Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
____________________
FORM
10-K
____________________
x ANNUAL
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Fiscal Year Ended June 30, 2006
o TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
Commission
File Number 0-22710
INTERPHARM
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-3673965
|
(State
or other jurisdiction of
corporation or organization)
|
|
(IRS.
Employer Identification
Number)
|
|
|
|
75
Adams Avenue Hauppauge, New York
|
|
11788
|
(Address
of principal executive
offices)
|
|
(Zip
Code)
|
Issuer’s
telephone number, including area code (631)
952-0214
Securities
registered pursuant to Section 12(b) of the Act: Common
Stock $.01 par value
Securities
registered pursuant to Section 12(g) of the Act: Series
A
Preferred Stock $.01 par value
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirement
for
the past 90 days.
YES
x
NO
o
Indicate
by check mark if disclosure of delinquent filer pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this
Form 10-K.
YES
o
NO x
Indicate
by check mark whether the registrant is an accelerated filer (as defined in
Rule
12b-2 of the Act.)
YES
o
NO x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act.)
YES
o
NO x
On
December 31, 2005, the aggregate market value of the voting common equity of
Interpharm Holdings, Inc., held by non-affiliates of the Registrant was
$17,151,803 based on the closing price of $1.24 for such common stock on said
date as reported by the American Stock Exchange.
On
September 27, 2006, we had 64,609,554 shares of common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Certain
information required by Part III (Items 10, 11, 12, and 14) is incorporated
by
reference to the Registrant's definitive proxy statement (the "2006 Proxy
Statement") in connection with its 2006 annual meeting of stockholders, which
is
to be filed with the Securities and Exchange Commission pursuant to Regulation
14A of the Securities Exchange Act of 1934.
INTERPHARM
HOLDINGS, INC.
Form
10-K
Fiscal
Year Ended June 30, 2006
Table
of Contents
PART
I
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|
Page
|
Item
1.
|
Business
|
1
|
Item
1A
|
Risk
Factors
|
13
|
Item
1 B
|
Unresolved
Staff Comments
|
21
|
Item
2.
|
Properties
|
21
|
Item
3.
|
Legal
Proceedings
|
22
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
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22
|
|
|
|
PART
II
|
|
|
|
|
|
Item
5.
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Market
for Common Stock and Related Stockholder Matters
|
23
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Item
6.
|
Selected
Financial Data
|
28
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
28
|
Item
7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
54
|
Item
8.
|
Financial
Statements and Supplementary Data
|
54
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosures
|
55
|
Item
9A.
|
Controls
and Procedures
|
55
|
Item
9B
|
Other
Information
|
55
|
|
|
|
PART
III
|
|
|
|
|
|
Item
10.
|
Directors
and Executive Officers of the Registrant.
|
56
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Item
11.
|
Executive
Compensation
|
56
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
56
|
Item
13.
|
Certain
Relationships and Related Transactions
|
56
|
|
|
|
Item
14.
|
Principal
Accounting Fees and Services
|
57
|
Item
15.
|
Exhibits,
Financial Statement Schedules and Reports on Form 8-K
|
57
|
|
|
|
Signatures
|
|
59
|
Financial
Statements
|
F-1
|
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
Certain
statements in this Report, and the documents incorporated by reference herein,
constitute "forward-looking statements" within the meaning of Section 27A of
the
Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934
and
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause deviations in actual results, performance or achievements to
be
materially different from any future results, performance or achievements
expressed or implied. Such factors include but are not limited to: the
difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market
our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange
Commission.
The
words
"believe, expect, anticipate, intend and plan" and similar expressions identify
forward-looking statements. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance
on
these forward-looking statements, which speak only as of the date the statement
was made.
PART
I
ITEM
1. - BUSINESS
Company
History
Interpharm
Holdings, Inc., (the "Company" or "Interpharm"), through its operating
wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively
with Interpharm, "we" or "us") has been engaged in the business of developing,
manufacturing and marketing generic prescription strength and over-the-counter
pharmaceuticals since 1984.
We
currently make sales both under our own label and to wholesalers, distributors,
repackagers, and other manufacturers which sell our products under their labels.
We currently manufacture and market 23 generic products, which represent various
oral dosage strengths for 11 unique products. Of these, we hold eight
Abbreviated New Drug Applications ("ANDA") for sixteen of these products. The
remaining products are manufactured under an over-the-counter monograph or
are
products which do not otherwise require ANDAs.
While
we
have, in the past, contract manufactured for other pharmaceutical companies,
during the fiscal year ended June 30, 2006, we significantly decreased contract
manufacturing to focus on expanding our business, diversifying our product
mix
and manufacturing and marketing higher margin products.
Our
Business and Expansion Plan
In
our
current phase of expansion, we are continuing the process of transforming the
Company into a full service generic pharmaceuticals provider and increasing
our
line of products, revenues and gross margins. During the fiscal year ended
June
30, 2006, we have increased our revenues by $23.4 million over the prior year
and $12.3 million of that growth is the result of the addition of new products
to our line. During the fiscal year ended June 30, 2006, our gross margins
were
27.5%, as compared to 22.7% during the prior year. This growth in gross margins
was attributable principally to our addition of new and higher margin products
to our line. We anticipate our trend of increasing gross margins to continue
in
fiscal 2007.
The
most
critical component of our expansion plan is the continued investment in research
and development to continue to add new products to our product portfolio. Over
the past two fiscal years, we have spent a total of $14.67 million on research
and development with $10.67 million spent during the fiscal year ended June
30,
2006 and $3.67 million during the quarter ended June 30, 2006 alone. During
the
fiscal year ended June 30, 2006, we moved a majority of our research and
development efforts to our new facility in Yaphank, New York, providing room
for
further expansion. During fiscal 2007, we anticipate further increases in
research and development expenditures. While these increasing expenditures
have
resulted in net losses, and without them we are otherwise profitable, we believe
that they will result in additional successful products, increasing revenues
and
profits in the future.
Another
critical component of our plan is an emphasis on sales. During fiscal 2006,
our
sales and marketing personnel focused on increasing sales of our existing
products and diversifying our customer base. These efforts have resulted in
an
$11.1 million increase in revenues from existing products for the fiscal year
ended June 30, 2005. Our sales strategy is continuing to shift to a direct
sales
mode whereby we will independently market our products to a broad base of
customers including, major chains, wholesalers, distributors, managed care
entities and government agencies without relying on outside parties.
We
are
continuing to build our sales department with the recent addition of our first
national account manager and a second anticipated to be added during the first
half of fiscal 2007 with the goal of expanding sales and being able to
accommodate the launch of new products. We have started to realize the benefits
of our new marketing strategy through the recent launch of our female hormone
products. With these launches, we have realized significantly higher gross
margins than we have historically achieved. Additionally, with our launch of
generic Bactrimâ,
we have
been able to make sales to national accounts as well as expand our customer
base. This strategy has provided us with added benefits to our existing product
line in that we have been able to sell both ibuprofen and naproxen to some
of
these new accounts. As our product lines expand, we will continue to migrate
sales from third parties to direct sales channels, enabling us to increase
margins.
During
the fiscal year ended June 30, 2006, we added numerous qualified and experienced
industry personnel. During fiscal 2006, we increased our research and
development staff to 35 employees. While we are continuing to hire qualified
personnel and anticipate hiring additional research and development personnel
in
fiscal 2007, we believe that we now have the personnel necessary for critical
developments that will continue to add to our new product launches.
During
fiscal 2006, we produced a total of approximately 4.2 billion tablets. We are
making further improvements to our efficiencies in manufacturing, which is
our
traditional strength, and are completing the buildout of our new facility in
Yaphank, New York. We anticipate FDA inspection of our new facility to be
completed by December 31, 2006 and plan to be operational at that time.
Our
growth is dependent upon increased research and development expenditures. As
such, in order to secure the funding to implement our plan, in
February
2006, we entered into a new $41.5 million, four-year financing arrangement
with
Wells Fargo Business Credit. Additionally, in May 2006, we sold $10
million of our Series B-1 Convertible Preferred Stock. Finally, on
September 11, 2006, we completed the sale of $10 million of our Series C-1
Convertible Preferred Stock to supplement the Wells Fargo and Series B-1
Convertible Preferred Stock financing and provide the necessary capital to
implement already identified projects that reach beyond the scope of our
existing expansion plan. The details of our credit line with Wells Fargo
are set forth in our Current Report on Form 8-K filed with the SEC on February
15, 2006. The details of sale of the Series B-1 Convertible Preferred
Stock and Series C-1 Convertible Preferred Stock are set forth in Current
Reports on Form 8-K filed with the SEC on June 2, 2006 and September 15, 2006,
respectively.
Research
and Development
During
the fiscal year ended June 30, 2006, we filed 17 ANDAs and the FDA granted
final
marketing authorization for our metformin hydrochloride tablets USP, 500 mg,
850
mg and 1000 mg. Since June 30, 2006, we received the following seven approvals:
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 5 mg / 500 mg;
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 5 mg / 325 mg;
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 10 mg / 325 mg;
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 7.5 mg/ 500
mg;
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 7.5 mg / 650 mg;
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 7.5 mg / 750 mg, and
|
· |
hydrocodone
bitartrate and acetaminophen tablets USP, 10 mg / 650
mg.
|
We
currently anticipate filing over 20 ANDAs during the fiscal year ending June
30,
2007. We continue to increase the pace of filings and anticipated approvals
with
the addition of research and development personnel and through our continuing
collaboration with Tris Pharma, Inc. ("Tris") under our previously announced
contracts.
Once
our
new facility is operational, we will begin making our new product ANDA filings
from Yaphank. This move to our new facility substantially increases our physical
facilities devoted to research and development enabling us to hire more research
and development personnel and accommodate further planned increases in research
and development hiring.
New
product development continues to focus on the following six areas: Female
Hormone Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products,
Liquid Products, Products Coming Off Patent and Special Release Products.
1. Female
Hormone Products
In
August, 2005 we started shipping and selling our female hormone product pursuant
to our agreement with Centrix Pharmaceutical, Inc., from which we derived $8.1
million in net sales through June 30, 2006. The manufacturing of the female
hormone products requires a dedicated facility and equipment with special air
handling that is segregated from other manufacturing facilities. These
specialized requirements create significant barriers to entry. Because many
companies do not invest the capital resources to develop such a facility that
has the capability to ensure that there is no cross contamination within the
manufacturing area for other products, competition remains limited.
We
are
configuring a portion of our Yaphank facility for female hormone products and
oral contraceptives. We have begun work on a full line of oral contraceptive
products currently targeting 17 products for development.
2.
Scheduled
Narcotics
In
August, 2006, we received seven approvals for the scheduled narcotics set forth
above and we continue to manufacture hydrocodone bitartrate and ibuprofen
tablets, 7.5 mg/200 mg. In addition to these products, additional filings in
the
scheduled product area, should increase to 15 the number of filings within
the
next fiscal year. Additional products already identified for future development
will provide us with the opportunity to further build out this product line.
"Scheduled"
narcotics are narcotic drugs with the potential for abuse as designated pursuant
to the Controlled Substances Act (CSA), 21 U.S.C. §§ 801 et. seq. These products
require special handling, tracking and record keeping, as well as strict
adherence to other DEA regulations, and stringent oversight and inspection
by
the DEA.
The
regulatory requirements with respect to the handling, storage, segregation,
filing and record keeping required for scheduled narcotics, and the inherent
DEA
oversight that accompanies it, create significant barriers to entry to the
market for these products. We are already in compliance with these regulatory
requirements. Therefore, as part of our expansion plan, we have begun
development of a number of additional products in this area with the objective
of expanding to a full line of scheduled narcotics.
3. Liquid
Products
Our
agreement with Tris is for the development and licensing to us of up to 25
liquid products. The production of these products requires dedicated equipment,
and competition in this area has historically been limited. We are currently
negotiating a possible modification to the Tris liquids agreement which could
outsource the manufacturing of these liquid products to Tris.
4. Special
Release Characteristics
We
have a
second agreement with Tris for the development of solid oral dosage products
which have special release characteristics such as delayed release technology.
We have already filed two ANDAs for these products under the Tris Agreement.
Products such as these are often difficult to formulate, which results in
limited competition and, therefore, creates an opportunity to derive greater
profits. We believe that we will be able to capitalize on the technology that
we
will receive from Tris in that we should be able to use such technology to
develop similar products in the future using our internal research and
development team.
We
anticipate filing three ANDAs for special release products by June 30, 2007,
and
we will continue to develop products in this area.
5. Soft
Gelatin Capsule Products
Like
liquid products, softgel products require specialized equipment in a segregated
area. As such, competition for softgel products is limited since many companies
do not devote the capital resources to develop the infrastructure to develop
these products. We have allocated the necessary space and infrastructure within
our new facility in Yaphank for soft gel development and manufacturing.
Specifically, we are developing two soft gel products that should enable us
to
file two ANDAs by June 30, 2007.
6. Products
Coming Off Patent
Over
the
next several years there are a large number of successful patented brand
products for which the patents are due to expire. We have targeted a number
of
these products for development, manufacturing and sale.
We
are
confident that we have targeted products that will enable us to not only
increase our revenues and gross margins per tablet, as we increase our
efficiency and ability to produce more tablets, but to also move away from
the
commodity type products that we have historically manufactured. We have targeted
products with a view towards revenue potential and our ability to achieve market
share. We have been mindful of increasing the diversity of the products in
our
pipeline. We have targeted products in specific areas with the intent of
providing a broad line of products within those areas. We believe that the
diversity of our pipeline will, as we launch these products, be a significant
factor which should increase our ability to attract customers and achieve market
share.
Facilities
We
currently have all of our manufacturing activities at our 100,000 square foot
facility in Hauppauge, New York. In order to support our expansion, we are
continuing to upgrade our physical infrastructure. The renovation of our 108,000
square foot facility located in Yaphank, N.Y. which includes an additional
16,000 square feet of mezzanine space is nearly complete and we have already
moved most of our research and development activities there. With this new
facility coming on line, we have put in place the necessary capacity and
infrastructure to support production requirements for the foreseeable
future.
Strategic
Alliances
Tris
Pharma, Inc.
On
February 24, 2005, we entered into two agreements with Tris for the development
and licensing of up to twenty-five immediate release liquid generic products
and
seven solid oral dosage generic pharmaceutical products (the "Solids Contract").
We subsequently amended the Solids Contract to include an additional solid
oral
dosage product and two soft gel products. In April, 2006, we entered into a
second amendment to the Solids Contract to add one additional special release
product. To date, we have filed two ANDAs for products developed under the
Solids Contract.
Centrix
Pharmaceutical, Inc.
As
previously reported, effective in August, 2005, we commenced shipments pursuant
to an agreement with Centrix whereby Centrix will have exclusive distribution
rights in the United States to a female hormone product that is manufactured
and
supplied by Interpharm. Pursuant to its terms, the agreement became effective
in
August, 2005 when Interpharm commenced shipment of the product to Centrix.
During fiscal 2006, we derived $8.1 million in net sales from the Centrix
agreement.
Marketing
Strategy
We
have
made significant progress on our marketing strategy since the implementation
of
our expansion plan. Our current marketing strategy focuses on offering an array
of products within product categories that require distinct capabilities in
manufacturing, facilities, regulatory or release technology. These limitations
can be characterized by high initial capital expenditures, qualified personnel
or specific technological capabilities. By selecting products within these
higher barrier to entry product categories, we believe we can offer a unique
breadth of products to the marketplace, further penetrate the direct sales
channel and reach a larger customer base.
We
believe that a broader customer base will enable us to achieve more stable
sales
and production cycles for both our existing products and new product launches.
By making more direct sales, we believe that we can maximize value and profits
by eliminating intermediaries as well as offer better customer service and
stronger customer relationships.
We
have
started development on products in all of our five primary targeted product
areas and are continuing to target and file ANDAs for products in our sixth
area
- products coming off patent and for which patents have expired. Each of these
product areas was chosen because of the higher margins that are available and
because we anticipate limited competition. Our progress to date in our targeted
product areas is allowing us to move further towards our goals of having a
full
line to offer in each product area and further increasing gross margins and
per
tablet revenues. Our five primary targeted product areas are: Female Hormone
Products, Scheduled Narcotic Products, Soft Gelatin Capsule Products, Special
Release Characteristic Products and Liquid Products.
Products:
The
names
of all of the products under the caption "Brand-Name Products" are registered
trademarks. The holders of the registered trademarks are non-affiliated
pharmaceutical manufacturers.
PRODUCT
NAME
|
BRAND-NAME
PRODUCTS
|
|
|
1.
Acetaminophen, 500 mg White Tablets
|
Tylenol®
|
|
|
2.
Acetaminophen, 500 mg White Caplets
|
Tylenol®
|
|
|
3.
Acetaminophen, 325 mg White Tablets
|
Tylenol®
|
|
|
4.
Ibuprofen, 200mg White Tablets
|
Advil®
|
|
|
5.
Ibuprofen, 200mg Brown Tablets
|
Advil®
|
|
|
6.
Ibuprofen, 200mg Orange Tablets
|
Motrin®
|
|
|
7.
Ibuprofen, 200mg White Caplets
|
Advil®
|
|
|
8.
Ibuprofen, 200mg Brown Caplets
|
Advil®
|
|
|
9.
Ibuprofen, 200mg Orange Caplets
|
Motrin®
|
|
|
10.
Ibuprofen, 400mg White Tablets
|
Motrin®
|
|
|
11.
Ibuprofen, 600mg White Tablets
|
Motrin®
|
|
|
12.
Ibuprofen, 800mg White Tablets
|
Motrin®
|
|
|
13.
Isometheptene Mucate, Dichloralphenazone Acetaminophen, Red/Red
Capsule,
65mg/100mg/325mg
|
Midrin®
|
|
|
14.
Naproxen, 250mg White Tablets
|
Naprosyn®
|
|
|
15.
Naproxen, 375mg White Tablets
|
Naprosyn®
|
|
|
16.
Naproxen, 500mg White Tablets
|
Naprosyn®
|
|
|
17.
Acetaminophen and Diphenhydramine HCl Tablets, 500 mg / 25
mg
|
Tylenol
PM®
|
|
|
18.
Hydrocodone Bitartrate and Ibuprofen Tablets, 7.5 mg / 200
mg
|
Vicoprofen®
|
|
|
19.
Hydrocodone Bitartrate and Ibuprofen Tablets, 5 mg / 200
mg
|
Reprexain®
|
|
|
20.
Sulfamethoxazole
& Trimethoprim Tablets, 400 mg / 80 mg
|
Bactrim
®
|
|
|
21.
Sulfamethoxazole
& Trimethoprim Tablets, 800 mg / 160 mg
|
Bactrim
DS ®
|
|
|
22.
and 23. Female Hormone Products
|
|
Competition
The
generic pharmaceutical industry is intensely competitive. The primary means
of
competition involve manufacturing capabilities and efficiencies, innovation
and
development, timely FDA approval, product quality, marketing, reputation, level
of service, including the maintenance of sufficient inventory levels to assure
timely delivery of products, product appearance and price. Often, price is
the
key factor in the generic pharmaceutical business. Therefore, to compete
effectively and remain profitable, a generic drug manufacturer must manufacture
its products in a cost effective manner. We believe that we maintain adequate
levels of inventories to meet customer demand and have them readily available.
We believe that our expansion and modernization of our facility, hiring of
experienced personnel, including logistics and operations personnel, and
implementation of quality control programs have improved our competitive
position during fiscal 2006.
During
the past several years the number of chain drug stores and wholesaler customers
have declined due to industry consolidation. In addition, the remaining chain
drug stores and wholesaler customers have instituted buying programs that have
caused them to buy more products from fewer suppliers. At the same time,
mail-order prescription services and managed care organizations have grown
in
importance and they also limit the number of vendors. The reduction in the
number of our customers and limitation on the number of vendors by the remaining
customers has increased competition among generic drug marketers. However,
these
pressures have not had a material adverse impact on our business and we believe
that we have good relationships with our key customers.
As
is the
case with many generic pharmaceutical manufacturers, many of our competitors
have longer operating histories and greater financial resources than us.
Consequently, some of these competitors may have larger production capabilities,
may be able to develop products at a significantly faster pace at a reduced
cost, and may be able to devote far greater resources to marketing their product
lines.
Certain
manufacturers of brand-name drugs and/or their affiliates have been introducing
generic pharmaceutical products equivalent to such brand-name drugs at
relatively low prices. Such pricing, with its attendant diminished profit
margins, could have the effect of inhibiting us and other manufacturers of
generic pharmaceutical products from developing and introducing generic
pharmaceutical products comparable to certain brand-name drugs. Also,
consolidation among wholesalers, distributors, and repackagers, and
technological advances in the industry and pricing pressures from large buying
groups, may create pricing pressure, which could reduce our profit margins
on
our product lines.
In
addition, increased price competition among manufacturers of generic
pharmaceutical products, resulting from new generic pharmaceutical products
being introduced into the market and other generic pharmaceutical products
being
reintroduced into the market, has led to an increase in demands by customers
for
downward price adjustments by the manufacturers of generic pharmaceutical
products. No assurance can be given that such price adjustments, which reduce
gross profit margins, will not continue, or even increase, with a consequent
adverse effect on our earnings.
Brand-name
companies also pursue other strategies to prevent or delay generic competition.
These strategies may include: seeking to establish regulatory and legal
obstacles that would make it more difficult to demonstrate bioequivalence,
initiating legislative efforts in various states to limit the substitution
of
generic versions of certain types of brand-name pharmaceuticals, instituting
legal action that automatically delays approval of an ANDA and may require
certifications that the brand-name drug's patents are invalid or unenforceable,
or introducing "second generation" products prior to the expiration of market
exclusivity for the reference product, obtaining extensions of market
exclusivity by conducting trials of brand-name drugs, persuading the FDA to
withdraw the approval of brand-name drugs, for which the patents are about
to
expire, thus allowing the brand-name company to obtain new patented products
serving as substitutes for the products withdrawn, or seeking to obtain new
patents on drugs for which patent protection is about to expire.
The
ability of brand-name companies to successfully delay generic competition in
any
of our targeted new product lines may adversely affect our ability to enter
into
the desired product line or may impact our ability to attain our desired market
share for that product.
The
Food
and Drug Modernization Act of 1997 includes a pediatric exclusivity provision
that may provide an additional six months of market exclusivity for indications
of new or currently marketed drugs if certain agreed upon pediatric studies
are
completed by the applicant. Brand-name companies are utilizing this provision
to
extend periods of market exclusivity.
Backlog
We
do not
have a significant backlog, as we normally deliver products purchased by our
customers within a short time of the date of order.
Patents
and Trademarks
We
do not
own any patents or registered trademarks.
Industry
The
Generic Drug Market and Necessary Approvals
Pharmaceutical
products in the United States are generally marketed as either "brand-name"
or
"generic" drugs. Brand-name products are drugs generally sold by the holder
of
the drug's patent or through an exclusive marketing arrangement. A company
that
receives approval for a new drug application ("NDA") from the U.S. Food and
Drug
Administration ("FDA"), usually the patent holder, has the exclusive right
to
produce and sell the drug for about 20 years from the date of filing of the
patent application. This market exclusivity generally provides brand-name
products the opportunity to build-up physician and customer
loyalties.
Once
a
patent on a drug expires, a manufacturer can obtain FDA approval to market
a
"generic" version. A generic drug is therefore usually marketed after the patent
on a brand drug expires. A generic product may be marketed prior to the brand
product’s patent expiration if that patent is shown to be invalid or not
infringed by the generic product.
The
FDA
requires that generic drugs have the same quality, strength, purity, identity
and efficacy as brand-name drugs. While comparable to brand-name drugs, generic
drugs are usually far less costly than brand-name drugs, resulting in
substantial savings to consumers, healthcare providers and hospitals. These
cost
savings have resulted in sustained growth of the generic pharmaceutical industry
in the United States. According to a CongressionalBudget Office study, "How
Increased Competition from Generic Drugs has Affected Prices and Returns in
the
Pharmaceutical Industry," 1
in 1984,
19% of prescription drugs sold in the United States were generic. According
to a
Federal Trade Commission Study in July, 2002, "Generic Drug Entry Prior to
Patent Expiration,"2
that
figure reached more than 47%. Moreover, Generic Pharmaceutical Association
statistics indicate that generic drug products were dispensed 56% of the time
in
2005.
(See
http://www.gphaonline.org/Content/NavigationMenu/AboutGenerics/Statistics/Statistics.htm,
visited September 22, 2006.)
