc. 171,529 - 171,529 100.0%
Other 1,046,390 1,000,971 45,419 4.5%
---------------- ---------------- --------------- ---------------
Total $ 13,110,177 $ 11,186,911 $ 1,923,266 17.2%
================ ================ =============== ===============
Salaries and employee benefits increased approximately $437,000 in the nine
months ended March 31, 2007 or 16.1% primarily as a result of hiring an investor
relations officer at the end of our fiscal year ended June 30, 2006. In addition
to his base salary, in the nine months ended March 31, 2007, this employee
earned a performance retention bonuses based on a transaction which occurred in
the nine months ended March 31, 2007, his combined compensation was
approximately $300,000 with no comparable expense in the nine months ended March
31, 2006. The balance of the increase of $137,000 represents a 5.0% increase
over salaries and employee benefits in the nine months ended March 31, 2006 as a
result of net new employees and general salary increases.
Advertising expense increased approximately $906,000 or 50.6% in the nine months
ended March 31, 2007 as part of our marketing plan to increase advertising to
support our proprietary branded nutraceutical products. We spent $1.5 million in
media advertisements such as radio, in store commercials, magazines and
newspaper ads in the nine months ended March 31, 2007 compared to $721,700 in
the comparable prior period, an increase of 756,200, and increased other trade
advertising expenses by $149,500.
We also incurred additional marketing expenses of $403,000 in the nine months
ended March 31, 2007 on the design and printing of new marketing materials used
in the general marketing of our products as compared to the nine months ended
March 31, 2006.
Commissions increased approximately $196,600 or 27.8%. Commissions as a
percentage of sales that commissions are owed was 3.4% of such sales in the nine
months ended March 31, 2007 compared to 2.8% of such sales in the nine months
ended March 31, 2006. Our commission payout rates range from three to five
percent of qualifying sales. The increase in the payout rate from the nine
months ended March 31, 2006 to the nine months ended March 31, 2007 is a result
of an increase in sales qualifying for a five percent commission payment.
21
Other expense, net. Other expense, net was $372,600 for the nine months ended
March 31, 2007 as compared to $146,700 for the comparable period a year ago. The
increase of $225,800 was primarily attributable to an increase in interest
expense of $303,500 due to the increase in the amount of the debt outstanding,
offset in part, by an increase in interest and other income of approximately
$77,700.
Federal and state income tax, net. Federal and state income tax increased from
$95,800 in the nine months ended March 31, 2006 to $1.2 million in the nine
months ended March 31, 2007. Our effective tax rate increased from 2.9% to
46.9%. The dollar amount increase and the increase in our effective tax rates
are primarily a result of having deferred and current federal tax expense of
approximately $721,000 in the nine months ended March 31, 2007 with a deferred
federal tax benefit of $39,000 in the nine months ended March 31, 2006, a
difference of $760,000 in our federal tax provision. Secondarily our federal and
state income taxes, net increased as a result of state taxes of approximately
$340,000 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 in the nine month period ended March 31, 2007.
Net income. The Company's net income for the nine months ended March 31, 2007
was $1.4 million as compared to net income of $3.3 million for the nine months
ended March 31, 2006. This decrease in net income of approximately $1.9 million
is primarily the result of an increase in selling and administrative expenses of
$1.9 million, an increase in other expense of approximately $225,800, and an
increase in federal and state income taxes of approximately $1.1 million offset
by an increase in gross profit of approximately $1.4 million.
For the three month period ended March 31, 2007 compared to the three month
period ended March 31, 2006
Sales, net. Sales, net, for the quarter ended March 31, 2007 and 2006 were $16.4
million and $12.9 million, respectively, an increase of $3.5 million or 27.0%.