1. |
available
at
HTTP://WWW.CBO.GOV/SHOWDOC.CFM?INDEX=655&SEQUENCE=0
|
2. |
HTTP://WWW.FTC.GOV/OS/2002/07/GENERICDRUGSTUDY.PDF
|
Much
of
the growth of the generic pharmaceutical industry has been attributed to The
Drug Price Competition and Patent Term Restoration Act of 1984 (the
"Waxman-Hatch Act") which encourages generic competition. Before the
Waxman-Hatch Act, generic drug manufacturers had to put their products through
an approval process similar to that for the original approval for brand-name
drugs. Waxman-Hatch created an accelerated approval process in which the generic
manufacturer needs only to demonstrate to the FDA that the generic product
is
bioequivalent to the brand-name product through the filing of an abbreviated
new
drug application ("ANDA"). The ANDA may rely on information from the
brand-name
drug's
application with the FDA.
On
June
12, 2003, the FDA announced new regulations and procedures to improve
implementation of the Waxman-Hatch Act. The new regulations and procedures
are
aimed at reducing the time it takes to bring generic drugs to the market and
expanding educational programs to assist health care practitioners and consumers
to get accurate information about the availability of generic drugs. The FDA
has
estimated that the new regulations and procedures will reduce the typical time
for generic drug approvals by three months or more during the three to five
year
period following implementation and will save consumers approximately $35
billion over 10 years.
Government
Regulation
FDA
approval is required before any generic drug can be marketed through an ANDA.
While the FDA has significantly streamlined the process of obtaining ANDA
approval for generic drugs, it is difficult to predict how long the process
will
take for any specific drug. In fact, the length of time necessary to bring
a
product to market can vary significantly and can depend on, among other things,
availability of funding, problems relating to formulation, safety or efficacy,
patent issues associated with the product or barriers to market entry from
brand-name product manufacturers. Therefore, there is always the risk that
the
introduction of new products can be delayed.
The
ANDA
process requires that a company's manufacturing procedures and operations
conform to FDA requirements and guidelines, generally referred to as current
Good Manufacturing Practices ("cGMP"). The requirements for FDA approval
encompass all aspects of the production process, including validation and record
keeping, and involve changing and evolving standards. Compliance with cGMP
regulations requires substantial expenditures of time, money and effort in
such
areas as production and quality control to ensure full technical compliance.
The
evolving and complex nature of these regulatory requirements, the broad
authority and discretion of the FDA and the generally high level of regulatory
oversight result in a continuing possibility that we may be adversely affected
by regulatory actions despite our efforts to comply with regulatory
requirements.
The
ANDA
process also requires bioequivalency studies to show that the generic drug
is
bioequivalent to the approved drug. Bioequivalence compares the bioavailability
of one drug product with that of another formulation containing the same active
ingredient. When established, bioequivalency confirms that the rate of
absorption and levels of concentration in the bloodstream of a formulation
of
the approved drug and the generic drug are equivalent as defined by the FDA.
Bioavailability indicates the rate and extent of absorption and levels of
concentration of a drug product in the bloodstream needed to produce the
same
therapeutic
effect.
We
contract with outside laboratories to conduct bioequivalence studies.
Historically, the vast majority of our research and development expenditures
have been on these studies. While we strive to engage reputable and experienced
companies to perform these studies, there can be no assurance that they will
use
the proper due diligence or that their work will otherwise be
accurate.
Supplemental
ANDAs are required for approval of various types of changes to an approved
application, and these supplements may be under review for six months or more.
In addition, certain types of changes may only be approved once new
bioequivalency studies are conducted or other requirements are satisfied.
The
scientific process of developing new products and obtaining FDA approval is
complex, costly and time consuming and there can be no assurance that any
products will be developed and approved despite the amount of time or money
spent on research and development. Product development may be curtailed in
the
early or later stages of development due to the introduction of competing
generic products or for other strategic reasons.
Even
if
an ANDA is approved, brand-name companies can impose substantial barriers to
market entry which may include: receiving new patents on drugs whose original
patent protection is about to expire; developing patented controlled-release
products or other improvements to the original product; marketing
over-the-counter versions of the brand-name product that will soon face generic
competition; and commencement of marketing initiatives, regulatory activities
and litigation. While none of these actions have been taken against us to date,
there can be no assurance that they will not be taken in the future,
particularly as we significantly expand our product development
efforts.
In
addition to the Federal government, individual states have laws regulating
the
manufacture and distribution of pharmaceuticals, as well as regulations
pertaining to the substitution of generic drugs for brand-name drugs. Our
operations are subject to regulation, licensing requirements and inspection
by
the states in which we are located or conduct business.
We
must
also comply with federal, state and local laws of general applicability, such
as
laws regulating working conditions and equal opportunity employment.
Additionally, we are subject, as are all manufacturers, to various federal,
state and local environmental protection laws and regulations, including those
governing the discharge of materials into the environment.
Historically,
the costs of complying with such environmental provisions have not had a
material adverse effect on our earnings, cash requirements or competitive
position, and we do not expect such costs to have any such material adverse
effect in the foreseeable future. However, if changes to such environmental
provisions are made that require significant changes in our operations or the
expenditure of significant funds, such changes could have a material adverse
effect on our earnings, cash requirements or competitive position.
As
a
public company, we are subject to the Sarbanes-Oxley Act of 2002 (the "SOX
Act"). The SOX Act contains a variety of provisions affecting public companies,
including the relationship with its auditors, prohibiting loans to executive
officers and requiring an evaluation of its disclosure controls and procedures
and internal controls. We have retained an outside consultant to assist us
with
the process of becoming compliant with Section 404 of the SOX Act by the
deadline for such compliance.
The
federal government made significant changes to Medicaid drug reimbursement
as
part of the Omnibus Budget Reconciliation Act of 1990 ("OBRA"). Generally,
OBRA
provides that a generic drug manufacturer must offer the states an 11% rebate
on
drugs dispensed under the Medicaid program and must enter into a formal drug
rebate agreement with the Federal Health Care Financing Administration. Although
not required under OBRA, we have also entered into similar agreements with
various states.
Continuing
studies of the proper utilization, safety and efficacy of pharmaceutical
products are being conducted by the pharmaceutical industry, government agencies
and others. Such studies, which increasingly employ sophisticated methods and
techniques, can call into question the utilization, safety and efficacy of
previously marketed products. There can be no assurances that these studies
will
not, in the future, result in the discontinuance of product
marketing.
Raw
Materials
Most
of
the raw materials that we use in the manufacturing of our products consist
of
pharmaceutical chemicals in various forms, which are available from various
sources. FDA approval is required in connection with the process of selecting
active ingredient suppliers. In selecting a supplier, we consider not only
their
status as an FDA approved supplier, but consistency of their products,
timeliness of delivery, price and patent position.
Employees
As
of
June 30, 2006, we had approximately 500 full time employees. We believe we
have
a strong relationship with our employees. None of our employees are represented
by a union.
ITEM
1A.
Risk
Factors
We
operate in a highly competitive environment in which there are numerous factors
which can influence our business, financial position or results of operations
and which can also cause the market value of our common stock to decline. Many
of these factors are beyond our control and therefore, are difficult to predict.
The following section sets forth what we believe to be the principal risks
that
could affect us, our business or our industry, and which could result in a
material adverse impact on our financial results or cause the market price
of
our common stock to fluctuate or decline.
Risks
Related to Our Business
Our
future success is dependent on our ability to develop, manufacture and
commercialize new generic drug products.
Our
current business and expansion plan is dependent on our ability to successfully
develop, manufacture and commercialize new generic drugs. There are numerous
factors which can delay or prevent us from developing, manufacturing or
commercializing new products, including:
· |
inability
to obtain requisite FDA approvals on a timely basis for new generic
products;
|
· |
reliance
on partners for development of certain
products;
|
· |
the
availability, on commercially reasonable terms, of raw materials,
including active pharmaceutical ingredients and other key
ingredients;
|
· |
competition
from other generic drug companies offering the same or similar
products;
|
· |
inadequate
funding available for product marketing and
sales;
|
· |
failure
to obtain market acceptance for new generic products;
|
· |
failure
to succeed in patent challenges;
|
· |
unforeseen
costs in development;
|
· |
legal
actions by brand competitors; and
|
· |
inability
to demonstrate bioequivalence in clinical studies as required by
the FDA.
|
These,
as
well as other factors may lead to product approval delays or the abandonment
of
products in development. The failure of a product to reach successful
commercialization could materially and adversely affect our business and
operating results.
Our
future success is dependent on increasing research and development expenditures
which are likely to create net losses.
Our
current business and expansion plan is dependent upon increasing levels of
research and development expenditures. In the near term, these expenditures
will
result in net losses which may cause the market price for our common stock
to
decline or fluctuate.
We
face intense competition which could significantly limit our expansion and
growth and materially adversely affect our business and financial results.
The
generic drug market and industry is highly competitive. Most of our competitors
have greater financial, research and development, marketing and other resources
than we do and therefore, can develop and commercialize more products and
develop and commercialize them faster and more efficiently than us. The markets
in which we compete and intend to compete are undergoing, and are expected
to
continue to undergo, rapid and significant changes. We expect competition to
intensify as technological advances are made.
We
also
face intense price competition in certain of our products and expect to face
intense competition in some of the products we intend to develop and market.
This price competition may lead to reductions in prices and gross margins which
can adversely affect our business and financial results, and can cause the
price
of our common stock to decline or fluctuate.
We
address competitive issues by seeking to develop and manufacture products where
competition is limited. However, there can be no assurance that this strategy
will be effective as there may be no barriers to additional competitors entering
the market for these products.
We
may not maintain adequate product liability insurance.
We
currently maintain $10 million in product liability insurance. While we believe
this amount to be adequate, there can be no assurance that any one or series
of
claims may exceed our coverage or that coverage will not be denied with respect
to a claim or series of claims. A lack of sufficient coverage could materially
and adversely affect our business, financial results and the market value of
our
common stock.
We
enter into various agreements in the normal course of our business which have
indemnification provisions, the triggering of which could have a material
adverse impact on our business and financial results.
In
the
normal course of our business, we enter into manufacturing, marketing and other
agreements whereby we agree to indemnify the other party or parties in the
event
of certain breaches of the agreement or with respect to product defects or
recalls. While we maintain insurance coverage which we believe can effectively
mitigate our obligations under these indemnification provisions, there can
be no
assurance that such coverage will be adequate to do so. Should our obligations
under an indemnification provision exceed our coverage or should coverage be
denied, our business, financial results and the market value of our common
stock
could be materially and adversely affected.
Our
operating results are affected by a number of factors and may fluctuate
significantly on a quarterly basis.
Our
operating results may vary substantially from quarter to quarter. Revenues
and
other operating results for any given period may be greater or less than those
in other periods. Factors that may cause quarterly results to vary include,
but
are not limited to, the following:
· |
the
amount of research and development
expenditures;
|
· |
competition
for new and existing products;
|
· |
changes
in pricing for raw materials and other inputs;
and
|
Fluctuations
in our operating results may cause a decline or fluctuation in the price of
our
common stock.
Reserves
for credits and pricing adjustments may be inadequate.
For
certain customers, we issue various price adjustments and credits based on
market prices or sales to certain customers. For instance, when we sell certain
products to prime vendors for the U.S. government, the sales to the prime vendor
are at one price, but if the products are resold to the government, the prime
vendor gets to chargeback a portion of the purchase price because sales to
the
government are at a discount.
Although
we establish a reserve for these credits and chargebacks at the time of sale
based on known contingencies, there can be no assurance that such reserves
will
be adequate. Increases in credits and chargebacks may exceed what was estimated
as a result of a variety of reasons, including unanticipated increased
competition or an unexpected change in one or more of its contractual
relationships. Any failure to establish adequate reserves with respect to
credits or chargebacks may result in a material adverse effect on our business,
financial results and may cause the price of our common stock to decline or
fluctuate.
We
are presently dependent on a limited number of products for most of our
revenues.
We
currently generate most of our revenues and gross margins from the sale of
a
limited number of products. For the fiscal year ended June 30, 2006, the
following products accounted for 81% of our total revenues: Ibuprofen, Naproxen
and our female hormone products. Ibuprofen alone accounted for 53% of our
revenues. Any material adverse developments, including increased competition,
with respect to the sale or use of these products, or our failure to
successfully introduce new products, could have a material adverse effect on
our
revenues and gross margins.
We
are presently dependent on a small number of major customers.
For
the
fiscal year ended June 30, 2006, 53% of our sales were to four customers. While
we have been able to diversify our customer base over the past two fiscal years,
the loss of any one or more of these customers or the substantial reduction
in
orders from any one or more of such customers could have a material adverse
effect on our operating results and financial condition and could cause a
decline in the market price of our common stock.
Our
loan agreement with Wells Fargo Business Credit imposes significant operating
and financial restrictions, which may prevent us from capitalizing on business
opportunities and taking certain actions.
Our
loan
agreement with Wells Fargo Business Credit, the details of which, and a copy
of
which, are contained in our Current Report on Form 8-K filed with the SEC on
February 15, 2006, imposes significant operating and financial restrictions
on
us. These restrictions limit our ability to, among other things, incur
additional indebtedness, make investments, sell assets, incur certain liens,
or
merge or consolidate. There can be no assurance that these restrictions will
not
adversely affect our ability to finance our future operations or capital needs
or to pursue available business opportunities.
We
may be liable to pay substantial damages, including liquidated damages, or
be
obligated to redeem such stock for cash if we do not timely perform certain
obligations we have to holders of our Series B-1 and C-1 Preferred
Stock.
In
May
2006 we sold to one institutional investor for $10 million shares of our Series
B-1 Convertible Preferred Stock. In September 2006 we sold to another
institutional investor shares of our Series C-1 Convertible Preferred Stock
for
$10 million. Under the transaction documents relating to these sales the holders
have the right to redeem such shares for cash upon the occurrence of certain
events, including our failure to pay dividends on such stock, our failure to
timely deliver certificates for shares of our common stock if the holders elect
to convert such shares, if we default on indebtedness owed to third parties
and
such persons accelerate the maturity of at least $3,000,000 of such
indebtedness, or there is a change in control of our company. In addition,
we
are subject to penalties, up to a maximum of 18% of the aggregate purchase
price (which penalties accrue on a daily basis so long as we continue to be
in default of our obligations) (a) if, within 60 days after a request to do
so
is made by the holders of such preferred stock, we do not timely file with
the
Securities and Exchange Commission (the “SEC”) a registration statement covering
the resale of shares of our common stock issuable to such holders upon
conversion of the preferred stock, (b) if a registration statement is filed,
such registration statement is not declared within 180 days after the request
is
made or (c) if after such a registration is declared effective, after certain
grace periods the holders are unable to make sales of our common stock because
of a failure to keep the registration statement effective or because of a
suspension or delisting of our common stock from the American Stock Exchange
or
other principal exchange on which our common stock is traded. We are also
subject to penalties if we fail to timely deliver to a holder (or credit the
holder’s balance with Depository Trust Company if the common stock is to be held
in street name) a certificate for shares of our common stock if the holder
elects to convert its preferred stock into common stock. Therefore, upon the
occurrence of one or more of the foregoing events our business and financial
condition would likely be materially adversely affected and the market price
of
our common stock would likely decline.
We
are currently involved in a legal dispute which could have a material adverse
effect on our financial condition.
As
reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006,
on June 1, 2006, Ray Vuono commenced an action against us in the Supreme Court
of the State of New York, County of Suffolk (Index No. 13985/06). The complaint
against Interpharm alleges, among other things, that Vuono is entitled to
receive additional compensation as a “finder” under an agreement dated July 1,
2002 with respect to a reverse merger transaction consummated by us in May
2003.
Vuono also alleges that he is entitled to additional compensation under the
agreement in respect of a $41.5 million credit facility from Wells Fargo
Business Credit, Inc. obtained by us in February 2006 and the sale for $10
million of shares of a new series of convertible preferred stock and warrants
to
purchase our common stock consummated by the Company with Tullis-Dickerson
Capital Focus III, L.P. in May 2006. The total amount of damages sought by
Vuono
in the action is approximately $10 million.
While
we
believe that these claims are without merit and are vigorously defending the
action, should we be unsuccessful in our defense, our business and financial
condition will be materially adversely affected and the market price of our
common stock could decline.
We
rely on independent third parties for some of the research and development
and
testing required for the regulatory approval of our products. Any failure by
any
of these third parties to perform this research and development or testing
properly and in a timely manner may have an adverse effect upon our ability
to
obtain regulatory approvals.
Our
applications
for the regulatory approval of products incorporate the results of research
and
development and testing and other information that is conducted or gathered
by
independent third parties (including, for example, Tris Pharma, Inc. whose
agreements with us are described fully under “Business”), manufacturers of raw
materials, testing laboratories, contract research organizations or independent
research facilities. Our ability to obtain regulatory approval on the products
being developed and tested is dependent upon the quality of the work performed
by these third parties, the quality of the third parties’ facilities and the
accuracy of the information provided by third parties. In some instances, we
have little or no control over any of these factors. If this testing is not
performed properly, our ability to obtain regulatory approvals could be
restricted or delayed.
Our
future success depends on our ability to attract and retain key employees and
consultants.
Our
future success will depend, to a substantial degree, upon the continued service
of the key members of our management team. The loss of the services of key
members of our management team, or their inability to perform services on our
behalf, could have a material adverse effect on our business and financial
condition and could result in a decline in the market value of our common stock.
Our
success,
and the success of our expansion plan, also will depend, to a large extent,
upon
the contributions of our existing sales, marketing, operations, regulatory,
compliance scientific, quality control and quality assurance staff and our
ability to build their departments and hire additional qualified personnel.
We
compete for qualified personnel against other larger companies which may offer
more favorable employment opportunities. If we are not able to attract and
retain the necessary personnel to accomplish our business objectives, we could
experience constraints that would adversely affect our ability to sell and
market products, or to support internal research and development programs.
In
particular, product development programs depend on the ability to attract and
retain highly skilled scientists, biochemists, and sales and marketing efforts
depend on the ability to attract and retain skilled and experienced sales,
marketing and quality assurance representatives. Although we believe we have
been successful in attracting and retaining skilled personnel in all areas
of
our business, we cannot assure that we can continue to attract, train and retain
such personnel. Any failure in this regard could limit our growth and expansion
and new product development.
Our
ability to service our debt from Wells Fargo Business Credit and make dividend
payments to the holders of our Series B-1 and C-1 Preferred Stock and to meet
our cash requirements depends on numerous factors, some of which are beyond
our
control.
Our
ability to satisfy our obligations to Wells Fargo Business Credit and the
holders of our Series B-1 and C-1 Preferred Stock will depend on our future
operating performance and financial results, which will be subject, in part,
to
factors beyond our control, including interest rates and general economic,
financial and business conditions. If we are unable to generate sufficient
cash
flow, we may be required to: refinance all or a portion of our debt with Wells
Fargo, obtain additional financing in the future, working capital, capital
expenditures and general corporate or other purposes; redirect a substantial
portion of our cash flow to debt service, which as a result, might not be
available for our operations or other purposes; sell some of our assets or
operations; reduce or delay capital expenditures; or revise or delay our
operations or strategic plans. If we are required to take any of these actions,
it could have a material adverse effect on our business and financial condition.
In addition, there can be no assurance that we would be able to take any of
these actions, that these actions would enable us to continue to satisfy our
capital requirements or that these actions would be permitted under the terms
of
our agreement with Wells Fargo or under the terms of the Series B-1 and C-1
Preferred Stock.
Risks
Related to Our Industry
Litigation
is common in our industry and can cause significant expense and
delays.
Branded
pharmaceutical companies with patented products are increasingly suing companies
that produce generic forms of their patented brand name products for alleged
patent infringement or other violations of intellectual property rights, which
may delay or prevent the entry of such generic products into the market.
Generally, a generic drug may not be marketed until the applicable patent(s)
on
the brand name drug expires. When an ANDA is filed with the FDA for approval
of
a generic drug, the filing person may either certify that the patent listed
by
the FDA as covering the generic product is about to expire, in which case the
ANDA will not become effective until the expiration of such patent, or that
any
patent listed as covering the generic drug is invalid or will not be infringed
by the manufacture, sale or use of the new drug for which the ANDA is filed.
Under either circumstance, there is a risk that a branded pharmaceutical company
may sue the filing person for alleged patent infringement or other violations
of
intellectual property rights. Also, other companies that compete with us by
manufacturing, developing and/or selling the same generic pharmaceutical
products similarly may file lawsuits against us claiming patent infringement
or
invalidity. Because a portion of our current business involves the marketing
and
development soon to be off-patent products, the threat of litigation, the
outcome of which is inherently uncertain, is always present. Such litigation
is
often costly and time consuming, and could result in a substantial delay in,
or
prevent, the commercialization of our products, which could have a material
adverse effect on our business and financial condition and the market for our
common stock.
We
are susceptible to product liability claims that may not be covered by
insurance, which, if successful, could require us to pay substantial
damages.
We
face
the risk of loss resulting from, and the adverse publicity associated with,
product liability lawsuits, whether or not such claims are valid. In many
instances, there is no way that such claims can be avoided. Unanticipated side
effects or unfavorable publicity concerning any of our products would likely
have an adverse effect on our ability to achieve acceptance by prescribing
physicians, managed care providers, pharmacies and other retailers, customers
and patients. Even unsuccessful product liability claims could require us to
spend money on litigation, divert management’s time, damage our reputation and
impair the marketability of our products. In addition, while we believe our
current level of product liability insurance is sufficient, there can be no
assurance that it will be enough to cover any one or series of claims. There
can
also be no assurance that as we expand, that we will be able to maintain
adequate insurance coverage at acceptable costs. A successful product liability
claim that is excluded from coverage or exceeds policy limits could require
us
to pay substantial sums. In addition, insurance coverage for product liability
may become prohibitively expensive in the future.
We
are subject to extensive governmental regulation, the non-compliance with which
may result in fines and/or other sanctions, including product seizures, product
recalls, injunctive actions and criminal prosecutions.
We
are
subject to extensive regulation by the federal government, principally the
FDA
and the Drug Enforcement Administration and state governments. The FFDC Act,
the
Controlled Substances Act, the Generic Drug Enforcement Act of 1992 (the
“Generic Act”), and other federal statutes and regulations govern the testing,
manufacture, safety, labeling, storage, recordkeeping, approval, advertising
and
promotion of our products. The Generic Act, a result of legislative hearings
and
investigations into the generic drug approval process, is particularly relevant
to our business. Under the Generic Act, the FDA is authorized to impose
debarment and other penalties on individuals and companies that commit illegal
acts relating to the generic drug approval process. In some situations, the
Generic Act requires the FDA not to accept or review for a period of time ANDAs
from a company or an individual that has committed certain violations and
provides for temporary denial of approval of applications during its
investigation. Additionally, non-compliance with other applicable regulatory
requirements may result in fines, perhaps significant in amount, and other
sanctions imposed by courts and/or regulatory bodies, including the initiation
of product seizures, product recalls, injunctive actions and criminal
prosecutions. The FDA also has the authority to withdraw its approval of drugs
in accordance with statutory procedures.
In
addition to the new drug approval process, the FDA also regulates the facilities
and operational procedures that we use to manufacture our products. We must
register our facilities with the FDA. All products manufactured in those
facilities must be made in a manner consistent with current good manufacturing
practices (“cGMP”). Compliance with cGMP regulations requires substantial
expenditures of time, money and effort in such areas as production and quality
control to ensure full technical compliance. The FDA periodically inspects
our
manufacturing facilities for compliance. FDA approval to manufacture a drug
is
site-specific. Failure to comply with cGMP regulations at one of our
manufacturing facilities could result in an enforcement action brought by the
FDA which could include withholding the approval of ANDAs or other product
applications of that facility. If the FDA were to require one of our
manufacturing facilities to cease or limit production, our business could be
adversely affected. Delay and cost in obtaining FDA approval to manufacture
at a
different facility also could have a material adverse effect on our business,
financial position and results of operations and could cause the market value
of
our common stock to decline.
Because
of the chemical ingredients of pharmaceutical products and the nature of the
manufacturing process, we are subject to extensive environmental regulation
and
the risk of incurring liability for damages and/or the costs of remedying
environmental problems. In the future, we may be required to increase
expenditures in order to remedy environmental problems and/or comply with
applicable regulations. Additionally, if we fail to comply with environmental
regulations to use, discharge or dispose of hazardous materials appropriately
or
otherwise to comply with the provisions of our operating licenses, the licenses
could be revoked and we could be subject to criminal sanctions and/or
substantial civil liability or be required to suspend or modify our
manufacturing operations.
As
part
of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003,
companies are now required to file with the FTC and the Department of Justice
certain types of agreements entered into between
brand and generic pharmaceutical companies related to the manufacture, marketing
and sale of generic versions of brand drugs. This requirement could affect
the
manner in which generic drug manufacturers resolve intellectual property
litigation and other disputes with brand pharmaceutical companies and could
result generally in an increase in private-party litigation against
pharmaceutical companies or additional investigations or proceedings by the
FTC
or other governmental authorities. The impact of this requirement, and the
potential private-party lawsuits associated with arrangements between brand
name
and generic drug manufacturers, is uncertain and could adversely affect the
Company’s business.