The increase is comprised of the following:
Three months ended Dollar Increase Percentage
March 31, (Decrease) Change
------------------------------------ ---------------- -------------
2007 2006 2007 vs 2006 2007 vs 2006
---------------- ---------------- ---------------- -------------
Nutraceutical - US Customers $ 13,044,807 $ 9,881,691 $ 3,163,116 32.0%
Nutraceutical - International Customers 1,843,477 2,430,799 (587,322) (24.2%)
---------------- ---------------- ---------------- -------------
Total Nutraceutical 14,888,284 12,312,490 2,575,794 20.9%
---------------- ---------------- ---------------- -------------
Pharmaceutical - US Customers 846,999 600,199 246,800 41.1%
Pharmaceutical - International Customers 380,954 18,332 362,622 N/M
---------------- ---------------- ---------------- -------------
Total Pharmaceutical 1,227,953 618,531 609,422 98.5%
---------------- ---------------- ---------------- -------------
Biotechnologies 309,435 5,071 304,364 N/M
---------------- ---------------- ---------------- -------------
Total $ 16,425,672 $ 12,936,092 $ 3,489,580 27.0%
================ ================ ================ =============
---------------------------------
N/M = not meaningful
This increase is primarily the result of an increase in our Nutraceutical
Segment sales of approximately $2.6 million or 20.9%. Our sales to US Customers
increased in our Nutraceutical Segment by $3.2 million and is offset, in part,
by an increase in our promotional advertising expenses of $856,000, from
$713,000 in the three months ended March 31, 2006 to $1.6 million in the three
months ended March 31, 2007, absent these advertising costs, sales to US
Customers increased by $4.0 million or 37.9%. Our international sales decreased
by $587,000 as a result of a shift in sales orders from our major customer in
our contract manufacturing business from international to US shipping
destinations.
Pharmaceuticals sales for the three months ended March 31, 2007 were $1.2
million compared to $618,500 for the comparable period. This increase is
primarily due to increased sales of approximately $609,400 in the quarter ended
March 31, 2007 compared to the quarter ended March 31, 2006 in our CRO business.
These increased sales are a result of the Segment implementing its sales and
marketing strategy that was adopted in the fiscal year ended June 30, 2006.
22
Our Biotechnologies Segment did not significantly contribute to our net sales
and gross profits in the quarters ended March 31, 2007 and 2006.
For the three months ended March 31, 2007, approximately 75% of revenues were
derived from three customers as compared 94% of revenues for the three months
ended March 31, 2006. The loss of any of these customers would have an adverse
affect on the Company's operations. We continue to expand our customer base by
expanding from selling our propriety branded nutraceutical products primarily to
"club" stores to the retail sales segment and expanding our sales in the
international market.
Cost of sales. Cost of sales increased to $11.5 million for the three months
ended March 31, 2007 as compared to $8.6 million for the three months ended
March 31, 2006. Cost of sales increased as a percentage of sales to 70.1% for
the three months ended March 31, 2007 as compared to 66.8% for the three months
ended March 31, 2006. The increase of approximately three percent (3.3%) in cost
of sales is primarily a result of our increased promotional advertising costs of
$856,000 in the three months ended March 31, 2007 to $1.6 million from 713,000
in the three months ended March 31, 2006, which are netted against sales. If
these advertising costs were not netted in sales, our costs of sales as a
percentage of sales, as adjusted, would have been 64.0% for the three months
ended March 31, 2007 compared to 63.8% for the three months ended March 31,
2006.
Selling and Administrative Expenses. Selling and administrative expenses were
$4.4 million for the three months ended March 31, 2007, an increase of $150,600
or 3.6% as compared with $4.2 million for the three months ended March 31, 2006.
As a percentage of sales, net, selling and administrative expenses were 26.6%
for the three months ended March 31, 2007 and 32.7% 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
March 31, (Decrease) Change
--------------------------------- ---------------- ---------------
2007 2006 2007 vs 2006 2007 vs 2006
--------------- --------------- ---------------- ---------------
Advertising $ 1,224,041 $ 747,426 $ 476,615 63.8%
Salaries and employee benefits 1,099,980 997,727 102,253 10.2%
Commissions 340,141 192,428 147,713 76.8%
Consulting and other professional fees 328,628 320,563 8,065 2.5%
Indirect expenses 283,494 341,887 (58,393) (17.1%)
Marketing 212,692 21,247 191,445 901.0%
Depreciation & Amortization 165,147 163,300 1,847 1.1%
Insurance 124,374 111,785 12,589 11.3%
Auto, Travel & Entertainment 114,879 225,728 (110,849) (49.1%)
Compensation expense for
employee stock options 111,504 94,799 16,705 17.6%
Research & Development 148 229,969 (229,821) (99.9%)
Other 371,136 778,800 (407,664) (52.3%)
--------------- --------------- ---------------- ---------------
Total $ 4,376,164 $ 4,225,659 $ 150,505 3.6%
=============== =============== ================ ===============
Advertising expense increased approximately $476,600 or 63.8% in the three
months ended March 31, 2007 as part of our marketing plan to increase
advertising to support our proprietary branded nutraceutical products. We spent
$681,200 in media advertisements such as radio, in store commercials, magazines
and newspaper ads in the three months ended March 31, 2007 compared to $263,200
the comparable prior period, an increase of $418,000, and increased other trade
advertising expenses by $58,600.
We also incurred additional marketing expenses of $191,500 in the three months
ended March 31, 2007 on the design and printing of new marketing materials used
in the general marketing of our products as compared to the three months ended
March 31, 2006.
Salaries and employee benefits increased approximately $102,000 in the three
months ended March 31, 2007 or 10.2% as a result of net new employees and
general salary increases which was offset in part by the absence of bonuses of
approximately $75,000, which were paid in the three months ended March 31, 2006
in our Pharmaceuticals segment.
23
Commissions increased approximately $147,700 or 76.8%. Commissions as a
percentage of sales that commissions are owed was 3.4% of such sales in the
three months ended March 31, 2007 compared to 2.5% of such sales in the three
months ended March 31, 2006. Our commission payout rates range from three to
five percent of qualifying sales. The increase in the payout rate from the three
months ended March 31, 2006 to the three months ended March 31, 2007 is a result
of an increase in sales qualifying for a five percent commission payment.
Research and Development costs decreased approximately $229,800 in the three
months ended March 31, 2007 to $148 from $230,000 in the comparable 2006 period
as a result of reaching milestones established in our research agreement with
Fraunhofer, which triggered payments of $200,000 in the 2006 period.
Other expense, net. Other expense, net was $179,000 for the three months ended
March 31, 2007 as compared to $50,000 for the comparable period a year ago. The
increase of $129,000 was primarily attributable to an increase in interest
expense of $141,000 due to the increase in the amount of the debt outstanding,
offset in part, by an increase in interest and other income of approximately
$12,000.
Federal and state income tax, net. Federal and state income tax increased from
$30,200 in the three months ended March 31, 2006 to $228,500 in the three months
ended March 31, 2007. Our effective tax rate for the three month period ended
March 31, 2007 was 65%. The dollar amount increase in our federal and state
income taxes are primarily a result of increased state taxes of approximately
$95,200 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 March 31,
2007, we had deferred federal tax expense of approximately $133,300 with a
federal tax benefit in the three months ended March 31, 2006 of $9,000, a
federal tax expense difference of $142,300.
Net income. The Company's net income for the three months ended March 31, 2007
was $122,000 as compared to net income of $9,500 for the three months ended
March 31, 2006. This increase in net income of approximately $112,500 is
primarily the result of an increase in gross profit of approximately $613,000,
offset by increases in selling and administrative expenses of $150,600 increases
in other expense of approximately $129,000, and an increase in federal and state
income taxes of approximately $198,000.
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 October 31, 2007 with a one-year renewal option
available at the lender's option and a $10.0 million five-year term note entered
into in April 2007. 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 less than $1,000 for the remainder of fiscal 2007 and none
thereafter as the shares were redeemed for $250,000 in the quarter ending June
30, 2007.