Our
raw materials are purchased primarily from foreign distributors of bulk
pharmaceutical chemicals. Any significant supply interruption could have a
material adverse effect on our business and financial condition and could cause
a decline in the market value of our common stock.
Our
raw
materials are purchased primarily from foreign companies. Although we have
not
experienced difficulty in obtaining these raw materials and products, there
can
be no assurance that supply interruptions or delays will not occur in the future
or that we will not have to obtain substitute materials or products, which
would
require additional regulatory approvals. In addition, changes in its raw
material suppliers could result in delays in production, higher raw material
costs and loss of sales and customers because regulatory authorities must
generally approve raw material sources for pharmaceutical products. Any
significant supply interruption could
have
a material adverse effect on our business and financial condition and could
cause a decline in the market value of our common stock.
We
may not be able to utilize all of the deferred tax assets recorded on our
balance sheet.
In
accordance with Statement of Financial Accounting Standard (SFAS) No. 109,
“Accounting for Income Taxes,” we are required to establish a valuation
allowance against our deferred tax assets if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
valuation allowance should be sufficient to reduce the deferred tax asset
to the
amount that is more likely than not to be realized. At June 30, 2006, we
had a
total of $6,170,000 in net deferred tax assets, which we believe are realizable
based on the requirements of SFAS 109. However, because we are likely to
incur
pre-tax losses during fiscal 2007, have shown volatile operating results
in the
past and because there is no guarantee that the amount and timing of net
profits, if any, will be sufficient to fully utilize our deferred tax assets,
there is a risk that we will have to record valuation allowances in the future.
Moreover, there is a risk that unfavorable audits of, for example, tax credit
or
NOL carryforwards by government agencies or change of ownership limitations
under Section 382 of the Internal Revenue Code of 1986 may reduce the value
of
our deferred tax assets. If any of these events were to occur, our financial
results for one or more periods would be adversely affected.
RISKS
RELATING TO OUR COMMON STOCK
Our
research and development expenditures may not lead to the commercialization
of
successful products.
Our current business and expansion plan calls for, and is dependent upon,
not
only increasing levels of research and development expenditures in order
to add
new products to our product line, but also upon the projected success of
those
products. There can be no assurance, however, that these research and
development expenditures will result in successful or profitable products
as
there are many factors which affect the success of pharmaceutical products
in
the market such as consumer acceptance, continuing acceptance by the medical
profession, litigation and product liability and competition. In the event
that our significant research and development expenditures do not result
in
profitable products, our business and financial condition would be materially
and adversely affected and the market price of our common stock would
decline.
We
have never paid cash dividends on our common stock and are not likely to do
so
in the foreseeable future.
We
have
never declared or paid any cash dividends on our common stock. We currently
intend to retain any future earnings for use in the operation and expansion
of
our business. We do not expect to pay any cash dividends in the foreseeable
future but will review this policy as circumstances dictate.
Four
of our shareholders control us through their ownership and control of voting
stock.
Four
of
our shareholders, one of whom is our Chief Operating Officer who owns and
controls approximately 28% of our common stock, own and control in the aggregate
approximately 78% of our common stock. These stockholders can effectively
control us and their interests may differ from other shareholders.
There
is only a limited trading market for our common stock.
Our
common stock is traded on the American Stock Exchange, but the public float
available for trading is currently relatively small. Therefore, the volume
and
price of trading in our common stock is subject to significant fluctuations.
ITEM
1B.
Unresolved Staff Comments
None.
ITEM
2. PROPERTIES
Description
of Property
We
lease
an entire building in Hauppauge, New York, pursuant to a non-cancellable lease
expiring in October, 2019, which houses our manufacturing, warehousing and
some
of our executive offices. The leased building is approximately 100,000 square
feet and is located in an industrial/office park. The current annual lease
payments to the landlord, Sutaria Family Realty, LLC, are $480,000. Sutaria
Family Realty, LLC is owned by Mona Rametra, Perry Sutaria and Raj Sutaria,
who
collectively own and control 37,655,960 shares of our common stock and 4,855,389
shares of our Series A-1 Preferred Stock and are the children of Dr. Maganlal
K.
Sutaria, the Chairman of our Board of Directors, and the niece and nephews
of
Bhupatlal K. Sutaria, our President. In addition, Raj Sutaria is the Chief
Operating Officer of Interpharm Holdings, Inc. The lease between the landlord
and Interpharm Inc, states that upon
a
change in ownership of Interpharm
Inc,
which
occurred on May 30, 2003,
the
landlord is entitled to increase the rents to fair market value and every three
years thereafter. Although entitled to receive fair market value for the
property as determined by an independent appraisal, through August 2006 the
rent
has
remained
the same, which is below market value for similar space in the local area.
There
are no tenants in the building other than us.
We
currently lease on a month to month basis, office space in Hauppauge, New York,
at a cost of $10,000 per month. We are currently evaluating other locations
and
options in order to select a more permanent location to house corporate,
administrative and sales office requirements.
On
June
29, 2004, pursuant to a contract entered into on November 14, 2003, we purchased
a 92,000 square foot facility on thirty seven acres of land, located at 50
Horseblock Road in Brookhaven, New York. The purchase price for the building
and
land was approximately $9.4 million. The facility is located in Suffolk County,
New York's Brookhaven Empire Zone. As part of the planned modifications to
the
facility, we constructed a 16,000 square foot research and development
laboratory within the facility, which is now operational. Through June 30,
2006
we have spent an additional $7,968,000 in building renovations and equipment.
ITEM
3. LEGAL
PROCEEDINGS
As
reported in our Current Report on Form 8-K filed with the SEC on June 28, 2006,
on June 1, 2006, Ray Vuono (“Vuono”) commenced an action against us in the
Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06).
Vuono’s complaint against us alleges, among other things, that Vuono is entitled
to receive additional compensation as a “finder” under an agreement dated July
1, 2002 between Vuono and the Company (then known as Atec Group, Inc.) with
respect to a reverse merger transaction consummated by us in May 2003. Vuono
also alleges that he is entitled to additional compensation under the agreement
in respect of a $41.5 million credit facility from Wells Fargo Business Credit,
Inc. obtained by us in February 2006 and the sale for $10 million of shares
of a
new series of convertible preferred stock and warrants to purchase our common
stock consummated by us with Tullis-Dickerson Capital Focus III, L.P. in May
2006. The total amount of damages sought by Vuono in the action
is approximately $10 million.
We
believe that Vuono’s claims are without merit and we are vigorously defending
the action.
We
are
unaware of any other material pending or threatened legal action or proceeding
against us.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No
matters were submitted to a vote of our security holders during the fiscal
quarter ended June 30, 2006.
PART
II
ITEM
5. |
MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS PRICE RANGE OF COMMON
STOCK
|
Our
common stock is traded on the American Stock Exchange under the symbol "IPA."
The following table sets forth the high and low sale prices for our common
stock
for the periods indicated as reported by the American Stock Exchange. Such
prices reflect inter-dealer prices without retail mark-up, markdown or
commissions and may not necessarily represent actual transactions.
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
5.87
|
|
|
4.30
|
|
Quarter
ended 6/30
|
|
|
4.80
|
|
|
2.45
|
|
Quarter
ended 9/30
|
|
|
3.98
|
|
|
2.25
|
|
Quarter
ended 12/31
|
|
|
3.49
|
|
|
2.20
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
2.58
|
|
|
1.50
|
|
Quarter
ended 6/30
|
|
|
1.65
|
|
|
1.23
|
|
Quarter
ended 9/30
|
|
|
1.82
|
|
|
1.07
|
|
Quarter
ended 12/31
|
|
|
1.49
|
|
|
1.21
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
Quarter
ended 3/31
|
|
|
1.68
|
|
|
1.24
|
|
Quarter
ended 6/30
|
|
|
1.56
|
|
|
1.10
|
|
As
of
September 7, 2006, there were approximately 293 holders of record of our common
stock, 288 holders of record of Series C preferred shares, and one holder of
record each of our Series B-1 Convertible Preferred Stock and Series C-1
Convertible Preferred Stock. The Series C-1 Convertible Preferred Stock was
issued subsequent to June 30, 2006.
We
do not
currently pay dividends on our common stock. It is our present intention not
to
declare or pay dividends on our common stock, but to retain earnings for the
operation and expansion of our business.
The
holders of our Series A-1 preferred shares are entitled to cumulative annual
dividends of $0.0341 per share when and as declared by our Board of Directors.
We are required to pay quarterly dividends on our Series B-1 Preferred Stock
and
our Series C-1 Preferred Stock at an annual dividend rate of 8.25%, in either
cash or common stock. In an effort to retain cash, we intend to pay the Series
B-1 Preferred Stock and Series C-1 Preferred Stock with restricted common
stock
SECURITIES
AUTHORIZED FOR ISSUANCE UNDER
EQUITY
COMPENSATION PLANS
The
following table gives information about our common stock that may be issued
upon
the exercise of options, warrants and rights under all of our equity
compensation plans as of June 30, 2006. The table includes the following
plans: 1997 Stock Option Plan and 2000 Flexible Stock Plan.
Plan
Category
|
|
Number
of Securities to be
issued
upon exercise of
outstanding
options, warrants
and
rights
|
|
Weighted-average
exercise
price
of outstandingoptions,
warrant
and rights
|
|
Number
of securities
remaining
available for future
issuance
under equity
compensation
plans
(excluding securities
reflected
in column (a))
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans
approved
by security
holders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1997
Stock Option Plan
|
|
|
1,411,650
|
|
$
|
1.93
|
|
|
-0-
|
|
2000
Flexible Stock Plan(1)
|
|
|
10,671,288
|
|
|
0.90
|
|
|
9,004,511
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
12,082,938
|
|
|
1.02
|
|
|
9,004,511
|
|
(1)
Securities available for future issue increase each year by 10% of our
outstanding common stock at the beginning of each year. The total amount of
common stock available under the plan cannot exceed 20 million
shares.
RECENT
SALES OF UNREGISTERED SECURITIES
During
the fiscal quarter ended June 30, 2006, we have made the following sales of
restricted securities:
On
June
22, 2006, we issued 700,000 shares of common stock as a result of the exercise
of employee options to acquire our common stock, for which we received cash
of
approximately $477,000 The shares were issued in reliance upon Section 4(2)
of
the Securities Act.
At
June 30, 2006, the Company has accrued
approximately $77,000
of Series B-1 dividends, which was paid in July 2006 through the issuance
of approximately 63,000 shares of the Company's common stock.
SERIES
K, A-1,
B-1 and C-1
PREFERRED STOCK
Series
K Convertible Preferred Stock
In
connection with our May 15, 2006 Securities Purchase Agreement with
Tullis-Dickerson Capital Focus III, L.P. which closed on May 26, 2006, pursuant
to which we issued and sold 10,000 shares of Series B-1 Convertible Preferred
Stock and warrants, we, and the holders of the Series K Convertible Preferred
Stock, agreed to, and did convert all 1,464,567 then outstanding shares of
our
Series K Stock into 31,373,875 shares of common stock.
The
Series K Stock would have automatically converted into the same number of shares
of common stock in equal annual installments through June 4, 2010. The effect
of
the agreement was merely to accelerate such conversions.
As
of
June 30, 2006, there were no shares of Series K Stock outstanding.
Series
A-1 Convertible Preferred Stock
The
following are the principal designations, preferences and rights of our Series
A-1 Convertible Preferred Stock which is held by two holders:
-
Title.
|
$.01
par value per share Series A-1 Convertible Cumulative Preferred
Stock.
|
|
|
-
Voting.
|
No
voting rights.
|
|
|
-
Liquidation Preference.
|
$0.682
per share.
|
|
|
-
Dividend Rights.
|
$0.0341
per share, per year, when and as declared by our Board of
Directors.
|
|
|
-
Redemption Provisions.
|
None.
|
|
|
-
Amount Authorized.
|
5
million shares.
|
|
|
-
Amount Issued.
|
4,855,389
|
|
|
-
Conversion.
|
Converts
on a 1:1 basis into common stock
upon:
|
|
i. |
the
Company reaching $150 million in revenues;
|
|
ii. |
a
merger, consolidation, sale of assets or similar transaction;
or
|
|
iii. |
a
“Change in Control” which occurs if (a) any person, or any two or more
persons acting as a group, and all affiliates of such person or persons,
shall, acquire and own, beneficially, 50% or more of the common stock
outstanding, or (b) if following (i) a tender or exchange offer for
voting
securities of the Company, or (ii) a proxy contest for the election
of
directors of the Company, the persons who were directors of the Company
immediately before the initiation of such event cease to constitute
a
majority of the Board of Directors of the Company upon the completion
of
such tender or exchange offer or proxy contest or within one year
after
such completion.
|
Series
B-1 Redeemable Convertible Preferred Stock
On
May
15, 2006, Tullis-Dickerson Capital Focus III, L.P. purchased 10,000 shares
of
our newly designated Series B-1 Redeemable Convertible Preferred Stock as fully
described in our Current Report on Form 8-K filed with the SEC on June 2, 2006.
The following are the principal designations, preferences and rights of our
Series B-1 Redeemable Convertible Preferred Stock which is held by one
holder:
-
Title.
|
$.01
par value per share Series B-1 Redeemable Convertible Preferred
Stock.
|
|
|
-
Voting.
|
Each
votes with the common and has a number of votes equal to the number
of
share of common into which it is convertible on the record date for
the
action to be voted upon. The current aggregate number of votes for
the
Series B-1 Stock is 6,519,755.
|
|
|
-
Liquidation Preference.
|
Upon
certain liquidation events set forth in the Certificate of Designation,
the holder of each share is entitled to a payment of $1,000 plus
accrued
but unpaid dividends.
|
|
|
-
Dividend Rights.
|
8.25%
per annum, payable quarterly in arrears in either cash or at our
option,
in restricted common stock.
|
|
|
-
Redemption Provisions.
|
We
are required to redeem the Series B-1 Stock upon the occurrence of
specified events, including, but not limited to a change in control,
a
going private transaction, failure to pay dividends or a failure
to allow
conversion.
|
|
|
-
Amount Authorized.
|
15,000
shares.
|
|
|
-
Amount Issued.
|
10,000
|
|
|
-
Conversion.
|
The
Series B-1 Stock, as well as any accrued dividends, may be converted
at
any time by the holder into a number of shares of our common stock
determined by dividing the dollar amount to be converted by
$1.5338.
|
|
|
-
Registration Rights
|
The
holders of the Series B-1 Stock have demand registration rights pursuant
to which we must file a registration statement to cover common shares
into
which the Series B-1 Stock is convertible within 60 days of a request
to
do so.
|
|
|
-
Right to Appoint a Director
|
For
so long as Tullis-Dickerson Capital Focus III, L.P. or any of its
affiliates holds at least 25% of the Series B-1 Stock, it shall have
the
right to appoint one member of our Board of
Directors.
|
Series
C-1 Redeemable Convertible Preferred Stock
On
September 11, 2006, Aisling Capital II, LP purchased 10,000 shares of our newly
designated Series C-1 Redeemable Convertible Preferred Stock as fully described
in our Current Report on Form 8-K filed with the SEC on September 15, 2006.
The
following are the principal designations, preferences and rights of our Series
C-1 Redeemable Convertible Preferred Stock which is held by one
holder:
-
Title.
|
$.01
par value per share Series C-1 Convertible Preferred
Stock.
|
|
|
-
Voting.
|
Each
votes with the common and has a number of votes equal to the number
of
share of common into which it is convertible on the record date for
the
action to be voted upon. The current aggregate number of votes for
the
Series C-1 Stock is 6,519,755.
|
|
|
-
Liquidation Preference.
|
Upon
certain liquidation events set forth in the Certificate of Designation,
the holder of each share is entitled to a payment of $1,000 plus
accrued
but unpaid dividends.
|
|
|
-
Dividend Rights.
|
8.25%
per annum, payable quarterly in arrears in either cash or at our
option,
in restricted common stock.
|
|
|
-
Redemption Provisions.
|
We
are required to redeem the Series C-1 Stock upon the occurrence of
specified events, including, but not limited to a change in control,
a
going private transaction, failure to pay dividends or a failure
to allow
conversion.
|
|
|
-
Amount Authorized.
|
10,000
shares.
|
|
|
-
Amount Issued.
|
10,000
|
|
|
-
Conversion.
|
The
Series C-1 Stock, as well as any accrued dividends, may be converted
at
any time by the holder into a number of shares of our common stock
determined by dividing the dollar amount to be converted by
$1.5338.
|
|
|
-
Registration Rights
|
The
holders of the Series C-1 Stock have demand registration rights pursuant
to which we must file a registration statement to cover common shares
into
which the Series C-1 Stock is convertible within 60 days of a request
to
do so.
|
|
|
-
Right to Appoint a Director
|
For
so long as Aisling Capital II, LP or any of its affiliates holds
at least
25% of the Series C-1 Stock, it shall have Board observer
rights.
|
ITEM
6. SELECTED
FINANCIAL DATA
The
following table presents summary financial data for the years ended June 30,
2006, 2005 and 2004, the six-months ended June 30, 2003 and June 30, 2002 and
the years ended December 31, 2002, and 2001. The summary financial data set
forth below with respect to our statements of operations for the years ended
December 31, 2001 and December 31, 2002 and the balance sheet data as at June
30, 2004 and 2003 and December 31, 2002, and 2001 was derived from our
consolidated financial statements which are not included in this Report. The
following summary financial data should be read in conjunction with the
consolidated financial statements and "Management's Discussion and Analysis
of
Financial Condition and Results of Operations" appearing elsewhere in this
Report (in thousands except per share data):
|
|
Year
Ended
June
30, 2006
|
|
Year
Ended
June
30, 2005
|
|
Year
Ended
June
30, 2004
|
|
Six
Months Ended June 30, 2003
|
|
Six
Months Ended June 30, 2002 (1)
|
|
Year
ended
December
31, 2002
|
|
Year
ended
December
31, 2001
|
|
Net
Sales
|
|
$
|
63,355
|
|
$
|
39,911
|
|
$
|
41,100
|
|
$
|
14,953
|
|
$
|
11,743
|
|
$
|
24,312
|
|
$
|
18,435
|
|
Net
(loss) income
|
|
|
(3,790
|
)
|
|
(149
|
)
|
|
3,123
|
|
|
724
|
|
|
611
|
|
|
1,050
|
|
|
515
|
|
(Loss)
Income per
common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.15
|
)
|
|
(0.01
|
)
|
|
0.16
|
|
|
0.08
|
|
|
0.07
|
|
|
0.13
|
|
|
0.06
|
|
Diluted
|
|
|
(0.15
|
)
|
|
(0.01
|
)
|
|
0.04
|
|
|
0.02
|
|
|
0.02
|
|
|
0.03
|
|
|
0.01
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
62,867
|
|
|
46,390
|
|
|
35,168
|
|
|
20,339
|
|
|
10,904
|
|
|
11,198
|
|
|
9,646
|
|
Long-term
obligations
|
|
|
14,077
|
|
|
6,706
|
|
|
7,076
|
|
|
267
|
|
|
3,461
|
|
|
3,336
|
|
|
3,591
|
|
Cash
dividend per
common
share
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
Unaudited.
ITEM
7. |
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(in
Thousands except per share
data)
|
Results
of Operations
Overview
Interpharm
Holdings, Inc., (the "Company" or "Interpharm"), through its operating
wholly-owned subsidiary, Interpharm, Inc., ("Interpharm, Inc." and collectively
with Interpharm, "we" or "us") is engaged in the business of developing,
manufacturing and marketing generic prescription strength and over-the-counter
pharmaceutical products. We currently manufacture and market 23 generic drug
products, which represent various oral dosage strengths for 11 unique products.
During
the fiscal year ended June 30, 2006, we continued implementation of our
expansion plan and transformation into a full service generic drug provider
by
committing the necessary capital, personnel and resources to do so. Pursuant
to
our expansion plan, our principal goals are to target higher margin products,
establish full product lines in each of our product areas, obtain approvals
for
those products and successfully commercialize those products, while increasing
production and efficiency in manufacturing and marketing our current products.
Our results of operations and financial statements not only reflect our
expansion and transformation, but also show that we are on the path to
continuing to meet our objectives:
o |
Our
revenues increased by approximately 58.7%, from $39,911 for the fiscal
year ended June 30, 2005 to $63,355 for the fiscal year ended June
30,
2006. Our significant revenue growth was driven by our expansion
plan
mandates: the addition of new products, increasing efficiencies and
a
stronger marketing presence.
|
o |
Our
gross margins increased by approximately 4.8 percentage points from
22.7%
for the fiscal year ended June 30, 2005 to 27.5% for the fiscal year
ended
June 30, 2006. Our significant growth in our gross margins was a
direct
result of our mandate to add higher margin products to our line,
which we
were able to do with the addition of our female hormone products
and
generic Bactrim® and increasing sales of
Naproxen.
|
o |
We
increased our research and development spending by approximately
166.6%,
from $4,003 for the fiscal year ended June 30, 2005 to $10,674 for
the
fiscal year ended June 30, 2006, and by 2034.8% from $538 for the
fiscal
year ended June 30, 2004. The only way to add more products to our
line is
to commit research and development spending to develop the products
and
file ANDAs. We have done this, and are committed to increase the
pace of
our research and development spending in the coming fiscal year.
From July
1, 2005, to the date of this Annual Report, our research and development
spending has resulted in the filing of 17 new ANDAs, and we anticipate
the
filing of at least an additional 20 ANDAs for the fiscal year ending
June
30, 2007. As disclosed in prior filings, we had previously projected
only
25 filings by June 30, 2007, but are now on a pace for at least
37.
|
o |
We
have started development on products in all of our five primary targeted
product areas and are continuing to target and file ANDAs for products
in
our sixth area - products coming off patent and for which patents
have
expired. Each of these product areas was chosen because of the higher
margins that are available and because we anticipate limited competition.
Our progress to date in our targeted product areas is allowing us
to move
further towards our goals of having a full line to offer in each
product
area and further increasing gross margins and per tablet revenues.
Our
five primary targeted product areas are: Female Hormone Products,
Scheduled Narcotic Products, Soft Gelatin Capsule Products Special
Release
Characteristic Products and Liquid
Products.
|
o |
We
have obtained all of the financing we require to meet our current
plan, as
well as to finance additional projects which may become available
to
us:
|
§ |
On
February 9, 2006, we obtained a new $41,500 credit facility from
Wells
Fargo to replace our previous $21,000 facility from
HSBC;
|
§ |
On
May 26, 2006, we closed the sale of $10,000 of our Series B-1 Convertible
Preferred Stock and warrants; and
|
§ |
On
September 11, 2006, we closed the sale of $10,000 of our Series C-1
Convertible Preferred Stock and warrants.
|
o |
We
continued our hiring of qualified research and development, marketing
and
other personnel, including a national sales manager, so that we have
most
of the personnel necessary to complete our plan. We are continuing
our
hiring and are adding additional research and development and marketing
personnel, including a second national sales
manager.
|
o |
We
have increased production to over 4.2 billion tablets during the
fiscal
year ended June 30, 2006. In addition, we have substantially completed
the
build out of our new Yaphank facility which we believe will come
on line
by December 31, 2006. We anticipate further increases in our revenue
per
tablet to complement our production and efficiency improvements.
|
o |
We
have elected to develop internally, certain research and development
projects that had been previously outsourced, such as certain off-patent
products, to expedite development and to take advantage of our increased
research and development capabilities with greater staff and space
in our
Yaphank facility.
|
o |
We
have significantly decreased contract manufacturing
activities.
|
Based
upon our achievements during the past fiscal year through the addition of higher
margin products and increased production, we believe that we have a solid
foundation for future growth, to complete our expansion plan and to achieve
profitability
Fiscal
Year Ended June 30, 2006 compared to Fiscal Year Ended June 30,
2005
|
|
For
the Fiscal
Year
Ended
June
30, 2006
|
|
For
the Fiscal
Year
Ended
June
30, 2005
|
|
SALES,
Net
|
|
$
|
63,355
|
|
$
|
39,911,
|
|
COST
OF SALES
|
|
|
45,927
|
|
|
30,8389
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
17,428
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
Gross
Profit Percentage
|
|
|
27.51
|
%
|
|
22.73
|
%
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
11,449
|
|
|
5,092
|
|
Related
party rent expense
|
|
|
72
|
|
|
72
|
|
Research
and development
|
|
|
10,674
|
|
|
4,003
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
22,195
|
|
|
9,167
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(4,767
|
)
|
|
(95
|
)
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
Gain
on sale of marketable securities
|
|
|
—
|
|
|
9
|
|
Loss
on Sale of Fixed Asset
|
|
|
(5
|
)
|
|
—
|
|
Interest
expense
|
|
|
(719
|
)
|
|
(136
|
)
|
Interest
and other income
|
|
|
1
|
|
|
—
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES
|
|
|
(723
|
)
|
|
(127
|
)
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
|
|
(5,490
|
)
|
|
(222
|
)
|
|
|
|
|
|
|
|
|
BENEFIT
FROM
INCOME
TAXES
|
|
|
(1,700
|
)
|
|
(73
|
)
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
Net
Sales
Net
sales
for the fiscal year ended June 30, 2006 were $63,355 compared to $39,911 for
fiscal year ended June 30, 2005, an increase of $23,444 or 58.7%. Significant
components contributing to our growth of existing products were those set forth
in the table below:
Product
|
|
Year
over year
increase
in net sales
|
|
Ibuprofen
|
|
$
|
5,866
|
|
Naproxen
|
|
|
7,721
|
|
Hydrocodone
/ Ibuprofen
|
|
|
1,166
|
|
Total
|
|
$
|
14,753
|
|
§ |
The
increase in net sales of Ibuprofen was primarily the result of an
expanded
customer base and improvements in manufacturing and packaging which
enabled us to increase output and modest cost of materials reductions.
We
believe sales of Ibuprofen should remain at current levels for fiscal
2007, however, there can be no assurance that this will
occur.
|
§ |
An
expanded customer base, as well as obtaining a U.S.
Government contract to supply Naproxen to various governmental agencies
valued at approximately $3,900 for the twelve month period beginning
September 2005 were key factors contributing to the $7,721 increase
in
sales of Naproxen. The contract includes four one-year option periods.
We
believe sales volume should continue or may increase slightly, however,
there can be no assurance that this will occur.
|
§ |
On
a fiscal year over year basis, we had an increase of more than $1,166
from
sales of Hydrocodone 7.5 mg/Ibuprofen 200 mg, our generic version
of
Vicoprofen®, which was launched during the three month period ended
December 31, 2004, and Reprexain® (Hydrocodone 5.0 mg/Ibuprofen 200 mg).
Both products are sold to and marketed by, Watson Pharmaceuticals,
Inc.
and therefore it is difficult to project future sales. The results
for the
periods reported include additional revenue derived from a profit
sharing
arrangement for these products.
|
During
the fiscal year ended June 30, 2006, we began to see the positive effects of
our
expansion plan which commenced in 2005. Two new products were launched which
contributed greatly to our revenue growth. As we continue our planned product
line expansion we anticipate that fiscal year 2007 should witness the launching
of new products as well; however there can be no assurance we will be successful
in achieving our plan. The two new products for fiscal 2006 were:
§ |
As
reported in our Current Report on Form 8-K filed with the SEC on
July 18,
2005, we entered into an agreement with Centrix Pharmaceutical, Inc.
(“Centrix”) for the sale of a female hormone product, which is distributed
in two strengths. This
product generates a higher gross margin compared to our other
products.
The agreement commenced upon the first shipment of the product to
Centrix
in August, 2005. Centrix was required to purchase a minimum $11,500
of the
product during the first twelve month period with the option to purchase
an additional $2,000 of product. For the twelve month period ended
June
30, 2006, we shipped approximately $8,100 of the female hormone product
to
Centrix. We will ship approximately $5,400 of product by September
30,
2006. We have renegotiated the agreement with Centrix for the up
coming
year and we anticipate sales during fiscal 2007 of the product to
exceed
fiscal year 2006 totals. In the event that the agreement is terminated
at
any time, or for any reason, we maintain the right to market the
product
alone or with a third party.
|
§ |
In
September, 2005, we launched Sulfamethoxazole and Trimethoprim (“SMT”)
single and double strength tablets, which are sold under the name
Bactrim®. SMT is a widely used antibiotic used to treat infections such as
urinary tract infections, bronchitis, ear infections (otitis), traveler's
diarrhea, and Pneumocystis carinii pneumonia. Sales during fiscal
2006 of
these products approximated $4,200. While we believe that sales of
for
these products should increase during fiscal 2007, market conditions
could
affect our results.
|
As
a
result of our decision to greatly reduce and ultimately halt the manufacture
and
sale of Allopurinol and Atenolol under a contract manufacturing agreement,
our
revenues for these products declined during the fiscal year ended June 30,
2006.
Both Allopurinol and Atenolol were manufactured for and shipped to one customer
based on quantities ordered by that customer. Revenue from sales of Allopurinol
and Atenolol decreased by approximately $4,700 from $7,100 for the year ended
June 30, 2005 to $2,400 for the year ended June 30, 2006. The manufacturing
capacity gained from the decrease in production of these two products is being
used for other products. For fiscal 2007 and beyond we anticipate little or
no
sales of these products.
The
fluctuations in revenue by product were generally not attributable to any
changes in our pricing which, for our entire product line, remained relatively
stable.
During
the fiscal year ended June 30, 2006, four key customers, in the aggregate,
accounted for approximately 53% of total sales. For the fiscal year ended June
30, 2005 we had three key customers which accounted for approximately
56%
Cost
of sales / Gross Profits
During
the year ended June 30, 2006, prices for our raw materials remained relatively
constant. While
no
assurance can be given, we
anticipate this trend to continue, at least for the near future. During the
fiscal year ended June 30, 2006, prices for packaging components increased.
It
is uncertain as to whether or not these costs will continue to rise.
We
have
incurred increased direct labor and supervisory salaries and related benefits
associated with increased production. As
part of
our expansion plan, we have increased managerial and production staff. We
believe this increase is required and should ultimately support our expansion
plan. Additionally,
incurred increased general overhead costs, such as product liability insurance,
workers compensation insurance, medical benefits and utilities. We believe
these
higher costs will likely continue for the near future.
Gross
profit for the fiscal year ended June 30, 2006 significantly increased by more
than $8,356, or 92%, to $17,428, compared to $9,072 for the year ended June
30,
2005. In
addition, our gross profit percentage increased 4.8 percentage points from
22.7%
for the year ended
June 30,
2005 to 27.5% for the year ended June 30, 2006. This increase is primarily
due
to sales of our new products: Bactrim® and our female hormone therapy products
which both generate higher gross margins compared to our remaining products.
Gross margins for the remaining products were generally consistent with the
prior year.
Gross
margin percentage can fluctuate as a result of many factors, such as changes
in
our selling price or the cost of raw materials, as well as increases in cost
of
labor and general overhead. Fluctuations in our sales volume and product mix
affect gross margin dollars. As part of our plan, we are seeking to add new
products with higher margins, however, there can be no assurance that sales
will
increase or cost of sales will not increase disproportionately.
.
Selling
and General and Administrative Expenses
Selling,
general and administrative expenses include salaries and related costs,
commissions, travel, administrative facilities, communications costs and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead.
During
the fiscal year ended June 30, 2006, selling, general and administrative
expenses increased approximately $6,357 to approximately $11,449, or 18.1%
of
net sales from approximately $5,092 or 12.8% of net sales, during fiscal year
end June 30, 2005.
Significant
factors contributing to this increase include: necessary increases in the
staffing of administrative and sales areas to support our growth of $1,954;
related payroll taxes and benefits of $496; increased commission expenses and
freight expenses of $314 and $234, respectively, both of which are attributable
to our higher sales; $600 for investment banking services; increased accounting
and legal costs of $284, primarily related to the refinancing of our bank debt
and sale of our Series B-1 preferred stock; an increase in general insurance
of
$229; increased rent, utilities and taxes of $200; an increase in depreciation
of non-manufacturing assets of $105; and the recognition of a non cash charge
of
$1,195` as a result of our adoption of the fair value recognition provisions
of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised
2004), “Share-Based Payment,” (“SFAS 123(R)”). Included in the $1,195 was a
non-cash charge related to the modification of an option grant as a result
the
death of an executive officer. Adoption of SFAS 123(R) requires us to report
a
non-cash expense for the ratable portion of the fair value of employee stock
option awards of unvested stock options over the remaining vesting period.
Previously we elected to follow the intrinsic value method in accounting for
our
stock-based employee compensation arrangements as defined by Accounting
Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations including Financial Accounting Standards
Board Interpretation No. 44, “Accounting for Certain Transactions Involving
Stock Compensation”. We believe that our selling and general and administrative
costs should stabilize at current levels, other than for those expenses that
fluctuate with sales.
Research
and Development Expenses
Research
and development expenses for new products currently in development in our new
product pipeline consist primarily of wages, outside development organizations,
bioequivalence studies, materials, legal fees, and consulting fees. During
the
fiscal year ended June 30, 2006 we incurred more than $10,674 in research and
development expenses, which is $6,671 greater than the prior year amount of
$4,003. We believe that research and development expenses, as a percentage
of
our net sales, will be substantially higher in the future as we seek to expand
our product lines. While we believe increased spending for research and
development efforts will allow us to add obtain approvals for new products,
there can be no assurance we will be successful in the
commercialization.
A
significant component of our expansion plan includes two agreements with Tris
Pharma, Inc. (“Tris”). One of the agreements is for the development and
licensing of twenty-five liquid generic products (“Liquids Agreement”). In the
event that Tris delivers twenty-five successful technical packages, of which
there can be no assurance, we will be required to pay Tris $3,000. In accordance
with the terms of this agreement, we make payments as various milestones are
achieved. In addition, Tris is to receive a royalty of between 10% and 12%
of
net profits resulting from the sales of each product. We are entitled to offset
the royalty payable to Tris each year, at an agreed upon rate, to recoup the
development fees paid to Tris under the Liquids Agreement.
The
second agreement, as amended, pertains to the solid dosage products (“solids”),
pursuant to which we are to collaborate with Tris on the development,
manufacture and marketing of eight solid oral dosage generic products. The
amendment to this agreement requires Tris to deliver technical packages for
two
softgel products. Further, the terms of this amendment require us pay to Tris
$750 based upon various Tris milestone achievements. Some products included
in
this agreement, as amended, may require us to challenge the patents for the
equivalent branded products. This agreement, as amended, provides for payments
of an aggregate of $4,500 to Tris, whether or not regulatory approval is
obtained for any of the solids products. The agreement for solids also provides
for an equal sharing of net profits for each product, except for one product,
if
it is successfully sold and marketed, after the deduction and reimbursement
of
all litigation-related and certain other costs. The excluded product provides
for a profit split of 60% for the Company and 40% for Tris. Further, this
agreement provides us with a perpetual royalty-free license to use all
technology necessary for the solid products in the United States, its
territories and possessions.
In
April,
2006, the solids agreement was further amended. This second amendment requires
Tris to deliver a Technical Package for one additional solid dosage product.
Further, terms of this second amendment will requires us to pay to Tris an
additional $300 after it has paid the initial aggregate amounts associated
to
the original agreement.
For
the
fiscal year ended June 30, 2006, we recorded as a research and development
expense approximately $2,110 in connection with these agreements. Further,
since
inception, we have incurred approximately $3,510 of research and development
costs associated with the Tris agreements. The
combined costs of these agreements could aggregate up to $7,800. The balance
on
the liquid agreement of $2,750 could be paid within three years if all
milestones are reached. The balance on the solids agreement, as amended, of
$1,675 could be paid within two years if all milestones are
reached.
During
the fiscal year ended June 30, 2006, we filed 17 ANDAs. We believe that with
our
increased research and development spending, we will be able to file ANDAs
at an
increasing rate and anticipate exceeding our previous projection of twenty
five
ANDAs for the period July 1, 2005 through June 30, 2007.
We
are
currently negotiating a possible modification to the Tris liquids agreement
which could outsource the manufacturing of these liquid products to
Tris.
Interest
Expense
Our
interest expense increased approximately $583 to approximately $719 for the
fiscal year ended June 30, 2006 from $136 for the fiscal year ended June 30,
2005. In an effort to fund our plan, in February, 2006, we increased our
borrowing capabilities through a new credit facility entered into with Wells
Fargo Business Credit. The additional borrowings were required primarily to
fund
our research and development efforts, for renovation and construction costs
incurred for our second facility and new equipment. In order to hedge against
rising interest rates, we entered into two interest rate swap arrangements.
As
of June 30, 2006, we have saved approximately $98 as a result of these swaps
agreements. However, it is likely that, as a result of additional borrowings
we
will incur increases in our interest expense in the future.
Operating
Loss
Although
our sales and gross margins increased, as a result of our increase in research
and development efforts from which we believe we will see the benefits from
in
the future, along with increases in selling and general and administrative
costs, we incurred an operating loss of $5,490 for the year ended June 30,
2006
compared to an operating loss of $222 for the year ended June 30, 2005.
Income
Taxes
For
the
year ended June 30, 2006 we recorded an income tax benefit of $1,700, an
increase in the benefit of $1,627 compared to the year ended June 30, 2005
which
had a benefit from income tax of $73.
We
account for income taxes using the liability method which requires the
determination of deferred tax assets and liabilities based on the differences
between the financial and tax bases of assets and liabilities using enacted
tax
rates in effect for the year in which differences are expected to reverse.
The
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion
or
all of the net deferred tax asset will not be realized. Our net deferred tax
asset at June 30, 2006 was $6,170 and $4,413 at June 30, 2005.
Liquidity
and Capital Resources
We
currently finance our operations and capital expenditures through cash flows
from operations, bank loans and sale of preferred stock. Net cash provided
by
operating activities for the fiscal year ended June 30, 2006, was $801 compared
to cash used in operating activities of $2,353 during the fiscal year ended
June
30, 2005. Significant factors comprising the cash provided in operating
activities include: net loss of $3,790, increases in accounts payable, accrued
expenses payable of $6,688, an increase in deferred revenue of $3,399, offset
by
decreases of $5,974 in accounts receivable. The increase in accounts payable,
accrued expenses and other payables are primarily attributable to increases
in
purchases due to greater sales volume as well as increased research and
development costs. Additionally, we reported depreciation and amortization
of
$1,534. At June 30, 2006, we had $1,438 in cash and cash equivalents, compared
to $536 at June 30, 2005. We also recognized a non cash charge of $1,195 as
a
result of adoption of SFAS 123 (R).
Significant
components in our net cash provided by financing activities of $8,243 for the
fiscal year ended June 30, 2006, were the our entering into new credit facility
of $41,500 (canceling a previous credit facility of $21,500) the details of
which is detailed below and the sale of $10,000 of our Series B-1 Redeemable
convertible preferred stock. A component of our current plan is the completion
of renovations to our second facility along with the installation of additional
equipment for manufacturing, packaging and research and development.
Accordingly, during the fiscal year ended June 30, 2006 we invested $8,240
for
new equipment and improvements. In addition, on September 11, 2006 we sold
$10,000 of our Series C-1 Redeemable Convertible Preferred stock
It
should
be noted that as part of our business plan, during the fiscal year ended June
30, 2006, we incurred more than $10,674 in research and development expenses.
We
believe that our research and development costs will likely exceed this current
rate, for the foreseeable future.
As
previously disclosed we have elected not to move forward with the planned
construction of a research and development facility in Ahmedabad, India. We
are
currently investigating our options pertaining to the land acquired. We
are continuing development and capital investment in our new Yaphank, NY
facility which already houses some of our expanded research and development
department and will also be used for manufacturing. We believe the Yaphank
facility will be operational by the end of calendar 2006.
Bank
Financing
On
February 9, 2006, we entered into a new four-year financing arrangement with
Wells Fargo Business Credit (“WFBC”). This financing agreement provided a
maximum credit facility of $41,500 comprised of:
· $22,500
revolving credit facility
· $12,000
real estate term loan
· $
3,500
machinery and equipment (“M&E”) term loan
· $
3,500
additional / future capital expenditure facility
The
funds
made available through this facility paid down, in its entirety, the $20.45
million owed on the previous credit facility. The new revolving credit facility
borrowing base is calculated as (i) 85% of our eligible accounts receivable
plus
the lesser of 50% of cost or 85% of the net orderly liquidation value of its
eligible inventory. The advances pertaining to inventory are capped at the
lesser of 100% of the advance from accounts receivable or $9,000. The $12,000
loan for the real estate in Yaphank, NY is payable in equal monthly installments
of $67 plus interest through February 2010 at which time the remaining principal
balance is due. The $3,500 M&E loan is payable in equal monthly installments
of $58 plus interest through February 2010 at which time the remaining principal
balance is due. With respect to additional capital expenditures, the Company
is
permitted to borrow 90% of the cost of new equipment purchased to a maximum
of
$3,500 in borrowings amortized over 60 months. As of June 30, 2006, there is
approximately $2,930 available for additional capital expenditure
borrowings.
Under
the
terms of the WFBC agreement, three stockholders, all related to our Chairman
of
the Board of Directors, one of whom is our Chief Operating Officer, were
required to provide limited personal guarantees, as well as pledge securities
with a minimum aggregate value of $7,500 as security for a portion of the
$22,500 credit facility. We were required to raise a minimum of $7,000 through
the sale of equity or subordinated debt by June 30, 2006. The
shareholder’s pledges of marketable securities would be reduced by WFBC either
upon our raising capital, net of expenses in excess of $5,000 or achieving
certain milestones. As a result of our sale of $10,000 of Series B-1 Redeemable
convertible preferred stock in May 2006, the credit facility and the limited
personal guarantees were reduced by $4,250 and $3,670, respectively. Further,
in
September, 2006 we consummated a $10,000 sale of Series C-1 Redeemable
Convertible preferred stock which will further reduce the credit facility by
$3,250 and eliminate the balance of the personal pledges of marketable
securities of $3,830. After the reductions described above, the maximum
availability of the revolving credit facility will be $15,000.
The
revolving credit facility and term loans will bear interest at a rate of the
prime rate less 0.5% or, at our option, LIBOR plus 250 basis points. At June
30,
2006, the interest rate on this debt was 7.75%. Pursuant to the requirements
of
the WFBC agreement, we put in place a lock-box arrangement. We will incur a
fee
of 25 basis points per annum on any unused amounts of this credit facility.
The
WFBC
credit facility is collateralized by substantially all of our assets. In
addition, we are required to comply with certain financial covenants.
With
respect to the real estate term loan and the $3.5 million M&E loan, we
entered into interest rate swap contracts (the “swaps”), whereby we pay a fixed
rate of 7.56% and 8.00% per annum, respectively. The swaps contracts mature
in
2010. The swaps are a cash flow hedge (i.e. a hedge against interest rates
increasing). As all of the critical terms of the swaps and loans match, they
are
structured for short-cut accounting under SFAS No. 133, “Accounting For
Derivative Instruments and Hedging Activities’” and by definition, there is no
hedge ineffectiveness or a need to reassess effectiveness. Fair value of the
interest rate swaps at June 30, 2006 was approximately $98 and is included
in
other assets.
As
previously disclosed, we entered into agreements with Tris for the development
and delivery of over thirty new Technical Packages. The combined costs of these
two agreements will approximate $7,800, of which we have paid $3,375 as of
June
30, 2006. The balance on one agreement of $2,750 could be paid within two years.
The second agreement has a balance of $1,675 and is scheduled to be paid within
two years.
Future
cash flows could be aided by utilization of our available Federal net operating
loss carryforwards ("NOLs"). At June 30, 2006 we have remaining Federal NOLs
of
approximately $14,328 and State NOLs of approximately $13,744 expiring through
2026. Pursuant to Section 382 of the Internal Revenue Code regarding substantial
changes in our ownership, utilization of these NOLs is limited. Approximately
$10,770 of these NOLs are available in fiscal 2007, and utilization of
approximately $3,558 of these NOLs is limited and becomes available after fiscal
2007. The limitations lapse at the rate of $2,690 per year, through fiscal
2009.
As of June 30, 2006, we determined that it is more likely than not, that we
will
utilize all of the Federal NOLs in the future. We recorded a valuation allowance
of approximately 25% of the State NOLs which we do not anticipate utilizing
due
to State limitations.
In
addition, at June 30, 2006, we have approximately $835 of New York State
investment tax credit carryforwards, expiring in various years through 2021.
These carryforwards are available to reduce future New York State income tax
liabilities. However, we reserved 100% of the investment tax credit
carryforward, which we do not anticipate utilizing.
We
believe with the funds obtained from the sale of Series B-1 and Series C-1
convertible preferred stocks, along with the credit facility currently in place
we should have sufficient funding for the next twelve months and to achieve
our
current business and expansion plan. In the unlikely event the current funding
is insufficient to implement our expansion plan we would be required to raise
additional capital through either additional debt financing or through
additional equity investments, the availability of which cannot be assured.
If
we are unable to obtain sufficient funds, we will have to either delay or scale
back on our expansion plan. However, we do not believe our existing business
would be materially adversely affected by such delay or scaling back of our
expansion plans.
Accounts
Receivable
Our
accounts receivable at June 30, 2006 was $13,592 as compared to $7,664 at June
30, 2005. The average annual turnover ratio of accounts receivable to net sales
for the fiscal years ended June 30, 2006 and 2005 was 5.7 and 5.5 turns,
respectively. Our turns are calculated on an annual average. Our accounts
receivable continue to have minimal risk with respect to bad debts; however
this
trend cannot be assured.
Inventory
At
June
30, 2006, our inventory was $8,706 as compared to $8,941 at June 30, 2005.
Our
turnover of inventory for the years ended June 30, 2005 and 2004 was 5.2 and
4.3, respectively. Our inventory is current; there are no reserves for
obsolescence. We anticipate our inventory levels to rise in order to support
future planned growth and overall customer demands.
Accounts
Payable
Our
accounts payable, accrued expenses and other current liabilities increased
by
approximately $6,417 to $12,650 at June 30, 2006, from $6,233 at June
30, 2005. The increase is primarily attributable to increases in purchases
of
our raw materials due to greater sales volume as well as increased research
and
development costs. Additionally, the increase is partially due to liabilities
incurred in relation to fixed asset additions and construction in progress.
We
do not believe this increase in our accounts payable, accrued expenses and
other
current liabilities will have any material affect on our vendor
relationships.
Cash
During
the year ended June 30, 2006, cash increased $902 from $536 at June 30, 2005
to
$1,438 at June 30, 2006.
For the
year ended June 30, 2006 we funded our business from bank debt, operations
and
sale of Series B-1 Redeemable convertible preferred stock.
Our
Obligations
As
of
June 30, 2006, our obligations and the periods in which they are scheduled
to
become due are set forth in the following table:
|
|
|
|
Due
in less
|
|
Due
|
|
Due
|
|
Due
|
|
|
|
|
|
than
1
|
|
in
2-3
|
|
in
4-5
|
|
after
5
|
|
Obligation
|
|
Total
|
|
Year
|
|
Years
|
|
Years
|
|
Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real
Estate and M&E Term Loans (a)
|
|
$
|
15,638
|
|
$
|
1,686
|
|
$
|
3,228
|
|
$
|
10,724
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
lease and
software
license
|
|
|
6,710
|
|
|
604
|
|
|
1,146
|
|
|
960
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tris
|
|
|
1,000
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash obligations
|
|
$
|
23,348
|
|
$
|
3,290
|
|
$
|
4,374
|
|
$
|
11,684
|
|
$
|
4,000
|
|
In
addition to the information presented in the table above, we may be obligated
to
pay Tris potential future payments aggregating $3,425. There could be a balance
on the Liquid Agreement of $2,750 which could be paid if specific milestones
are
reached. Additionally, there is a balance on the solids agreement, as amended,
of $675 which could be paid by us if certain milestones are
reached.
(a)
The
Real Estate Term Loan of $12,000 is for the real estate in Brookhaven, NY,
is
payable in equal monthly installments of $67 plus interest through February
2010
at which time the remaining principal balance is due. The M&E Term Loan is
payable in equal monthly installments of $58 plus interest through February
2010
at which time the remaining principal balance is due. With respect to additional
capital expenditures, we are permitted to borrow 90% of the cost of new
equipment purchased to a maximum of $3,500 in borrowings amortized over 60
months. As of June 30, 2006, there is approximately $2,930 available for
additional capital expenditure borrowings.
Leases
We
lease
an entire building in Hauppauge, New York, pursuant to a non-cancellable lease
expiring in October, 2019, which houses our manufacturing, warehousing and
some
executive offices. The leased building is approximately 100,000 square feet
and
is located in an industrial/office park. The current annual lease payments
to
the landlord, Sutaria Family Realty, LLC, are $480,000. Sutaria Family Realty,
LLC is owned by Mona Rametra, Perry Sutaria and Raj Sutaria. Upon a change
in
ownership of the Company, and every three years thereafter, the annual base
rent
will be adjusted to fair market value, as determined by an independent
appraisal. There are no tenants in the building other than us.