24
The following table sets forth, for the periods indicated, the Company's net
cash flows used in operating, investing and financing activities, its period end
cash and cash equivalents and other operating measures:
For the Nine months ended
March 31,
---------------------------------------
2007 2006
---------------- -----------------
Net cash (used in) provided by operating acitivites $ (3,932,342) $ 2,151,086
================ =================
Net cash used in investing acitivites $ (1,214,946) $ (604,536)
================ =================
Net cash provided by (used in) financing acitivites $ 707,961 $ (236,322)
================ =================
Cash and cash equivalents at end of period $ 1,307,509 $ 3,737,781
================ =================
Days sales in inventory 49 74
================ =================
Inventory turnover 7.4 4.9
================ =================
At March 31, 2007, the Company's working capital was $11.1 million, a decrease
of $4.0 million over working capital at June 30, 2006 of $15.1 million. Cash and
cash equivalents were $1.3 million at March 31, 2007, a decrease of $4.4 million
from June 30, 2006. The Company used $3.9 million and provided $2.2 million of
net cash from operations for the nine months ended March 31, 2007 and 2006,
respectively. The primary reason for the increase in cash used in operating
activities of $6.1 million is the increase in cash used in inventories. Our
inventory levels increased by $5.7 million in the nine months ended March 31,
2007 based on our increased sales orders for future shipments, including
additional raw materials for new products. The Company believes that anticipated
sales for next year, current cash balances, its revolving credit facility and
its five-year term note should meet its cash needs for operations for the
remainder of fiscal 2007 and into fiscal 2008.
The Company utilized $1.2 million and $604,500 of cash in investing activities
for the nine months ended March 31, 2007 and 2006, respectively. The Company
provided for net cash of $708,000 and utilized $236,300 of cash from financing
activities for the nine months ended March 31, 2007 and 2006, respectively. The
net cash provided by financing activities of 708,000 was primarily the result of
net borrowings of $13.5 million under its revolving credit facility offset, in
part by the paydown of notes payable ($4.7 million), early redemption of 650
shares of our Series B Preferred stock ($6.5 million) and 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 March 31, 2007 for long term
non-cancelable leases of approximately $1.2 million consists of obligations
under operating leases for facilities and lease agreements for the rental of
warehouse equipment, office equipment and automobiles.
The Company believes its sources of cash will be sufficient to fund its
operations and meet its cash requirements to satisfy its working capital needs,
capital expenditure needs, outstanding commitments, and other liquidity
requirements associated with its existing operations over the next twelve
months. The Company's ability to fund these requirements will depend on its
future operations, performance and cash flow and is subject to prevailing
economic conditions and financial, business and other factors, some of which are
beyond the Company's control. In addition, as part of the Company's strategy, it
may pursue acquisitions and investments that are complementary to its business.
Any material future acquisitions or investments will likely require additional
capital and therefore, the Company cannot predict or assure that additional
funds from existing sources will be sufficient for such future events.
25
Capital Expenditures
The Company's capital expenditures for the nine months ended March 31, 2007 and
2006 were $656,300 and $167,600, respectively and was primarily attributable to
the purchase of machines and equipment in our Nutraceutical segment.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements - refer to footnote 1 of the condensed
consolidated financial statements for the nine months ended
March 31, 2007 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 in
interest rates relating to our outstanding variable debt. If interest rates
varied by plus or minus one percent our income before taxes would be higher or
lower in the amount of $135,000 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.
26
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 filed a notice of
appeal of that decision. On April 17, 2007, the Supreme Court, Appellate
Division, First Department dismissed Plaintiffs' appeal for failure to perfect.
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.
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
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
27
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.
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: May 9, 2007 By: /s/ E. Gerald Kay
----------------------
E. Gerald Kay
Chief Executive Officer
Date: May 9, 2007 By: /s/ Dina L. Masi
--------------------
Dina L. Masi
Senior Vice President & Chief Financial Officer
29