Fiscal
Year Ended June 30, 2005 compared to Fiscal Year Ended June 30,
2004
|
|
For
the Fiscal
Year
Ended
June
30, 2005
|
|
For
the Fiscal
Year
Ended
June
30, 2004
|
|
SALES,
Net
|
|
$
|
39,911
|
|
$
|
41,100
|
|
COST
OF SALES
|
|
|
30,839
|
|
|
31,305
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
9,072
|
|
|
9,795
|
|
|
|
|
|
|
|
|
|
Gross
Profit Percentage
|
|
|
22.73
|
%
|
|
23.83
|
%
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,092
|
|
|
4,124
|
|
Related
party rent expense
|
|
|
72
|
|
|
72
|
|
Research
and development
|
|
|
4,003
|
|
|
_538
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
9,167
|
|
|
4,734
|
|
|
|
|
|
|
|
|
|
OPERATING
(LOSS) INCOME
|
|
|
(95
|
)
|
|
5,061
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
Gain
on sale of marketable securities
|
|
|
9
|
|
|
—
|
|
Interest
expense
|
|
|
(136
|
)
|
|
(21
|
)
|
Interest
and other income
|
|
|
—
|
|
|
69
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER (EXPENSES) INCOME
|
|
|
(127
|
)
|
|
48
|
|
|
|
|
|
|
|
|
|
(LOSS)
INCOME BEFORE INCOME
TAXES
|
|
|
(222
|
)
|
|
5,109
|
|
|
|
|
|
|
|
|
|
(BENEFIT
FROM) PROVISION FOR
INCOME
TAXES
|
|
|
(73
|
|
|
1,986
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
$
|
(149
|
)
|
$
|
3,123
|
|
Net
Sales
Net
sales
for the fiscal year ended June 30, 2005 were $39,911 compared to $41,100 for
fiscal year ended June 30, 2004, a decrease of $1,189, or 2.9%. Significant
components aggregating to this decrease were: (i) a decrease in sales
of Allopurinol
and Atenolol of $2,700 to $7,070 for the year ended June 30, 2005 compared
to
sales of $9,770 during the year ended June 30, 2004; (ii) partially offset
by
increases in sales of Hydrocodone Bitartrate with Ibuprofen, and Prednisone
aggregating approximately $3,200; and (iii) revenue from the sale of Naproxen
decreased by approximately $2,350 on a year over year basis. Revenue for the
products discussed in (i) and (ii) above were generated through a manufacturing
and supply agreement with a significant customer. As such we were unable to
control the revenue for these products. The fluctuations in revenue by product
were not attributable to any changes in pricing which, for our entire product
line, remained relatively stable.
During
the fiscal year ended June 30, 2005, three key customers, in the aggregate,
accounted for approximately 56% of total sales. The same three customers
accounted for approximately 65% for the fiscal year ended June 30,
2004.
We
had
already entered into an agreement with Centrix for the sale of our first female
hormone product. That agreement commenced upon the first shipment of the product
to Centrix in August, 2005 and has a ten year term but, under certain
circumstances, may be terminated by Centrix at any time after the first year
of
the agreement's term. Pursuant to the terms of the agreement, Centrix was
required to purchase a minimum $11,500 of the product during the first year
of
the agreement's term. There are also additional annual minimum purchase
requirements after the first year of the agreement’s term for so long as the
agreement remains in effect. In the event that the Agreement is terminated
at
any time, or for any reason, we maintain the right to market the product alone
or with a third party.
In
September, 2005, we launched Sulfamethoxazole and Trimethoprim (“SMT”) single
and double strength tablets, which are sold under the name Bactrim®. SMT is a
widely used antibiotic used to treat infections such as urinary tract
infections, bronchitis, ear infections (otitis), traveler's diarrhea, and
Pneumocystis carinii pneumonia. We have already entered into a number of sales
contracts for SMT and shipments have commenced.
Gross
Profit / Cost of Sales
Gross
profit for the fiscal year ended June 30, 2005 decreased approximately $723,
or
7%, to $9,072, compared to $9,795 for the year ended June 30, 2004. In
addition, our gross profit percentage decreased 1.1 percentage points from
23.8%
for the year ended
June 30,
2004 to 22.7% for the year ended June 30, 2005.
Cost
of
sales decreased approximately $466 or 1.5% to $30,839 for the year ended June
30, 2005, from $31,305 for the year ended June 30, 2004, primarily due to
decreased production and sales. However, it increased as a percentage of net
sales primarily
as a result of: (i) higher labor costs resulting from increased staffing, labor
rates and payroll taxes and (ii) increases in insurance, depreciation and
factory supplies. During the year ended June 30, 2005, prices for our raw
materials remained relatively constant. However, as a result of recent weather
/
economic factors, we anticipated that some of the raw materials and packaging
components would likely increase in the near future.
Research
and Development
During
the fiscal year ended June 30, 2005, particularly during the period January,
2005 through June 2005, our research and development efforts increased
significantly. We expensed approximately $538 during the fiscal year ended
June
30, 2004. During the first six months of fiscal 2005 we expensed $500. However
during the six month period ended June 30, 2005 our research and development
efforts expanded approximately seven-fold to approximately $3,500 or $4,003
for
the full year ended June 30, 2005. Research and development expenses were
primarily for materials, wages and bioequivalence studies for new drugs
currently in development. We believed that research and development expenses
would represent a substantially larger percentage of our net sales in the future
as we seek to expand our product line.
As
previously discussed in February 2005 we, entered into two agreements with
Tris
for the development and licensing of up to twenty-five immediate release liquid
generic products and seven solid oral dosage generic pharmaceutical products.
In
the event that Tris delivers twenty-five products under the liquids agreement,
of which there can be no assurance, Tris was to receive approximately $2,000
in
development fees from us and, in addition, Tris was to receive a royalty of
between 10% and 12% of net profits resulting from the sales of each product.
We
are entitled to offset the royalty payable to Tris each year, at an agreed
upon
rate, to recoup the development fees paid to Tris under the liquids
agreement.
Pursuant
to the terms of the Solids Agreement, as amended, we and Tris are to collaborate
on the development, manufacture and marketing of eight solid oral dosage generic
products and two soft gel products, some of which may require us to challenge
the patents for the equivalent branded products. The Solids Agreement, as
amended by the first amendment provided for payments of an aggregate of $4,500
to Tris. The Solids Agreement, as amended, also provides for an equal sharing
of
net profits for all but one product that is successfully sold and marketed,
after the deduction and reimbursement to us of all costs incurred by us in
the
development and marketing of the solid products, including the amounts paid
to
Tris under the contract. The other product provides for a profit split of 60%
for us and 40% for Tris.
As
we
develop our research and development capabilities, the Tris agreements allowed
us to bring in-house several specialized technologies which would otherwise
not
be available to us, and which can allow us to manufacture and sell more higher
margin and profitable products.
During
the year ended June 30, 2005, we recorded and paid $1,400 to Tris.
Selling,
General and Administrative
Selling,
general and administrative expenses were $5,092 for the fiscal year end June
30,
2005 or 12.8% of net sales, an increase of $968 or 2.8 percentage points over
the prior year total of $4,124, and 10% of net sales.
Major
components of our selling, general and administrative expenses for the fiscal
year ended June 30, 2005 included: payroll taxes and benefits $1,980, selling
commissions $380, freight expenses $430, legal and accounting $380, insurance
expense $180 and professional fees of $250. Significant factors contributing
to
the increase in selling, general and administrative expenses are: (i)salaries,
including payroll taxes and benefits increased $520 from the fiscal year ended
June 30, 2004 primarily due to additions during the year of a new Chief
Executive Officer, as well as two other senior level executives; (ii) utilities
increased $130; (iii)investor relations/listing fees increased $130 and (iv)
professional fees, rents and licenses aggregating $180.
We
believed that general and administrative costs would likely increase during
the
next fiscal year as a result of our second facility becoming operational.
Further, we anticipated that selling expenses, specifically commissions will
increase as a result of the anticipated increases in net sales.
In
December 2004, the FASB finalized SFAS No. 123R “Share-Based Payment”
which will require us to expense stock options based on grant date fair value
in
its financial statements beginning the first quarter of fiscal 2006. As such,
in
future periods we will be reporting the non-cash compensation
expense.
Interest
Expense
Our
interest expense increased approximately $115 primarily as a result of increased
borrowings to fund the Yaphank location renovations and well as purchase
necessary new equipment. It is likely that, as a result of additional borrowings
and higher interest rates, we will incur increases in our interest expense.
Operating
Income
As
a
result of our increase in research and development efforts described above
from
which we believe we will see the benefits from in the future, along with an
increase in selling and general and administrative costs and a modest decrease
in net sales, we incurred an operating loss of $95 for the year ended June
30,
2005 compared to an operating income of $5,061 for the year ended June 30,
2004.
Income
Taxes
For
the
year ended June 30, 2005 we recorded an income tax benefit of $73 a decrease
in
income taxes of $2,059 compared to the year ended June 30, 2004 income tax
expense of $1,986.
Liquidity
and Capital Resources
We
financed our operations and capital expenditures through cash flows from
operations and bank loans. As a result of our research and development efforts,
we incurred a net loss for the fiscal year ended June 30, 2005 of approximately
$149. Net cash used in operating activities for the fiscal year ended June
30,
2005 was $2,353, as compared to cash provided by operations of $2,126 for the
year ended June 30, 2004. Significant factors comprising the cash used in
operating activities include: increases in inventories, accounts receivable
and
prepaid expenses and other current assets of $3,411, $814 and $703,
respectively. The increase in inventories is primarily a result of a new product
launches scheduled for early in fiscal 2006 as well as necessary increases
to
support our customers’ requirements. Offsetting the above uses of cash are
increases in accounts and accrued expenses payable and depreciation and
amortization of $1,563 and $1,248, respectively. Other items affecting our
net
cash used in operating activities aggregated $290.
Bank
lines of credit
On
March
29, 2004, we obtained a $21,000 credit facility from HSBC. The new credit
facility consists of (i) a $7,400 mortgage loan for the purchase of our second
manufacturing plant in Yaphank, New York last year; (ii) $8,600 of credit lines
primarily to acquire new equipment and for renovations, and (iii) a $5,000
general line of credit. Details of the new facility are as follows:
· |
The
$7,400 mortgage loan is to be repaid with 119 monthly principal
installments of $31 commencing on August 1, 2004 with the balance
due June
1, 2014.
|
· |
Two
advised secured credit lines aggregating $6,600 primarily for acquisitions
of equipment and for renovations of our plant. The balance of the
funds
accessed through these credit lines will convert into fully amortizing
60
month term loans.
|
· |
A
$2,000 advised non-revolving secured facility for equipment purchases.
Each advance cannot exceed 90% of the invoice amount of the new equipment
and is convertible into fully amortizing 60 month term loans.
|
· |
The
$5,000 advised secured line of credit is primarily for working capital
and
general corporate purposes.
|
This
credit facility was collateralized by substantially all assets of the Company.
At our option interest will be calculated at (i) LIBOR plus 1.5% per annum
(“PA”) for 3 to 36 month periods, or at (ii) the Bank's then fixed prime rate.
As of June 30, 2005, the interest rates on the working capital lines range
from
4.46% PA to 5.14% PA and interest on the mortgage loan was 4.46% PA. On July
1,
2005, the mortgage loan interest rate increased to 5.19% PA and will be
recalculated at December 1, 2005. The Bank will review the new credit facility
annually; the next review is scheduled to occur no later than November 30,
2005.
The credit lines are terminable by the Bank at any time as to undrawn amounts.
In addition, we are required to comply with certain financial covenants, and
as
of June 30, 2005, we were in default of three financial covenants. We obtained
a
waiver from the Bank.
In
addition to the outstanding borrowings at June 30, 2005, we had approximately
$440 outstanding under advised letters of credit. As a result, at June 30,
2005,
we had approximately $3,190 available for future borrowings. During fiscal
2005,
the Company and HSBC informally agreed to consolidate the four credit lines
into
one advised credit line totaling $13,600. As a result, the $9,970 of advances
had not been allocated to each individual credit line. Because the Company
and
the Bank had not determined the amount of loans that are available to be
converted into 60 month term loans, the entire advised credit facility was
classified as current.
As
previously disclosed, we entered into agreements with Tris for the development
and delivery of over thirty new Technical Packages. The combined costs of these
two agreements will approximate $6,750 of which we have paid $1,400 as of June
30, 2005. The balance on one agreement of $2,750 could be paid within three
years. The second agreement has a balance of $2,600 and is scheduled to be
paid
within two years.
Future
cash flows could be aided by utilization of our available Federal net operating
loss carryforwards ("NOLs"). At June 30, 2005 the Company had remaining Federal
NOLs of approximately $13,000 and State NOLs of approximately $12,440 expiring
through 2025. Pursuant to Section 382 of the Internal Revenue Code regarding
substantial changes in Company ownership, utilization of these NOLs is limited.
Approximately $6,750 of these NOL’s are available in fiscal 2006, and
utilization of $6,250 of these NOL’s is limited and becomes available after
fiscal 2006. The limitations lapse at the rate of $2,690 per year, through
fiscal 2009.
In
order
to finance our expansion plan, we were utilizing our $21,000 advised line of
credit obtained from HSBC Bank. We will have to spend a significant amount
of
money on research and development to continue our expansion plan and have
already begun to do so.
While
we
continued to rely on this advised credit line, continuing with our expansion
plan will be dependent on our ability to raise additional capital through either
additional debt financing or through an equity investment, the availability
of
which cannot be assured. If we are unable to obtain sufficient funds, we will
have to either delay or scale back on our expansion plan. However, we do not
believe our existing business would be materially adversely affected by such
delay or scaling back of our expansion plans.
Accounts
Receivable
Our
accounts receivable at June 30, 2005 was $7,664 as compared to $6,850 at June
30, 2004. The average annual turnover ratio of accounts receivable to net sales
for the fiscal years ended June 30, 2005 and 2004 was 5.5 and 6.8 turns,
respectively. As our turns are calculated on an annual average, the decrease
is
primarily the result of credit terms for new larger customers as well as when
sales are recognized during the periods. Our accounts receivable continue to
have minimal risk with respect to bad debts; however this trend cannot be
assured.
Inventory
At
June
30, 2005, our inventory was $8,941 as compared to $5,530 at June 30, 2004.
We
believe the increase in inventory is necessary in order to maintain our future
planned growth and overall customer demands. Our turnover of inventory for
the
years ended June 30, 2005 and 2004 was 4.3 and 6.2, respectively. Our inventory
is current, there are no reserves for obsolescence.
Accounts
Payable
Accounts
payable, accrued expenses and other liabilities, in the aggregate, increased
approximately $1,680, to $6,233 at June 30, 2005 from $4,545 at June 30, 2004,
primarily attributable to the increase in inventory.
Cash
and Cash Equivalents
During
the year ended June 30, 2005, cash and cash equivalents decreased $2,348 from
$2,884 at June 30, 2004 to $536 at June 30, 2005, primarily, among other
factors: (i) net uses of cash for components of working capital of $3,370;
(iii)
cash used for the acquisition of new machinery, equipment, renovations and
enhancements of the facility in Yaphank, NY, aggregating $8,110 and (iii)
investment in APR, LLC of $1,023. Offset by funds received from: (i) net bank
borrowings of $9,210; (ii) proceeds from the exercise of stock options of $630.
Critical
Accounting Policies
Management's
discussion and analysis of financial condition and results of operations
discusses our financial statements, which have been prepared in accordance
with
accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires that Interpharm make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date
of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, Interpharm evaluates judgments
and estimates made, including those related to revenue recognition, inventories,
income taxes and contingencies including litigation. Interpharm bases its
judgments and estimates on historical experience and on various other factors
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results
may
differ from these estimates under different assumptions or
conditions.
We
consider the following accounting policies to be most critical in understanding
the more complex judgments that are involved in preparing its financial
statements and the uncertainties that could impact results of operations,
financial condition and cash flows.
Revenue
Recognition
We
recognize product sales revenue upon the shipment of product, when estimated
provisions for chargebacks and other sales allowances are reasonably
determinable, and when collectibility is reasonably assured. Accruals for these
provisions are presented in the consolidated financial statements as reductions
to revenues. Accounts receivable are presented net of allowances relating to
the
above provisions.
We
purchase raw materials from two suppliers, which are manufactured into finished
goods and sold back to such suppliers as well as to other customers. We can
and
do purchase raw materials from other suppliers. Pursuant to Emerging Issues
Task
Force, (“EITF”) No. 99-19, “Reporting Revenue Gross as a Principal Versus Net as
an Agent,” we recorded sales to, and purchases from, these suppliers on a gross
basis. Sales and purchases were recorded on a gross basis since we (i) has
a
risk of loss associated with the raw materials purchased, (ii) converts the
raw
material into a finished product based upon our specifications, (iii) has other
sources of supply of the raw material, and (iv) has credit risk related to
the
sale of such product to the suppliers. These factors among others, qualify
us as
the principal under the indicators set forth in EITF 99-19, “Reporting Revenue
Gross as a Principal vs. Net as an Agent.” If the terms and substance of the
arrangement change, such that we no longer qualify to report these transactions
on a gross reporting basis, our net income and cash flows would not be affected.
However, our sales and cost of sales would both be reduced by a similar
amount. These purchase and sales transactions are recorded at fair value
in accordance with EITF Issue 04-13 "Accounting for Purchase and Sales of
Inventory with the Same Counterparty."
Sales
Incentives
In
the
current year we offered a sales incentive to one of our customers in the form
of
an incentive volume price adjustment. We account for sales incentives in
accordance with EITF 01-9, "Accounting for Consideration Given by a Vendor
to a
Customer (Including a Reseller of Vendor's Products)" (“EITF 01-9”). The terms
of this volume based sales incentive require the customer to purchase a minimum
quantity of our products during a specified period of time. The incentive
offered is based upon a fixed dollar amount per unit sold to the customer.
We
made an estimate of the ultimate amount of the incentive the customer will
earn
based upon past history with the customer and other facts and circumstances.
We
have the ability to estimate this volume incentive price adjustment, as there
does not exist a relatively long period of time for the particular adjustment
to
be earned. Any change in the estimated amount of the volume incentive is
recognized immediately using a cumulative catch-up adjustment. In accordance
with EITF 01- 9, we record the provision for this sales incentive when the
related revenue is recognized. The accrual for sales incentives at June 30,
2006
was approximately $3,400 and reported as deferred revenue on our balance sheet.
Our sales incentive liability may prove to be inaccurate, in which case we
may
have understated or overstated the provision required for these arrangements.
Therefore, although we make a best estimate of its sales incentive liability,
many factors, including significant unanticipated changes in the purchasing
volume of its customer, could have significant impact on our liability for
sales
incentives and our reported operating results.
Inventory
Our
inventories are valued at the lower of cost or market, determined on a first-in,
first -out basis, and include the cost of raw materials and manufacturing.
We
continually evaluate the carrying value of our inventories and when factors
such
as expiration dates and spoilage indicate that impairment has occurred, either
a
reserve is established against the inventories' carrying value or the
inventories are disposed of and completely written off in the period
incurred.
Income
Taxes
We
account for income taxes using the liability method which requires the
determination of deferred tax assets and liabilities based on the differences
between the financial and tax bases of assets and liabilities using enacted
tax
rates in effect for the year in which differences are expected to reverse.
The
net deferred tax asset is adjusted by a valuation allowance, if, based on the
weight of available evidence, it is more likely than not that some portion
or
all of the net deferred tax asset will not be realized. Our net deferred tax
asset at June 30, 2006 was $6,170 and $4,413 at June 30, 2005.
Research
and Development
Pursuant
to SFAS No. 2 “Accounting for Research and Development Costs,” research and
development costs are expensed as incurred or at the date payment of
non-refundable amounts become due, whichever occurs first. Research and
development costs, which consist of salaries and related costs of research
and
development personnel, fees paid to consultants and outside service providers,
raw materials used specifically in the development of its new products and
bioequivalence studies. Pre-approved milestone payments due under contract
research and development arrangements are expensed when the milestone is
achieved.
Stock
Based Compensation
Effective
July 1, 2005, we adopted the fair value recognition provisions of SFAS
No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”), using
the modified-prospective-transition method. As a result, our net income before
taxes for the year ended June 30, 2006 is $1,195, lower than if it had continued
to account for share-based compensation under Accounting Principles Board
(“APB”) opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No.
25”).
Years
Ended June 30, 2005 and 2004
Prior
to
July 1, 2005, our stock-based employee compensation plans were accounted
for under the recognition and measurement provisions of APB No. 25, and
related Interpretations, as permitted by FASB Statement No. 123,
“Accounting for Stock-Based Compensation,” (“SFAS No. 123”). We did not
recognize stock-based compensation cost in its statement of operations for
periods prior to July 1, 2005 as all options granted had an exercise price
equal to the market value of the underlying common stock on the date of
grant.
Accounts
Receivable and Chargebacks
Accounts
receivable are comprised of amounts owed to us through the sales of its products
throughout the United States. These accounts receivable are presented net of
allowances for doubtful accounts, sales returns and customer chargebacks.
Allowances for doubtful accounts were approximately $101 and $66 at June 30,
2006 and June 30, 2005, respectively. The allowance for doubtful accounts
is based on a review of specifically identified accounts in addition to an
overall aging analysis. Judgments are made with respect to the collectibility
of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates. Allowances for customer
chargebacks were $2,315 and $425 at June 30, 2006 and June 30, 2005,
respectively. We sell
some
of its products indirectly to various government agencies referred to below
as
“indirect customers.” We enter into agreements with its indirect customers to
establish pricing for certain products. The indirect customers then
independently select a wholesaler from which to actually purchase the products
at these agreed-upon prices. We will provide credit to the selected wholesaler
for the difference between the agreed-upon price with the indirect customer
and
the wholesaler’s invoice price if the price sold to the indirect customer is
lower than the direct price to the wholesaler. This credit is called a
chargeback. The provision for chargebacks is based on expected sell-through
levels by our wholesale customers to the indirect customers, and estimated
wholesaler inventory levels. As sales to the large wholesale customers increase,
the reserve for chargebacks will also generally increase. However, the size
of
the increase depends on the product mix. We continually
monitor the reserve for chargebacks and makes adjustments to the reserve as
deemed necessary. Actual chargebacks may differ from estimated reserves.
Recent
New Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS 154 requires retrospective application to prior periods’
financial statements of changes in accounting principle. It also requires that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the
opening balance of retained earnings for that period rather than being reported
in an income statement. The statement will be effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. We do not expect the adoption of SFAS No. 154 will have a material effect
on its consolidated financial statements.
In
June
2005, the EITF reached consensus on Issue No. 05-6, “Determining the
Amortization Period for Leasehold Improvements” ("EITF 05-6"). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for reporting periods beginning after June 29, 2005. The adoption
of EITF 05-6 did not have a material impact on our consolidated financial
statements.
In
June
2005, the EITF issued EITF 05-2, "The Meaning of Conventional Convertible Debt
Instrument in Issue No. 00-19." EITF 05-2 retained the definition of a
conventional convertible debt instrument as set forth in EITF 00-19, and which
is used in determining certain exemptions to the accounting treatments
prescribed under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." EITF 05-2 also clarified that certain contingencies related to
the
exercise of a conversion option would not be outside the definition of
"conventional" and determined that convertible preferred stock with a mandatory
redemption date would also qualify for similar exemptions if the economic
characteristics of the preferred stock are more akin to debt than equity. EITF
05-2 is effective for new instruments entered into and instruments modified
in
periods beginning after June 29, 2005. The adoption of EITF 05-2 did not have
a
material impact on our consolidated financial statements.
In
September 2005, the FASB ratified EITF Issue No. 04-13,
“Accounting for Purchases and Sales of Inventory with the Same Counterparty”
(“EITF 04-13”). EITF 04-13 provides guidance on whether two or more inventory
purchase and sales transactions with the same counterparty should be viewed
as a
single exchange transaction within the scope of APB No. 29, “Accounting for
Nonmonetary Transactions.” In addition, EITF 04-13 indicates whether nonmonetary
exchanges of inventory within the same line of business should be recognized
at
cost or fair value. The adoption of EITF 04-13 did not have a material
impact on our consolidated financial statements.
In
September 2005, the FASB ratified the EITF’s Issue No. 05-7, “Accounting for
Modifications toConversion Options Embedded in Debt Instruments and Related
Issues” (EITF 05-7”), which addresses whether a modification to a conversion
option that changes its fair value effects the recognition of interest expense
for the associated debt instrument after the modification, and whether a
borrower should recognize a beneficial conversion feature, not a debt
extinguishment, if a debt modification increases the intrinsic value of the
debt
(for example, the modification reduces the conversion price of the debt). The
statement will be effective for accounting modifications of debt instruments
beginning in the first interim or annual reporting period beginning after
December 15, 2005. The adoption of EITF 05-7 did not have a material impact
on
our consolidated financial statements.
In
September 2005, the FASB ratified the EITF’s Issue No. 05-8, “Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”
(“EITF 05-8”), which discusses whether the issuance of convertible debt with a
beneficial conversion feature results in a basis difference arising from the
intrinsic value of the beneficial conversion feature on the commitment date
(which is recorded in the stockholder’s equity for book purposes, but as a
liability for income tax purposes) and, if so, whether that basis difference
is
a temporary difference under FASB Statement No. 109, “Accounting for Income
Taxes.” The statement will be effective for financial statements beginning in
the first interim or annual reporting period beginning after December 15, 2005.
The adoption of EITF 05-8 did not have a material impact on our consolidated
financial statements.
In
September 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-1,
“Classifications and Measurement of Freestanding Financial Instruments
Originally Issued in Exchange for Employee Services under FASB Statement No.
123(R), to defer the requirement of SFAS No. 123(R) that a freestanding
financial instrument originally subject to SFAS No. 123(R) becomes subject
to
the recognition and measurement requirements of other applicable GAAP when
the
rights conveyed by the instrument to the holder are no longer dependent on
the
holder being an employee of the entity. The rights under stock-based payment
awards issued to employees by the Company are all dependent on the recipient
being an employee of ours. Therefore, the FSP does not have an impact on our
consolidated financial statements and its measurement of stock-based
compensation in accordance with SFAS No. 123(R).
In
October 2005, the FASB issued FSP No. 123(R)-2, “Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R)”,to provide
guidance on determining the grant date for an award as defined in SFAS
No.123(R). This FSP stipulated that assuming all other criteria in the grant
definition are met, a mutual understanding of the key terms and conditions
of an
award to an individual employee is presumed to exist upon the award’s approval
in accordance with the relevant corporate governance requirements, provided
that
the key terms and conditions of an award (a) cannot be negotiated by the
recipient with the employer because the award is a unilateral grant, and (b)
are
expected to be communicated to an individual recipient within a relatively
short
period of time from the date of approval. We have applied the principles set
forth in the FSP upon the adoption of SFAS No. 123(R).
In
November 2005, the FASB issued Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards.” FAS 123(R)-3 provides that companies may elect to use a
specified alternative method to calculate the historical pool of excess tax
benefits available to absorb tax deficiencies recognized upon adoption of SFAS
No. 123 (R). The option to use the alternative method is available regardless
of
whether SFAS No. 123 (R) was adopted using the modified prospective or modified
retrospective application transition method, and whether it is has the ability
to calculate its pool of excess tax benefits in accordance with the guidance
in
paragraph 81 of SFAS No. 123 (R). This method only applies to awards that are
fully vested and outstanding upon adoption of SFAS No. 123 (R). FAS 123(R)-3
became effective after November 10, 2005. The adoption of FAS 123(R)-3 did
not have a material impact on our consolidated financial
statements.
In
February 2006, the FASB issued No.123(R)-4, “Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow for Cash
Settlement upon the Occurrence of a Contingent Event”, to address the
classifications of options and similar instruments issued as employee
compensation that allow for cash settlement upon the occurrence of a contingent
event. The guidance in this FSP amends paragraphs 32 and A229 of FASB Statement
No. 123 (revised 2004), “Share-Based Payment”. Our Option Plans have no cash
settlement provisions. Therefore, this FSP currently does not have an impact
on
our consolidated financial statements or its measurements of stock-based
compensation in accordance with SFAS No. 123(R).
In
February 2006, the FASB issued SFAS No. 155 ''Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140'',
(''SFAS 155''). SFAS No. 155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets. The
provisions of SFAS No. 155 are effective for all financial instruments acquired
or issued after fiscal years beginning after September 15, 2006. We are
currently assessing the impact that the adoption of SFAS No. 155 will have
on
our consolidated financial statements.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“SFAS No. 156”), which amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. SFAS No. 156 permits the choice of the amortization
method or the fair value measurement method, with changes in fair value recorded
in income, for the subsequent measurement for each class of separately
recognized servicing assets and servicing liabilities. The statement is
effective for years beginning after September 15, 2006, with earlier
adoption permitted. We are currently evaluating the effect that
adopting this statement will have on our consolidated financial
statements.
In
June
2006, The FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, (“FIN 48”). This interpretation clarified the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes” (“SFAS No.109”). Specifically, FIN 48 clarifies
the application of SFAS No. 109 by defining a criterion that an individual
tax
position must meet for any part of the benefit of that position to be recognized
in an enterprise’s financial statements. Additionally, FIN 48 provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods of income taxes, as well as the required
disclosure and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. We are currently evaluating the requirements
of FIN 48 and has not yet determined if the adoption of FIN 48 will have a
significant impact on our consolidated financial statements.
Issue
and Uncertainties
Risk
of Product Liability Claims
The
testing, manufacturing and marketing of pharmaceutical products subject us
to
the risk of product liability claims. We believe that we maintain an adequate
amount of product liability insurance, but no assurance can be given that such
insurance will cover all existing and future claims or that we will be able
to
maintain existing coverage or obtain additional coverage at reasonable
rates.
ITEM7A. |
QUANTITIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISKS
|
(In
Thousands, except per Share Data)
As
of
this filing, our principal financial instrument is a $34,000 credit facility,
consisting of a real property mortgage of $12,000, two machinery and equipment
lines aggregating $7,000 and a revolving credit line of a maximum of $15,000,
subject to a certain asset levels. The original amount of the credit facility
and the revolving credit facility was $41,500. Under the terms of the WFBC
agreement, three stockholders, all related to our Chairman of the Board of
Directors, one of whom is the our Chief Operating Officer, were required to
provide limited personal guarantees, as well as pledge securities with a minimum
aggregate value of $7,500 as security for a portion of the $22,500 credit
facility. We were required to raise a minimum of $7,000 through the sale of
equity or subordinated debt by June 30, 2006. The
shareholder’s pledges of marketable securities would be reduced by WFBC either
upon raising capital, net of expenses in excess of $5,000 or achieving certain
milestones. As a result of the sale of $10,000 of Series B-1 convertible
preferred stock in May 2006, the credit facility and the limited personal
guarantees were reduced by $4,250 and $3,670, respectively. In September, 2006
we consummated a $10,000 sale of a Series C-1 Convertible preferred stock,
which
will further reduce the credit facility by $3,250 and eliminate the balance
of
the personal pledges of marketable securities of $3,830. After the reductions
described above, the maximum availability of the revolving credit facility
will
be $15,000.
At
June
30, 2006, total obligations to our bank pertaining to the credit facility
described above were: (i) approximately $11,734 real property term loan; and
(ii) $3,833 owing on the machinery and equipment lines.
With
respect to the real property term loan and the machinery and equipment loans,
we
entered into interest rate swap contracts (the “swaps”), whereby the Company
pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
interest rates increasing). As all of the critical terms of the swaps and loans
match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative Instruments and Hedging Activities’” and by
definition, there is no hedge ineffectiveness or a need to reassess
effectiveness. Fair value of the interest rate swaps at June 30, 2006 was
approximately $98.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Our
consolidated financial statements, including the notes thereto, together with
the report from our independent registered public accounting firm are presented
beginning at page F-1.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None
ITEM
9A. CONTROLS
AND PROCEDURES
Evaluation
of Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
At
the
conclusion of the period ended June 30, 2006, we carried out an evaluation,
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness
of
the design and operation of our disclosure controls and procedures. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective in alerting
them in a timely manner to information relating to the Company, required to
be
disclosed in this report.
Our
independent registered accounting firm Marcum & Kliegman, LLP (“MK”),
informed us and our Audit Committee of the Board of Directors that in connection
with their audit of our financial results for the fiscal year ended June 30,
2005, MK had discovered conditions which they deemed to be significant
deficiencies, (as defined by standards established by the Public Company
Accounting Oversight Board) in our financial statement closing process. The
significant deficiencies related to the performance of processes and procedures
for the period end closing process and its review by internal accounting
personnel. Management informed MK and the Audit Committee that it added
additional personnel and modified its controls over the financial statement
closing process as to prevent a reoccurrence of this deficiency and continues
to
monitor the effectiveness of these actions and will make any other changes
or
take such additional actions as management determines to be
appropriate.
ITEM
9B. OTHER
INFORMATION
None
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
The
information required by this Item is incorporated herein by reference to the
section entitled "Directors and Executive Officers of the Registrant " of the
2006 Proxy Statement.
ITEM
11. EXECUTIVE
COMPENSATION
The
information required by this Item is incorporated herein by reference to the
section entitled "Executive Compensation " of the 2006 Proxy
Statement.
ITEM
12. |
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AND RELATED STOCKHOLDER
MATTERS
|
The
information required by this Item is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters " of the 2006 Proxy Statement.
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Lease
Our
100,000 square foot facility at 75 Adams Avenue in Hauppauge, New York is owned
by Sutaria Family Realty, LLC which is owned by Perry Sutaria, Raj Sutaria
and
Mona Rametra.No third party assessment or appraisal of the lease was made at
the
time it was entered into or at any subsequent time. Interpharm, Inc. is
obligated to pay minimum annual rent of $480,000, plus property taxes,
insurance, maintenance and other expenses related to the leased facility. Upon
a
change in ownership of the Company, which effectively occurred on May 30, 2003
the landlord is entitled to increase the rents to fair market value and every
three years thereafter. Although entitled to receive fair market value for
the
property as determined by an independent appraisal, through August 2006 the
rents have remained the same, which is below market value for similar space
in
the local area. There are no tenants in the building other than us.
Investment
in APR, LLC.
In
February and April 2005, we purchased 5.0 Class A membership interests
(“Interests”) from each of Cameron Reid (“Reid”), the Company’s Chief Executive
Officer, and John Lomans (“Lomans”), who has no affiliation with us, for an
aggregate purchase price of $1,022,500 (including costs of $22,500) of APR,
LLC,
a Delaware limited liability company primarily engaged in the development of
complex bulk pharmaceutical products (“APR”). The purchases were made pursuant
to separate Class A Membership Interest Purchase Agreements dated February
16,
2005 between us and Reid and Lomans (the “Purchase Agreements”). At the time of
the purchases, Reid and Lomans owned all of the outstanding Class A membership
interests of APR, which had outstanding 100 Class A membership interests and
100
Class B membership interests. The two classes of membership interests have
different economic and voting rights, and the Class A members have the right
to
make most operational decisions. The Class B interests are held by one of our
major customers and suppliers. As a result, we currently own 10 Interests out
of
the 100 Interests now outstanding.
In
accordance with the terms of the Purchase Agreements, we have granted to Reid
and Lomans each a proxy to vote 5 of the Interests owned by us on all matters
on
which the holders of Interests may vote. Our Board of Directors approved the
purchases of Interests at a meeting held on February 15, 2005, based on an
analysis and advice from an independent investment banking firm. Reid did not
participate during the deliberations on this matter. We are accounting for
our
investment in APR pursuant to the cost method of accounting.
ITEM
14. PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The
information required by this Item is incorporated herein by reference to the
section entitled "Principal Accounting Fees and Services" of the 2006 Proxy
Statement.
ITEM
15. EXHIBITS,
FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL
STATEMENTS
The
following financial statements of Interpharm Holdings, Inc., are included
herein:
Report
of
Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of June 30, 2006 and June 30, 2005
Consolidated
Statements of Operations for the years ended June 30, 2006, 2005 and
2004
Consolidated
Statement of Stockholders’ Equity for the years ended June 30, 2006, 2005 and
2004
Consolidated
Statements of Comprehensive (Loss) Income for the years ended June 30, 2006,
2005 and 2004.
Consolidated
Statements of Cash Flows for the years ended June 30, 2006, 2005 and
2004
(3)
EXHIBITS
Number
|
Description
|
|
|
3.1
|
Certificate
of Incorporation of the Company; (1)
|
3.2
|
Certificate
of Amendment of Certificate of Incorporation, filed October 21,
1992;
(1)
|
3.3
|
By-laws
of the Company; (1)
|
3.4
|
Certificate
of Amendment of Certificate of Incorporation, filed December 22,
1992;
(1)
|
3.5
|
Certificate
of Powers, Designations, Preferences and Rights of the Series A-1
Convertible Preferred Stock; (1)
|
3.6
|
Certificate
of Powers, Designations, Preferences and Rights of the Series B-1
Convertible Preferred Stock; (6)
|
3.7
|
Certificate
of Powers, Designations, Preferences and Rights of the Series C-1
Convertible Preferred Stock;
|
4.7
|
Form
of Common Stock Certificate; (1)
|
4.9
|
Form
of Preferred Stock Certificate; (1)
|
10.3
|
Form
of Employment Agreements for Interpharm Holdings, Inc. employees
(3);
|
10.6
|
Supply
Agreement between Interpharm Holdings, Inc. and Tris Pharma, Inc.
for
Development of Liquid Products (5);
|
10.7
|
February
24, 2005 Agreement between Interpharm Holdings, Inc. and Tris Pharma,
Inc.
for development of Solid Products (5);
|
10.8
|
July
6, 2005 amendment to February 24, 2005 Agreement between Interpharm
Holdings, Inc. and Tris Pharma, Inc. for development of
Solid
Products (5);
|
10.9
|
Supply
Agreement between Interpharm Holdings, Inc. and Centrix Pharmaceutical,
Inc. (4)
|
21.1
|
List
of Subsidiaries;
|
23.1
|
Consent
of Marcum & Kliegman, LLP;
|
31.1
|
Certification
of Cameron Reid pursuant to Exchange Act Rules 13a-15(d) and 15d-15(e),
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002;
|
31.2
|
Certification
of George Aronson pursuant to Exchange Act Rules 13a-15(d) and
15d-15(e),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002;
|
32.1
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002;
|
|
|
Footnotes:
1. |
Incorporated
by reference from Registration Statement on Form SB-2 registration
no.
33-54356 filed by the Company with the Securities and Exchange Commission
on November 9, 1992.
|
2. |
Annexed
to our Current Report on Form 8-K filed on November 26, 2002 and
incorporated herein by reference;
|
3. |
Annexed
to our Transition Report on Form 10-K filed on September 29, 2003
and
incorporated herein by reference.
|
4. |
Annexed
to our Current Report on Form 8-K filed on July 18, 2005 and incorporated
herein by reference.
|
5. |
Annexed
to our Annual Report on Form 10-K filed on September 28, 2005 and
incorporated herein by reference.
|
6. |
Annexed
to our Current Report on Form 8-K filed on June 2, 2006 and incorporated
herein by reference.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
|
|
INTERPHARM
HOLDINGS, INC. |
|
|
|
Date: September
28, 2006 |
By: |
/s/ Cameron
Reid |
|
Cameron
Reid, Chief Executive Officer |
|
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, this Report has been signed below by the following persons on behalf
of
the Registrant and in the capacities and on the dates indicated.
/s/
George Aronson
|
|
September
28, 2006
|
George
Aronson, Chief Financial Officer
|
|
|
|
|
|
/s/
Bhupatlal K. Sutaria
|
|
September
28, 2006
|
Bhupatlal
K. Sutaria, President and Treasurer
|
|
|
|
|
|
/s/
Dr. Maganlal K. Sutaria
|
|
September
28, 2006
|
Dr
Maganlal K. Sutaria, Chairman of the Board of Directors
|
|
|
|
|
|
/s/Stewart
Benjamin
|
|
September
28, 2006
|
Stewart
Benjamin, Director
|
|
|
|
|
|
/s/David
Reback
|
|
September
28, 2006
|
David
Reback, Director
|
|
|
|
|
|
/s/
Kennith C Johnson
|
|
September
28, 2006
|
Kennith
C Johnson, Director
|
|
|
|
|
|
|
|
|
/s/
Rick Miller
|
|
September
28, 2006
|
Rick
Miller, Director
|
|
|
|
|
|
|
|
|
/s/
Joan Neuscheler
|
|
September
28, 2006
|
Joan
Neuscheler
|
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
For
the
Years Ended June 30, 2006, 2005 and 2004
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONTENTS
|
|
|
Page
|
|
|
|
|
|
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
|
|
|
F-1 |
|
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS |
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheets
|
|
|
F-2 |
|
Consolidated
Statements of Operations
|
|
|
F-4 |
|
Consolidated
Statements of Stockholders’ Equity
|
|
|
F-5 |
|
Consolidated
Statements of Comprehensive (Loss)
Income
|
|
|
F-6 |
|
Consolidated
Statements of Cash Flows
|
|
|
F-7 |
|
|
|
|
|
|
NOTES
TO CONSOLIDATED FINANCIAL
STATEMENTS |
|
|
F-10 |
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING
FIRM
To
the
Audit Committee of
Interpharm
Holdings, Inc.
We
have
audited the accompanying consolidated balance sheets of Interpharm Holdings,
Inc. and Subsidiaries (the “Company”) as of June 30, 2006 and 2005, and the
related consolidated statements of operations, stockholders’ equity,
comprehensive (loss) income and cash flows for each of the three years in
the
period ended June 30, 2006. These financial statements are the responsibility
of
the Company's management. Our responsibility is to express an opinion on
these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required
to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control
over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures
in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all material respects, the consolidated financial position of Interpharm
Holdings, Inc. and Subsidiaries at June 30, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the three years
in the
period ended June 30, 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Marcum & Kliegman LLP
Melville,
New York
September
22, 2006
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except share data)
ASSETS
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,438
|
|
$
|
536
|
|
Accounts
receivable, net
|
|
|
13,592
|
|
|
7,664
|
|
Inventories
|
|
|
8,706
|
|
|
8,941
|
|
Prepaid
expenses and other current assets
|
|
|
1,936
|
|
|
1,156
|
|
Deferred
tax assets
|
|
|
1,321
|
|
|
87
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
26,993
|
|
|
18,384
|
|
|
|
|
|
|
|
|
|
Land,
building and equipment, net
|
|
|
29,069
|
|
|
21,872
|
|
Deferred
tax assets
|
|
|
4,849
|
|
|
4,326
|
|
Investment
in APR, LLC
|
|
|
1,023
|
|
|
1,023
|
|
Other
assets
|
|
|
933
|
|
|
785
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
62,867
|
|
$
|
46,390
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
1,686
|
|
$
|
10,340
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
12,650
|
|
|
6,233
|
|
Deferred
revenue
|
|
|
3,399
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
17,735
|
|
|
16,573
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
13,952
|
|
|
6,691
|
|
Other
liabilities
|
|
|
125
|
|
|
15
|
|
|
|
|
|
|
|
|
|
Total
Other Liabilities
|
|
|
14,077
|
|
|
6,706
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
31,812
|
|
|
23,279
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Redeemable Convertible Preferred Stock:
15,000
shares authorized; issued and outstanding - 10,000 at
June
30, 2006; liquidation preference of $10,000
|
|
|
8,225
|
|
|
--
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stocks, 10,000 shares authorized; issued and
outstanding
- 5,141 and 6,608, respectively; aggregate
liquidation
preference of $4,291 and $5,483, respectively
|
|
|
51
|
|
|
66
|
|
Common
stock, $0.01 par value,70,000 shares authorized;
shares
issued - 64,537 and 32,339 respectively
|
|
|
645
|
|
|
323
|
|
Additional
paid-in capital
|
|
|
26,059
|
|
|
19,382
|
|
Stock
subscription receivable
|
|
|
(90
|
)
|
|
--
|
|
Accumulated
other comprehensive loss
|
|
|
98
|
|
|
--
|
|
Unearned
stock based compensation
|
|
|
(1,863
|
)
|
|
--
|
|
Retained
(deficit) earnings
|
|
|
(2,070
|
)
|
|
3,340
|
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
22,830
|
|
|
23,111
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
62,867
|
|
$
|
46,390
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES,
Net
|
|
$
|
63,355
|
|
$
|
39,911
|
|
$
|
41,100
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
(including related party
rent
expense of $408)
|
|
|
45,927
|
|
|
30,839
|
|
|
31,305
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
17,428
|
|
|
9,072
|
|
|
9,795
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
11,449
|
|
|
5,092
|
|
|
4,124
|
|
Related
party rent
|
|
|
72
|
|
|
72
|
|
|
72
|
|
Research
and development
|
|
|
10,674
|
|
|
4,003
|
|
|
538
|
|
TOTAL
OPERATING EXPENSES
|
|
|
22,195
|
|
|
9,167
|
|
|
4,734
|
|
OPERATING
(LOSS) INCOME
|
|
|
(4,767
|
)
|
|
(95
|
)
|
|
5,061
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
Gain
on sale of marketable securities
|
|
|
--
|
|
|
9
|
|
|
--
|
|
Loss
on sale of fixed asset
|
|
|
(5
|
)
|
|
--
|
|
|
--
|
|
Interest
expense
|
|
|
(719
|
)
|
|
(136
|
)
|
|
(21
|
)
|
Interest
and other income
|
|
|
1
|
|
|
--
|
|
|
69
|
|
TOTAL
OTHER (EXPENSES) INCOME
|
|
|
(723
|
)
|
|
(127
|
)
|
|
48
|
|
(LOSS)
INCOME BEFORE INCOME TAXES
|
|
|
(5,490
|
)
|
|
(222
|
)
|
|
5,109
|
|
|
|
|
|
|
|
|
|
|
|
|
(BENEFIT
FROM) PROVISION FOR INCOME TAXES
|
|
|
(1,700
|
)
|
|
(73
|
)
|
|
1,986
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
|
(3,790
|
)
|
|
(149
|
)
|
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 preferred stock beneficial conversion feature
|
|
|
1,418
|
|
|
--
|
|
|
--
|
|
Preferred
stock dividends
|
|
|
312
|
|
|
166
|
|
|
360
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(5,520
|
)
|
$
|
(315
|
)
|
$
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
(LOSS)
EARNINGS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) earnings per share
|
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.16
|
|
Diluted
(loss) earnings per share
|
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
36,521
|
|
|
25,684
|
|
|
17,595
|
|
Diluted
weighted average shares and equivalent shares outstanding
|
|
|
36,521
|
|
|
25,684
|
|
|
68,637
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
|
|
|
Preferred
Stock
|
|
|
Common
Stock
|
|
|
Additional
|
|
|
Stock
|
|
|
Based
|
|
|
Accumulated
Other
Compre-
hensive
|
|
|
Retained
|
|
|
|
|
|
|
|
|
holders
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Paid-In
Capital
|
|
|
Subscription
Receivable
|
|
|
Compen-
sation
|
|
|
Income
(Loss)
|
|
|
Earnings
(Deficit)
|
|
|
Shares
|
|
|
Amount
|
|
|
Equity
|
|
BALANCE
-
June 30, 2003
|
|
|
7,301
|
|
$
|
73
|
|
|
15,672
|
|
$
|
157
|
|
$
|
12,355
|
|
$
|
--
|
|
$
|
--
|
|
$
|
12
|
|
$
|
669
|
|
|
624
|
|
$
|
(798
|
)
|
$
|
12,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for options and warrants exercised
|
|
|
--
|
|
|
--
|
|
|
3,535
|
|
|
35
|
|
|
3,485
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,520
|
|
Tax
benefit in connection with exercise of stock options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,679
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,679
|
|
Adjustments
related to reverse merger
|
|
|
--
|
|
|
--
|
|
|
4
|
|
|
--
|
|
|
4
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
4
|
|
Conversion
of Series J preferred stock
|
|
|
(105
|
)
|
|
(1
|
)
|
|
105
|
|
|
1
|
|
|
--
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Conversion
of Series K preferred stock
|
|
|
(293
|
)
|
|
(3
|
)
|
|
6,275
|
|
|
63
|
|
|
(60
|
)
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Unrealized
loss on marketable securities, net
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
(12
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(12
|
)
|
Net
income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,123
|
|
|
--
|
|
|
--
|
|
|
3,123
|
|
BALANCE
-
June 30, 2004
|
|
|
6,903
|
|
|
69
|
|
|
25,591
|
|
|
256
|
|
|
19,463
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,792
|
|
|
624
|
|
|
(798
|
)
|
|
22,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued for options exercised
|
|
|
--
|
|
|
--
|
|
|
1,097
|
|
|
11
|
|
|
617
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
628
|
|
Tax
benefit in connection with exercise of stock options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
153
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
153
|
|
Conversion
of Series C preferred stock
|
|
|
(2
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Conversion
of Series K preferred stock
|
|
|
(293
|
)
|
|
(3
|
)
|
|
6,275
|
|
|
62
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Retirement
of treasury stock
|
|
|
--
|
|
|
--
|
|
|
(624
|
)
|
|
(6
|
)
|
|
(792
|
)
|
|
|
|
|
|
|
|
--
|
|
|
--
|
|
|
(624
|
)
|
|
798
|
|
|
--
|
|
Dividends
declared - Series A-1
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
--
|
|
|
(303
|
)
|
|
--
|
|
|
--
|
|
|
(303
|
)
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(149
|
)
|
|
--
|
|
|
--
|
|
|
(149
|
)
|
BALANCE
-
June 30, 2005
|
|
|
6,608
|
|
|
66
|
|
|
32,339
|
|
|
323
|
|
|
19,382
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
3,340
|
|
|
--
|
|
|
--
|
|
|
23,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
of Series A preferred stock
|
|
|
(1
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Conversion
of Series C preferred stock
|
|
|
(1
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Conversion
of Series K preferred stock
|
|
|
(1,465
|
)
|
|
(15
|
)
|
|
31,373
|
|
|
314
|
|
|
(299
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Common
stock subscribed
|
|
|
--
|
|
|
--
|
|
|
125
|
|
|
1
|
|
|
132
|
|
|
(133
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Collections
on common stock subscribed
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
43
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
43
|
|
Dividends
declared - Series A-1
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(124
|
)
|
|
--
|
|
|
--
|
|
|
(124
|
)
|
Series
B-1 Preferred beneficial conversion feature
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,418
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(1,418
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
Accrued
dividends - Series B-1
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(78
|
)
|
|
--
|
|
|
--
|
|
|
(78
|
)
|
Fair
value of unvested stock options upon adoption of FAS 123
(R)
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,739
|
|
|
--
|
|
|
(2,739
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Fair
value of stock options issued
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
311
|
|
|
--
|
|
|
(311
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Forfeiture
of performance based options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(194
|
)
|
|
--
|
|
|
194
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Fair
value of warrants issued
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,704
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,704
|
|
Modification
of previously issued stock based compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
202
|
|
|
--
|
|
|
(202
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Amortization
of unearned stock based compensation
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,195
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
1,195
|
|
Shares
issued for options exercised
|
|
|
--
|
|
|
--
|
|
|
700
|
|
|
7
|
|
|
470
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
477
|
|
Tax
benefit in connection with exercise of options
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
79
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
79
|
|
Stock
options issued in settlement of contractual
obligations
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
115
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
115
|
|
Change
in fair value of interest rate swap
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
98
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
98
|
|
Net
loss
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(3,790
|
)
|
|
--
|
|
|
--
|
|
|
(3,790
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
- June 30, 2006
|
|
|
5,141
|
|
$
|
51
|
|
|
64,537
|
|
$
|
645
|
|
$
|
26,059
|
|
$
|
(90
|
)
|
$
|
(1,863
|
)
|
$
|
98
|
|
$
|
(2,070
|
)
|
|
--
|
|
$
|
--
|
|
$
|
22,830
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In
thousands)
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
(LOSS) INCOME
|
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
$
|
3,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE (LOSS) INCOME
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
|
98
|
|
|
--
|
|
|
--
|
|
Unrealized
gain (loss) on marketable securities, net
|
|
|
--
|
|
|
--
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COMPREHENSIVE (LOSS) INCOME
|
|
$
|
(3,692
|
)
|
$
|
(149
|
)
|
$
|
3,111
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In
thousands)
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
$
|
3,123
|
|
Adjustments
to reconcile net (loss) income to net cash provided by (used in
)
operating activities:
|
|
|
|
|
|
|
|
|
|
|
Loss
on sale of marketable securities
|
|
|
--
|
|
|
(9
|
)
|
|
--
|
|
Depreciation
and amortization
|
|
|
1,534
|
|
|
1,248
|
|
|
886
|
|
Deferred
tax (benefit) expense
|
|
|
(1,678
|
)
|
|
(78
|
)
|
|
1,999
|
|
Amortization
of unearned stock based compensation
|
|
|
1,195
|
|
|
--
|
|
|
--
|
|
Excess
tax benefit from exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
Provision
for doubtful accounts
|
|
|
46
|
|
|
--
|
|
|
40
|
|
Loss
(gain) on disposal of equipment
|
|
|
5
|
|
|
--
|
|
|
(3
|
)
|
Changes
in operating assets and liabilities:
|
|
|
4,591 |
|
|
--
|
|
|
--
|
|
Accounts
receivable
|
|
|
(5,974
|
)
|
|
(814
|
)
|
|
(1,960
|
)
|
Inventories
|
|
|
235
|
|
|
(3,411
|
)
|
|
(947
|
)
|
Prepaid
expenses and other current assets
|
|
|
(780
|
)
|
|
(703
|
)
|
|
(229
|
)
|
Deferred
revenue
|
|
|
3,399
|
|
|
--
|
|
|
--
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
6,688
|
|
|
1,563
|
|
|
(783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
ADJUSTMENTS
|
|
|
4,591
|
|
|
(2,204
|
)
|
|
(997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
801
|
|
|
(2,353
|
)
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
--
|
|
|
46
|
|
|
--
|
|
Payments
for deposits
|
|
|
(1,309
|
)
|
|
(561
|
)
|
|
(178
|
)
|
Proceeds
from notes receivable
|
|
|
--
|
|
|
--
|
|
|
1,524
|
|
Proceeds
from sale of equipment
|
|
|
--
|
|
|
--
|
|
|
19
|
|
Investment
in APR, LLC
|
|
|
--
|
|
|
(1,023
|
)
|
|
--
|
|
Purchases
of land, building and equipment
|
|
|
(6,833
|
)
|
|
(8,112
|
)
|
|
(4,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
$
|
(8,142
|
)
|
$
|
(9,650
|
)
|
$
|
(3,060
|
)
|
The
accompanying notes are an integral part of these consolidated financial
statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
|
Repayments
of bank line of credit, net
|
|
$
|
(1,315
|
)
|
$
|
(425
|
)
|
$
|
(2,102
|
)
|
Proceeds
from long-term debt
|
|
|
570
|
|
|
9,970
|
|
|
--
|
|
Repayments
of long-term debt
|
|
|
(776
|
)
|
|
(339
|
)
|
|
--
|
|
Proceeds
from sale of Series B-1 preferred stock and warrants, net
|
|
|
9,928
|
|
|
--
|
|
|
--
|
|
Payment
of Series A-1 preferred stock dividends
|
|
|
(248
|
)
|
|
(179
|
)
|
|
--
|
|
Collections
on stock subscription receivable
|
|
|
43
|
|
|
--
|
|
|
--
|
|
Payment
of financing costs
|
|
|
(515
|
)
|
|
--
|
|
|
--
|
|
Cash
received in reverse merger transaction
|
|
|
--
|
|
|
--
|
|
|
64
|
|
Proceeds
from options and warrants exercised
|
|
|
477
|
|
|
627
|
|
|
3,520
|
|
Excess
tax benefit from exercise of stock options
|
|
|
79 |
|
|
--
|
|
|
--
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
8,164
|
|
|
9,654
|
|
|
1,482
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND
|
|
|
|
|
|
|
|
|
|
|
CASH
EQUIVALENTS
|
|
|
902
|
|
|
(2,349
|
)
|
|
548
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - Beginning
|
|
|
536
|
|
|
2,885
|
|
|
2,336
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS - Ending
|
|
$
|
1,438
|
|
$
|
536
|
|
$
|
2,884
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS, Continued
(In
thousands)
|
|
|
Year
Ended June 30,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the periods for:
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
657
|
|
$
|
99
|
|
$
|
21
|
|
Income
Taxes
|
|
$
|
15
|
|
$
|
61
|
|
$
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit in connection with exercise of stock options
|
|
$
|
79
|
|
$
|
153
|
|
$
|
3,619
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
loan utilized to acquire new facility
|
|
$
|
--
|
|
$
|
--
|
|
$
|
7,400
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for subscription
receivable
|
|
$
|
133
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of machinery and equipment in exchange for
capital
lease payable
|
|
$
|
128
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
Declaration
of Series A-1 preferred dividends:
|
|
$
|
124
|
|
$
|
303
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual
of Series B-1 preferred dividends
|
|
$
|
78
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment
of debt with proceeds from new credit
facility
|
|
$
|
20,445
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
$
|
98
|
|
$
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of preferred stock to common stock:
|
|
|
|
|
|
|
|
|
|
|
Series
C
|
|
$
|
--
|
|
$
|
2
|
|
$
|
--
|
|
Series
K
|
|
$
|
15
|
|
$
|
3
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
assets obtained in reverse
merger
transaction
|
|
$
|
--
|
|
$
|
--
|
|
$
|
4
|
|
The
accompanying notes are an integral part of
these consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies
Nature
of Business
Interpharm
Holdings, Inc. and Subsidiaries (the “Company”), through one of its wholly-owned
subsidiaries, Interpharm, Inc., is in the business of developing, manufacturing
and marketing generic prescription strength and over-the-counter pharmaceutical
products for wholesale distribution throughout the United States. The majority
of the Company’s sales have been derived from sales of Ibuprofen tablets in both
over-the-counter and prescription strength.
Principles
of Consolidation
The
consolidated financial statements include the accounts of Interpharm Holdings,
Inc. and its wholly-owned subsidiaries are prepared in accordance with
accounting principles generally accepted in the U.S. The consolidated financial
statements include the accounts of wholly owned subsidiaries, after elimination
of inter-company accounts and transactions.
Revenue
Recognition
The
Company recognizes product sales revenue upon the shipment of product, when
estimated provisions for chargebacks and other sales allowances are reasonably
determinable, and when collectibility is reasonably assured. Accruals for
these
provisions are presented in the consolidated financial statements as reductions
to revenues. Accounts receivable are presented net of allowances relating
to the
above provisions.
The
Company purchases raw materials from two suppliers, which are manufactured
into
finished goods and sold back to such suppliers as well as to other customers.
The Company can, and does, purchase raw materials from other suppliers. Pursuant
to Emerging Issues Task Force, (“EITF”) No. 99-19, “Reporting Revenue Gross as a
Principal Versus Net as an Agent,” the Company recorded sales to, and purchases
from, these suppliers on a gross basis. Sales and purchases were recorded
on a
gross basis since the Company (i) has a risk of loss associated with the
raw
materials purchased, (ii) converts the raw material into a finished product
based upon Company developed specifications, (iii) has other sources of supply
of the raw material, and (iv) has credit risk related to the sale of such
product to the suppliers. For the years ended June 30, 2006, 2005 and 2004,
the
Company purchased raw materials from the two suppliers totaling approximately
$10,608, $9,251 and $12,367, respectively, and sold finished goods to such
suppliers totaling approximately $6,110, $17,414, and $22,625, respectively.
These purchase and sales transactions are recorded at fair value in accordance
with EITF Issue No. 04-13, “Accounting for Purchases and Sales of Inventory with
the Same Counterparty”
Sales
Returns and Allowances
At
the
time of sale, the Company records estimates for various costs, which reduce
product sales. These costs include estimates of chargebacks and other sales
allowances. In addition, the Company records allowances for rebates, including
Medicaid rebates and shelf-stock adjustments when the conditions are
appropriate. Estimates for sales allowances such as chargebacks are based
on a
variety of factors including actual return experience of that product or
similar
products, rebate arrangements for each product, and estimated sales by our
wholesale customers to other third parties who have contracts with the Company.
Actual experience associated with any of these items may be different than
the
Company’s estimates. The Company regularly reviews the factors that influence
its estimates and, if necessary, makes adjustments when it believes that
actual
product returns, credits and other allowances may differ from established
reserves.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
Sales
Incentives
In
the
current year the Company has offered a sales incentive to one of its customers
in the form of an incentive volume price adjustment. The Company accounts
for
sales incentives in accordance with EITF 01-9, "Accounting for Consideration
Given by a Vendor to a Customer (Including a Reseller of Vendor's Products)"
(“EITF 01-9”). The terms of this volume based sales incentive require the
customer to purchase a minimum quantity of the Company's products during
a
specified period of time. The incentive offered is based upon a fixed dollar
amount per unit sold to the customer. The Company makes an estimate of the
ultimate amount of the incentive the customer will earn based upon past history
with the customer and other facts and circumstances. The Company has the
ability
to estimate this volume incentive price adjustment, as there does not exist
a
relatively long period of time for the particular adjustment to be earned.
Any
change in the estimated amount of the volume incentive is recognized immediately
using a cumulative catch-up adjustment. In accordance with EITF 01- 9, the
Company records the provision for this sales incentive when the related revenue
is recognized. The accrual for sales incentives at June 30, 2006 was
approximately $3,400 and reported as deferred revenue on the Company’s balance
sheet. The Company's sales incentive liability may prove to be inaccurate,
in
which case the Company may have understated or overstated the provision required
for these arrangements. Therefore, although the Company makes its best estimate
of its sales incentive liability, many factors, including significant
unanticipated changes in the purchasing volume of its customer, could have
significant impact on the Company's liability for sales incentives and the
Company's reported operating results.
Earnings
Per Share
Basic
earnings per share (“EPS”) of common stock is computed by dividing net income
attributable to common stockholders by the weighted average number of shares
of
common stock outstanding during the period. Diluted EPS reflects the amount
of
net income for the period available to each share of common stock outstanding
during the reporting period, giving effect to all potentially dilutive shares
of
common stock from the potential exercise of stock options and warrants and
conversions of convertible preferred stocks. In accordance with EITF Issue
No.
03-6, “Participating Securities and the Two-Class Method Under Financial
Accounting Standards Board (“FASB”) Statement No. 128, Earnings Per Share,” in
periods when there is a net income, the Company uses the two-class method
to
calculate the effect of the participating Series K on the calculation of
basic
EPS and the if-converted method is used to calculate the effect of the
participating Series K on diluted EPS. In periods when there is a net loss,
the
effect of the participating Series K is excluded from both basic and diluted
EPS.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, the Company considers all short-term
investments with original maturities of three months or less to be cash
equivalents. At June 30, 2006, and from time to time, the Company maintains
cash
balances in excess of the FDIC insurance limit.
Allowance
for Doubtful Accounts
The
allowance for doubtful accounts reflects management’s best estimate of probable
losses inherent in the account receivable balance. Management determines
the
allowance based on known troubled accounts, historical experience and other
currently available evidence.
Inventories
Inventories
are valued at the lower of cost (first-in, first-out basis) or market value.
Losses from the write-down of damaged, nonusable, or otherwise nonsalable
inventories are recorded in the period in which they occur.
Land,
Building and Equipment
Land,
building and equipment is stated at cost. Maintenance and repairs are charged
to
expense as incurred, costs of major additions and betterments are capitalized.
When equipment is sold or otherwise disposed of, the cost and related
accumulated depreciation is eliminated from the accounts and any resulting
gain
or loss is reflected in operations.
Depreciation
and Amortization
Depreciation
is provided for on the straight-line method over the estimated useful lives
of
the related assets. The cost of leasehold improvements is amortized over
the
lesser of the length of the related leases or the estimated useful lives
of the
improvements.
Capitalization
of Interest and Other Costs
The
Company capitalizes interest on borrowings and certain other direct costs
during
the active construction period of major capital projects. Capitalized costs
are
added to the cost of the underlying assets and will be depreciated over the
useful lives of the assets. In connection with its capital improvements to
the
Brookhaven, NY facility, the Company capitalized approximately $907 and $343,
including interest approximating $517 and $252, during the fiscal years ended
June 30, 2006 and 2005, respectively.
Comprehensive
(Loss)
Income
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 130,
“Reporting Comprehensive Income,” the Company reports comprehensive (loss)
income in addition to net (loss) income. Comprehensive (loss) income is a
more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been recognized in the
calculation of net (loss) income.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
Use
of
Estimates in the Financial Statements
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenue and expenses
during
the reporting period. Actual results could differ from those estimates.
Significant estimates include depreciation, deferred tax asset valuations,
reserve for chargebacks, deferred revenue and inventory overhead costing
estimates.
Derivative
Instruments
The
Company uses derivative instruments on a limited basis, principally to manage
its exposure to changes in interest rates. Derivative instruments are recorded
at their fair value on the balance sheet, while changes in the fair value
of the
instrument are included in other comprehensive income.
Impairment
of Long-Lived Assets
The
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not
be
fully recoverable. To determine if impairment exists, the Company compares
the
estimated future undiscounted cash flows from the related long-lived assets
to
the net carrying amount of such assets. Once it has been determined that
impairment exists, the carrying value of the asset is adjusted to fair value.
Factors considered in the determination of fair value include current operating
results, trends and the present value of estimated expected future cash
flows.
Income
Taxes
The
Company accounts for income taxes using the liability method which requires
the
determination of deferred tax assets and liabilities based on the differences
between the financial and tax bases of assets and liabilities using enacted
tax
rates in effect for the year in which differences are expected to reverse.
The
net deferred tax asset is adjusted by a valuation allowance, if, based on
the
weight of available evidence, it is more likely than not that some portion
or
the entire net deferred tax asset will not be realized. The Company and its
subsidiaries file a consolidated income tax return.
Shipping
Costs
The
Company’s shipping and handling costs are included in selling, general and
administrative expenses. For the years ended June 30, 2006, 2005 and 2004,
shipping and handling costs approximated $668, $434, and $419,
respectively.
Research
and Development
Pursuant
to SFAS No. 2 “Accounting for Research and Development Costs,” research and
development costs are expensed as incurred or at the date payment of
non-refundable amounts become due, whichever occurs first. Research and
development costs, which consist of salaries and related
costs of research and development personnel, fees paid to consultants and
outside service providers,
raw materials used specifically in the development of its new products and
bioequivalence studies. Pre-approved milestone payments due under contract
research and development arrangements are expensed when the milestone is
achieved.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
Concentrations
and Fair Value of Financial Instruments
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash investments and accounts receivable.
Concentrations of credit risk with respect to accounts receivable are disclosed
in Note 13. The Company performs ongoing credit evaluations of its customers’
financial conditions and, generally, requires no collateral from its customers.
Unless otherwise disclosed, the fair values of financial instruments approximate
their recorded value.
Reclassification
Certain
accounts in the prior period’s financial statements have been reclassified for
comparative purposes to conform with the presentation in the current period’s
financial statements. These reclassifications have no effect on previously
reported operations.
Stock
Based Compensation
Effective
July 1, 2005, the Company adopted the fair value recognition provisions of
SFAS No. 123 (Revised 2004), “Share-Based Payment,” (“SFAS No. 123(R)”),
using the modified-prospective-transition method. As a result, the Company’s net
income before taxes for the year ended June 30, 2006 is $1,195 lower than
if it
had continued to account for share-based compensation under Accounting
Principles Board (“APB”) opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB No. 25”).
Years
Ended June 30, 2005 and 2004
Prior
to
July 1, 2005, the Company’s stock-based employee compensation plans were
accounted for under the recognition and measurement provisions of APB
No. 25, and related Interpretations, as permitted by FASB Statement
No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”). The
Company did not recognize stock-based compensation cost in its statement
of
operations for periods prior to July 1, 2005 as all options granted had an
exercise price equal to the market value of the underlying common stock on
the
date of grant. The following table illustrates the effect on net income and
net
income per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123 to stock-based employee compensation:
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
Years
Ended June 30, 2005 and 2004,
continued
|
|
|
|
|
Year
Ended June 30,
|
|
|
|
2005
|
|
|
2004
|
|
Net
(loss) income as
reported
|
|
$
|
(149
|
)
|
$
|
3,123
|
|
|
|
|
|
|
|
|
|
Less:
Stock-based employee compensation expense
determined
under fair value-based method for all awards, net of income
tax
|
|
|
7,600
|
|
|
804
|
|
|
|
|
|
|
|
|
|
Pro
forma
|
|
$
|
(7,749
|
)
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
Basic
net (loss) earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.01
|
)
|
$
|
0.16
|
|
Pro
forma
|
|
$
|
(0.30
|
)
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
Diluted
net (loss) earnings per share
|
|
|
|
|
|
|
|
As
reported
|
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
Pro
forma
|
|
$
|
(0.30
|
)
|
$
|
0.04
|
|
For
the
year ended June 30, 2005, the fair values of Company common stock options
granted to employees were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility
ranging from 106% to 131% (2) risk-free interest rate ranging from 4.25%
to
5.58% and (3) expected average lives of 10 years.
For
the
year ended June 30, 2004, the fair values of Company common stock options
granted to employees were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility
ranging from 126% to 135%, (2) risk-free interest rates ranging from 4.25%
to
4.50% and (3) expected average lives of 10 years.
New
Accounting Pronouncements
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”
(“SFAS No. 154”). SFAS 154 requires retrospective application to prior periods’
financial statements of changes in accounting principle. It also requires
that
the new accounting principle be applied to the balances of assets and
liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to
the
opening balance of retained earnings for that period rather than being reported
in an income statement. The statement will be effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. The Company does not expect the adoption of SFAS No. 154 will have
a
material effect on its consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
In
June
2005, the EITF reached consensus on Issue No. 05-6, “Determining the
Amortization Period for Leasehold Improvements” ("EITF 05-6"). EITF 05-6
provides guidance on determining the amortization period for leasehold
improvements acquired in a business combination or acquired subsequent to
lease
inception. The guidance in EITF 05-6 will be applied prospectively and is
effective for reporting periods beginning after June 29, 2005. The adoption
of EITF 05-6 did not have a material impact on the Company's consolidated
financial statements.
In
June
2005, the EITF issued EITF 05-2, "The Meaning of Conventional Convertible
Debt
Instrument in Issue No. 00-19." EITF 05-2 retained the definition of a
conventional convertible debt instrument as set forth in EITF 00-19, and
which
is used in determining certain exemptions to the accounting treatments
prescribed under SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities." EITF 05-2 also clarified that certain contingencies related
to the
exercise of a conversion option would not be outside the definition of
"conventional" and determined that convertible preferred stock with a mandatory
redemption date would also qualify for similar exemptions if the economic
characteristics of the preferred stock are more akin to debt than equity.
EITF
05-2 is effective for new instruments entered into and instruments modified
in
periods beginning after June 29, 2005. The adoption of EITF 05-2 did not
have a
material impact on the Company's consolidated financial statements.
In
September 2005, the FASB ratified EITF Issue No. 04-13,
“Accounting for Purchases and Sales of Inventory with the Same Counterparty”
(“EITF 04-13”). EITF 04-13 provides guidance on whether two or more inventory
purchase and sales transactions with the same counterparty should be viewed
as a
single exchange transaction within the scope of APB No. 29, “Accounting for
Nonmonetary Transactions.” In addition, EITF 04-13 indicates whether nonmonetary
exchanges of inventory within the same line of business should be recognized
at
cost or fair value. The adoption of EITF 04-13 did not have a material
impact on the Company's consolidated financial statements.
In
September 2005, the FASB ratified the EITF’s Issue No. 05-7, “Accounting for
Modifications to
Conversion
Options Embedded in Debt Instruments and Related Issues” (EITF 05-7”), which
addresses whether a modification to a conversion option that changes its
fair
value effects the recognition of interest expense for the associated debt
instrument after the modification, and whether a borrower should recognize
a
beneficial conversion feature, not a debt extinguishment, if a debt modification
increases the intrinsic value of the debt (for example, the modification
reduces
the conversion price of the debt). The statement will be effective for
accounting modifications of debt instruments beginning in the first interim
or
annual reporting period beginning after December 15, 2005. The adoption of
EITF
05-7 did not have a material impact on the Company's consolidated financial
statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
New
Accounting Pronouncements,
continued
In
September 2005, the FASB ratified the EITF’s Issue No. 05-8, “Income Tax
Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature”
(“EITF 05-8”), which discusses whether the issuance of convertible debt with a
beneficial conversion feature results in a basis difference arising from
the
intrinsic value of the beneficial conversion feature on the commitment date
(which is recorded in the stockholder’s equity for book purposes, but as a
liability for income tax purposes) and, if so, whether that basis difference
is
a temporary difference under FASB Statement No. 109, “Accounting for Income
Taxes.” The statement will be effective for financial statements beginning in
the first interim or annual reporting period beginning after December 15,
2005.
The adoption of EITF 05-8 did not have a material impact on the Company's
consolidated financial statements.
In
September 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-1,
“Classifications and Measurement of Freestanding Financial Instruments
Originally Issued in Exchange for Employee Services under FASB Statement
No.
123(R), to defer the requirement of SFAS No. 123(R) that a freestanding
financial instrument originally subject to SFAS No. 123(R) becomes subject
to
the recognition and measurement requirements of other applicable GAAP when
the
rights conveyed by the instrument to the holder are no longer dependent on
the
holder being an
employee
of the entity. The rights under stock-based payment awards issued to employees
by the Company are all dependent on the recipient being an employee of the
Company. Therefore, the FSP does not have an impact on the Company’s
consolidated financial statements and its measurement of stock-based
compensation in accordance with SFAS No. 123(R).
In
October 2005, the FASB issued FSP No. 123(R)-2, “Practical Accommodation to the
Application of Grant Date as Defined in FASB Statement No. 123(R)”,to provide
guidance on determining the grant date for an award as defined in SFAS
No.123(R). This FSP stipulated that assuming all other criteria in the grant
definition are met, a mutual understanding of the key terms and conditions
of an
award to an individual employee is presumed to exist upon the award’s approval
in accordance with the relevant corporate governance requirements, provided
that
the key terms and conditions of an award (a) cannot be negotiated by the
recipient with the employer because the award is a unilateral grant, and
(b) are
expected to be communicated to an individual recipient within a relatively
short
period of time from the date of approval. The Company has applied the principles
set forth in the FSP upon the adoption of SFAS No. 123(R).
In
November 2005, the FASB issued Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards.” FAS 123(R)-3 provides that companies may elect to use a
specified alternative method to calculate the historical pool of excess tax
benefits available to absorb tax deficiencies recognized upon adoption of
SFAS
No. 123 (R). The option to use the alternative method is available regardless
of
whether SFAS No. 123 (R) was adopted using the modified prospective or modified
retrospective application transition method, and whether
it is has the ability to calculate its pool of excess tax benefits in accordance
with the guidance in paragraph 81 of SFAS No. 123 (R). This method only applies
to awards that are fully vested and outstanding upon adoption of SFAS No.
123
(R). FAS 123(R)-3 became effective after November 10, 2005. The adoption of
FAS 123(R)-3 did not have a material impact on the Company’s consolidated
financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
In
February 2006, the FASB issued No.123(R)-4, “Classification of Options and
Similar Instruments Issued as Employee Compensation That Allow for Cash
Settlement upon the Occurrence of a Contingent Event”, to address the
classifications of options and similar instruments issued as employee
compensation that allow for cash settlement upon the occurrence of a contingent
event. The guidance in this FSP amends paragraphs 32 and A229 of FASB Statement
No. 123 (revised 2004), “Share-Based Payment”. The Company’s Option Plans have
no cash settlement provisions. Therefore, this FSP currently does not have
an
impact on its consolidated financial statements or its measurements of
stock-based compensation in accordance with SFAS No. 123(R).
In
February 2006, the FASB issued SFAS No. 155 ''Accounting for Certain Hybrid
Financial Instruments, an amendment of FASB Statements No. 133 and 140'',
(''SFAS 155''). SFAS No. 155 clarifies certain issues relating to embedded
derivatives and beneficial interests in securitized financial assets. The
provisions of SFAS No. 155 are effective for all financial instruments acquired
or issued after fiscal years beginning after September 15, 2006. The Company
is
currently assessing the impact that the adoption of SFAS No. 155 will have
on
its consolidated financial statements.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“SFAS No. 156”), which amends SFAS No. 140, “Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,”
with respect to the accounting for separately recognized servicing assets
and
servicing liabilities. SFAS No. 156 permits the choice of the amortization
method or the fair value measurement method, with changes in fair value recorded
in income, for the subsequent measurement for each class of separately
recognized servicing assets and servicing liabilities. The statement is
effective for years beginning after September 15, 2006, with earlier
adoption permitted. The Company is currently evaluating the
effect that adopting this statement will have on its consolidated
financial statements.
In
June
2006, The FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes”, (“FIN 48”). This interpretation clarified the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes” (“SFAS No.109”). Specifically, FIN 48 clarifies
the application of SFAS No. 109 by defining a criterion that an individual
tax
position must meet for any part of the benefit of that position to be recognized
in an enterprise’s financial statements. Additionally, FIN 48 provides guidance
on measurement, derecognition, classification, interest and penalties,
accounting in interim periods of income taxes, as well as the required
disclosure and transition. This interpretation is effective for fiscal years
beginning after December 15, 2006. The Company is currently evaluating the
requirements of FIN 48 and has not yet determined if the adoption of FIN
48 will
have a significant impact on its consolidated financial statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
1 -
Summary
of Significant Accounting Policies,
continued
NOTE
2 -
Accounts
Receivable
Accounts
receivable are comprised of amounts owed to the Company through the sales
of its
products throughout the United States. These accounts receivable are presented
net of allowances for doubtful accounts, sales returns and customer chargebacks.
Allowances for doubtful accounts were approximately $101 and $66 at June
30,
2006 and June 30, 2005, respectively. The allowance for doubtful accounts
is based on a review of specifically identified accounts in addition to an
overall aging analysis. Judgments are made with respect to the collectibility
of
accounts receivable based on historical experience and current economic trends.
Actual losses could differ from those estimates. Allowances for customer
chargebacks were $2,315 and $425 at June 30, 2006 and June 30, 2005,
respectively. The Company
sells some of its products indirectly to various government agencies referred
to
below as “indirect customers.” The Company enters into agreements with its
indirect customers to establish pricing for certain products. The indirect
customers then independently select a wholesaler from which to actually purchase
the products at these agreed-upon prices. The Company will provide credit
to the
selected wholesaler for the difference between the agreed-upon price with
the
indirect customer and the wholesaler’s invoice price if the price sold to the
indirect customer is lower than the direct price to the wholesaler. This
credit
is called a chargeback. The provision for chargebacks is based on expected
sell-through levels by the Company’s wholesale customers to the indirect
customers, and estimated wholesaler inventory levels. As sales to the large
wholesale customers increase, the reserve for chargebacks will also generally
increase. However, the size of the increase depends on the product mix.
The
Company continually monitors the reserve for chargebacks and makes adjustments
to the reserve as deemed necessary. Actual chargebacks may differ from estimated
reserves.
The
changes in the allowance for doubtful accounts are summarized as follows:
|
|
Year
Ended June
30,
|
|
|
|
2006
|
|
|
2005
|
|
Beginning
balance
|
|
$
|
66
|
|
$
|
74
|
|
Provision
for doubtful accounts
|
|
|
46
|
|
|
--
|
|
Charge-offs
|
|
|
(11
|
)
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
Ending
balance
|
|
$
|
101
|
|
$
|
66
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
2 -
Accounts
Receivable,
continued
The
changes in the allowance for customer chargebacks, discounts and other credits
that reduced gross revenue for each of the fiscal years ended June 30, 2006
and
2005:
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
Reserve
balance - beginning
|
|
$
|
425
|
|
$
|
630
|
|
|
|
|
|
|
|
|
|
Actual
chargebacks, discounts and other credits taken in the current period
(a)
|
|
|
(5,277
|
)
|
|
(2,822
|
)
|
|
|
|
|
|
|
|
|
Current
provision related to current period sales
|
|
|
7,167
|
|
|
2,617
|
|
Reserve
balance - ending
|
|
$
|
2,315
|
|
$
|
425
|
|
(a)
Actual chargebacks, discounts and other credits are determined based upon
the
customer’s application of amounts taken against the accounts receivable
balance.
NOTE
3 -
Inventories
Inventories
consist of the following:
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
Finished
goods
|
|
$
|
1,781
|
|
$
|
721
|
|
Work
in process
|
|
|
3,685
|
|
|
5,539
|
|
Raw
materials
|
|
|
2,928
|
|
|
2,117
|
|
Packaging
materials
|
|
|
312
|
|
|
564
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,706
|
|
$
|
8,941
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
4 -
Land,
Building and Equipment
Land,
building and equipment consists of the following:
|
|
June
30,
|
|
Estimated
Useful
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Lives
|
|
Land
|
|
$
|
4,924
|
|
$
|
4,924
|
|
|
|
|
Building
|
|
|
12,460
|
|
|
4,492
|
|
|
30
Years
|
|
Machinery
and equipment
|
|
|
12,643
|
|
|
9,135
|
|
|
5-7
Years
|
|
Construction
in progress
|
|
|
587
|
|
|
3,976
|
|
|
30
Years
|
|
Furniture
and fixtures
|
|
|
811
|
|
|
435
|
|
|
5
Years
|
|
Leasehold
improvements
|
|
|
3,206
|
|
|
2,951
|
|
|
5-15
Years
|
|
|
|
|
34,631
|
|
|
25,913
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
5,562
|
|
|
4,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land,
Building and Equipment, net (a)
|
|
$
|
29,069
|
|
$
|
21,872
|
|
|
|
|
(a)
Includes assets not yet placed in service of approximately $4,123
and
$9,314 for June 30,
|
2006
and 2005, respectively.
|
Depreciation
and amortization expense for the years ended June 30, 2006, 2005 and 2004
was
approximately $1,534, $1,248 and $886, respectively.
NOTE
5 -
Accounts
Payable, Accrued Expenses and Other Current Liabilities
Accounts
payable, accrued expenses and other current liabilities consist of the
following:
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
Accrued
inventory purchases
|
|
$
|
5,734
|
|
$
|
3,303
|
|
Accrued
research and development expenses
|
|
|
2,068
|
|
|
465
|
|
Other
|
|
|
4,848
|
|
|
2,465
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,650
|
|
$
|
6,233
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
6 -
Debt
Long-term
Debt
A
summary of the outstanding long-term debt is as
follows:
|
|
|
June
30,
2006
|
|
|
June
30,
2005
|
|
|
|
|
|
|
|
|
|
Advised
credit facility
|
|
$
|
--
|
|
$
|
9,970
|
|
Real
estate term loan
|
|
|
11,734
|
|
|
7,061
|
|
Machinery
and equipment term loans
|
|
|
3,833
|
|
|
--
|
|
Capital
lease
|
|
|
72
|
|
|
--
|
|
|
|
|
15,639
|
|
|
17,031
|
|
Less:
amount representing interest on capital lease
|
|
|
1
|
|
|
--
|
|
Total
long-term debt
|
|
|
15,638
|
|
|
17,031
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
1,686
|
|
|
10,340
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
$
|
13,952
|
|
$
|
6,691
|
|
In
March,
2004, the Company obtained a $21,000 credit facility consisting of (i) a
$7,400
mortgage loan for the purchase of the Company's second manufacturing plant
in
Brookhaven, NY; (ii) $8,600 of credit lines primarily to acquire new equipment
and for renovations, and (iii) a $5,000 general line of credit. During fiscal
2005, the Company and the Bank informally agreed to consolidate the credit
lines
into one advised credit line totaling $13,600. As a result, the $13,600 of
advances was not allocated to each individual credit line. Because the Company
and the Bank did not determine the amount of loans that were available to
be
converted into 60 month term loans, the $13,000 of advances were classified
as
current at June 30, 2005.
This
credit facility was collateralized by substantially all assets of the Company.
At the option of the Company, interest was calculated at (i) LIBOR plus 1.5%
for
3 to 36 month periods, or at (ii) the Bank's then fixed prime rate.
On
February 9, 2006, the Company entered into a new four-year financing arrangement
with Wells Fargo Business Credit (“WFBC”). This financing agreement provided a
maximum credit facility of $41,500 comprised of:
· $22,500
revolving credit facility
· $12,000
real estate term loan
· $
3,500
machinery and equipment (“M&E”) term loan
· $
3,500
additional / future capital expenditure facility
The
funds
made available through this facility paid down, in its entirety, the $20,445
owed on the previous credit facility.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
6 -
Debt,
continued
Long-term
Debt
The
new
revolving credit facility borrowing base is calculated as (i) 85% of the
Company’s eligible accounts receivable plus the lesser of 50% of cost or 85% of
the net orderly liquidation value of its eligible inventory. The advances
pertaining to inventory are capped at the lesser of 100% of the advance from
accounts receivable or $9,000. The $12,000 loan for the real estate in
Brookhaven, NY is payable in equal monthly installments of $67 plus interest
through February 2010 at which time the remaining principal balance is due.
The
$3,500 M&E loan is payable in equal monthly installments of $58 plus
interest through February 2010 at which time the remaining principal balance
is
due. With respect to additional capital expenditures, the Company is permitted
to borrow 90% of the cost of new equipment purchased to a maximum of $3,500
in
borrowings amortized over 60 months. As of June 30, 2006, there is approximately
$2,930 available for additional capital expenditure borrowings.
Under
the
terms of the WFBC agreement, three stockholders, all related to the Company’s
Chairman of the Board of Directors, one of whom is the Company’s Chief Operating
Officer, were required to provide limited personal guarantees, as well as
pledge
securities with a minimum aggregate value of $7,500 as security for a portion
of
the $22,500 credit facility. The Company was required to raise a minimum
of
$7,000 through the sale of equity or subordinated debt by June 30,
2006. The
shareholder’s pledges of marketable securities would be reduced by WFBC either
upon the Company raising capital, net of expenses in excess of $5,000 or
achieving certain milestones. As a result of the Company completing the sale
of
$10,000 of Series B-1 convertible preferred stock in May 2006 (See Note 10),
the
credit facility and the limited personal guarantees were reduced by $4,250
and
$3,670, respectively. In September, 2006 the Company consummated a $10,000
sale
of Series C-1 Convertible preferred stock (see Note 16), which will further
reduce the credit facility by $3,250 and eliminate the balance of the personal
pledges of marketable securities of $3,830. After the reductions described
above, the maximum availability of the revolving credit facility will be
$15,000.
The
revolving credit facility and term loans will bear interest at a rate of
the
prime rate less 0.5% or, at the Company’s option, LIBOR plus 250 basis points.
At June 30, 2006, the interest rate on this debt was 7.75%. Pursuant to the
requirements of the WFBC agreement, the Company has put in place a lock-box
arrangement. The Company will incur a fee of 25 basis points per annum on
any
unused amounts of this credit facility.
The
WFBC
credit facility is collateralized by substantially all of the assets of the
Company. In addition, the Company is required to comply with certain financial
covenants.
With
respect to the real estate term loan and the $3,500 M&E loan, the Company
entered into interest rate swap contracts (the “swaps”), whereby the Company
pays a fixed rate of 7.56% and 8.00% per annum, respectively. The swaps
contracts mature in 2010. The swaps are a cash flow hedge (i.e. a hedge against
interest rates increasing). As all of the critical terms of the swaps and
loans
match, they are structured for short-cut accounting under SFAS No. 133,
“Accounting For Derivative
Instruments and Hedging Activities’” and by definition, there is no hedge
ineffectiveness or
a need
to reassess effectiveness. Fair value of the interest rate swaps at June
30,
2006 was approximately $98 and is included in other assets.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
6 -
Debt,
continued
Capital
Lease
The
Company has acquired equipment under a capital lease with annual interest
at
3.26% that expires in April 2007. The asset and liability under the capital
lease is recorded at the fair value of the asset. The cost of the asset included
in machinery and equipment is $128 for the year ended June 30, 2006. The
asset
is depreciated over its estimated useful life.
Scheduled
annual maturities of long-term debt are as follows:
For
the Year
Ending
June 30,
|
|
|
Amount
|
|
2007
|
|
$
|
1,686
|
|
2008
|
|
|
1,614
|
|
2009
|
|
|
1,614
|
|
2010
|
|
|
10,724
|
|
|
|
|
|
|
Total
|
|
$
|
15,638
|
|
Rents
The
Company leases its business premises (“Premises”) from the Trust, an entity
owned directly by one officer and indirectly by another officer of the Company,
under a noncancelable lease expiring in October 2019. The Company is obligated
to pay minimum annual rent of $480, plus property taxes, insurance, maintenance
and other expenses related to the Premises.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
7 -
Related
Party Transactions,
continued
Rents,
-
continued
Future
annual minimum rental payments under this operating lease are as follows:
For
the Year Ending June 30,
|
|
|
Amount
|
|
2007
|
|
$
|
480
|
|
2008
|
|
|
480
|
|
2009
|
|
|
480
|
|
2010
|
|
|
480
|
|
2011
|
|
|
480
|
|
Thereafter
|
|
|
4,000
|
|
|
|
|
|
|
Total
|
|
$
|
6,400
|
|
The
lease
does not grant the Company the option to purchase the Premises at any time
during the lease term nor at its termination, nor will the Company share
in any
proceeds that may result from sale or disposition of the Premises.
The
lease
between the landlord and the Company states that upon a change in control
of the
Company, which effectively occurred on May 30, 2003, the landlord is entitled
to
increase the rents to fair market value and every three years thereafter.
Although entitled to receive fair market value for the property as determined
by
an independent appraisal, through August 2006 the rent has remained the same,
which is below market value for similar space in the local area. There are
no
tenants in the building other than the Company.
Investment
in APR, LLC
In
February and April 2005, the Company purchased 5 Class A membership interests
(“Interests”) from each of Cameron Reid (“Reid”), the Company’s Chief Executive
Officer, and John Lomans (“Lomans”), who has no affiliation with the Company,
for an aggregate purchase price of $1,022 (including costs of $22) of APR,
LLC,
a Delaware limited liability company primarily engaged in the development
of
complex bulk pharmaceutical products (“APR”). The purchases were made pursuant
to separate Class A Membership Interest Purchase Agreements dated February
16,
2005 between the Company and Reid and Lomans (the “Purchase Agreements”). At the
time of the purchases, Reid and Lomans owned all of the outstanding Class
A
membership interests of APR, which had, outstanding, 100 Class A membership
interests and 100 Class B membership interests. As a result, the Company
owns 10
of the 100 Class A membership Interests outstanding. The two classes of
membership interests have different economic and voting rights, and the Class
A
members have the right to make most operational decisions. The Class B interests
are held by one of the Company’s major customers and suppliers.
In
accordance with the terms of the Purchase Agreements, the Company has granted
to
Reid and Lomans each a proxy to vote 5 of the Interests owned by the Company
on
all matters on which the holders of Interests may vote.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
7 -
Related
Party Transactions,
continued
The
Board
of Directors approved the purchases of Interests at a meeting held on February
15, 2005, based on an analysis and advice from an independent investment
banking
firm. Reid did not participate during the Company’s deliberations on this
matter. The Company is accounting for its investment in APR pursuant to the
cost
method of accounting.
NOTE
8 -
Income
Taxes
The
income tax (benefit) expense is comprised of the following:
|
|
Year
Ended June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
--
|
|
$
|
--
|
|
$
|
(31
|
)
|
State
|
|
|
(22
|
)
|
|
5
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current
|
|
|
(22
|
)
|
|
5
|
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(1,739
|
)
|
|
(71
|
)
|
|
1,785
|
|
State
|
|
|
61
|
|
|
(7
|
)
|
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Deferred
|
|
|
(1,678
|
)
|
|
(78
|
)
|
|
1,999
|
|
|
|
|
|
|
|
|
|
|
|
|
(Benefit)
Provision for Income Taxes
|
|
$
|
(1,700
|
)
|
$
|
(73
|
)
|
$
|
1,986
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
8 -
Income
Taxes,
contined
The
Company's effective income tax rate differs from the statutory U.S. Federal
income tax rate as a result of the following:
|
|
Year
Ended June 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Statutory
U.S. federal tax rate
|
|
|
(34.0
|
)%
|
|
(34.0
|
)%
|
|
34.0
|
%
|
State
taxes
|
|
|
0.7
|
|
|
(3.0
|
)
|
|
3.0
|
|
Stock
based compensation
|
|
|
1.9
|
|
|
--
|
|
|
--
|
|
Permanent
differences
|
|
|
0.2
|
|
|
4.0
|
|
|
0.2
|
|
Change
in valuation allowance
|
|
|
--
|
|
|
--
|
|
|
0.7
|
|
Other
|
|
|
0.2
|
|
|
0.3
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
(31.0
|
)%
|
|
(32.7
|
)%
|
|
38.9
|
%
|
The
components of deferred tax assets and liabilities consist of the following:
|
|
June
30,
|
|
|
|
2006
|
|
2005
|
|
Deferred
Tax Assets, Current Portion
|
|
|
|
|
|
Capitalized
inventory
|
|
$
|
31
|
|
$
|
19
|
|
Receivable
allowance and reserves
|
|
|
36
|
|
|
25
|
|
Other
|
|
|
50
|
|
|
43
|
|
Deferred
revenue
|
|
|
1,204
|
|
|
--
|
|
Deferred
Tax Assets, current
|
|
$
|
1,321
|
|
$
|
87
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets, Non-Current Portion
|
|
|
|
|
|
Other
|
|
$
|
45
|
|
$
|
47
|
|
|
|
|
314
|
|
|
--
|
|
Investment
tax credits
|
|
|
835
|
|
|
600
|
|
Net
operating loss carryforwards (“NOLs”)
|
|
|
5,068
|
|
|
4,799
|
|
|
|
|
6,262
|
|
|
5,446
|
|
|
|
|
|
|
|
|
|
Valuation
allowance
|
|
|
(884
|
)
|
|
(702
|
)
|
Deferred
Tax Assets, Non-Current
|
|
|
5,378
|
|
|
4,744
|
|
|
|
|
|
|
|
|
|
Deferred
Tax Liabilities, Non-Current Portion
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
(529
|
)
|
|
(418
|
)
|
|
|
|
|
|
|
|
|
Deferred
Tax Assets, non-current, net
|
|
$
|
4,849
|
|
$
|
4,326
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
8 -
Income
Taxes,
continued
During
the year ended June 30, 2006 and 2005, stock options were exercised which
generated approximately $216 and $413 of income tax deductions, respectively,
resulting in tax benefits of approximately $80 and $153, respectively, which
were credited to additional paid-in capital.
At
June
30, 2006 the Company has remaining Federal NOLs of $14,328 and State NOLs
of
$13,744 expiring through 2026. Pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership, utilization of these
NOLs is limited. $10,770 of these NOLs are available in fiscal 2007, and
utilization of $3,558 of these NOLs is limited and becomes available after
fiscal 2007. The limitations lapse at the rate of $2,690 per year, through
fiscal 2009. As of June 30, 2006, the Company has determined that it is more
likely than not, that the Company will utilize all of the Federal NOLs in
the
future. The Company reserved approximately 25% of the State NOLs which the
Company does not anticipate utilizing due to State limitations.
In
addition, at June 30, 2006, the Company has approximately $835 of New York
State
investment tax credit carryforwards, expiring in various years through 2021.
These carryforwards are available to reduce future New York State income
tax
liabilities. However, the Company has reserved 100% of the investment tax
credit
carryforward, which the Company does not anticipate utilizing.
NOTE
9 -
Earnings
Per Share
The
calculations of basic and diluted EPS are as follows: (in thousands, except
share data)
|
|
Year
Ended June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(3,790
|
)
|
$
|
(149
|
)
|
$
|
3,123
|
|
Less:
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
68
|
|
|
--
|
|
|
--
|
|
Series
A-1
|
|
|
166
|
|
|
166
|
|
|
166
|
|
Series
B-1
|
|
|
78
|
|
|
--
|
|
|
--
|
|
Less:
Series B-1 benefical conversion feature
|
|
|
1,418
|
|
|
--
|
|
|
--
|
|
Less:
Net income attributable to
Series
K preferred stockholders
|
|
|
--
|
|
|
--
|
|
|
194
|
|
Numerator
for basic EPS
|
|
|
(5,520
|
)
|
|
(315
|
)
|
|
2,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Net
income attributable to
Series
K preferred stockholders
|
|
|
--
|
|
|
166
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
for diluted EPS
|
|
$
|
(5,520
|
)
|
$
|
(149
|
)
|
$
|
2,957
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
9 -
Earnings
Per Share,
continued
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic EPS
weighted
average shares outstanding
|
|
|
36,521
|
|
|
25,684
|
|
|
17,595
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Convertible
Series K preferred stock
|
|
|
--
|
|
|
--
|
|
|
43,461
|
|
Convertible
Series A, B, B-1, C and J
preferred
stocks
|
|
|
--
|
|
|
--
|
|
|
11
|
|
Stock
options
|
|
|
--
|
|
|
--
|
|
|
7,570
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.16
|
|
Diluted
EPS
|
|
$
|
(0.15
|
)
|
$
|
(0.01
|
)
|
$
|
0.04
|
|
As
of
June 30, 2006, the total number of common shares outstanding and the number
of
common shares potentially issuable upon exercise of all outstanding stock
options and conversion of preferred stocks (including contingent conversions)
is
as follows:
Common
stock outstanding
|
|
|
64,537
|
|
Stock
options outstanding (see Note 10)
|
|
|
12,083
|
|
Warrants
outstanding (see Note 10)
|
|
|
2,282
|
|
Common
stock issuable upon conversion of preferred stocks:
|
|
|
|
|
Series
A
|
|
|
14
|
|
Series
A-1 (maximum contingent conversion) (a)
|
|
|
4,855
|
|
Series
B
|
|
|
1
|
|
Series
B-1
|
|
|
6,520
|
|
Series
C
|
|
|
6
|
|
|
|
|
|
|
Total
(b)
|
|
|
90,298
|
|
(a) |
As
described in Note 10, the Series A-1 shares are convertible only
if the
Company reaches $150,000 in annual sales or upon a merger, consolidation,
sale of assets or similar
transaction.
|
(b) |
Assuming
no further issuance of equity instruments, or changes to the equity
structure of the Company, this total represents the maximum number
of
shares of common stock that could be outstanding through June 15,
2016
(the end of the current vesting and conversion
periods).
|
The
Company has received proxy statements from a majority of its
shareholders to amend the Certificate of Incorporation of the
Company and increase the number of authorized shares to an amount to be
determined by the Company’s Chief Executive Officer. The number of
authorized shares will be increased to an amount of at least the
number of common shares that would be outstanding upon exercise of all
outstanding stock options, warrants and conversion of all preferred
stocks.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
10 -
Series
B-1 Redeemable Convertible Preferred Stock
On
May
15, 2006, the Company entered into a Securities Purchase Agreement (the
“Agreement”) with Tullis-Dickerson Capital Focus III, L.P. (the “Buyer”). Under
the Agreement, the Company agreed to issue and sell to the Buyer, and the
Buyer
agreed to purchase from the Company, for a purchase price of $10,000 an
aggregate of 10 shares of a newly designated series of the Company’s preferred
stock (“B-1”), together with 2,282 warrants to purchase shares of common stock
of the Company with an exercise price of $1.639 per share. The warrants have
a
five year term. The Series B-1 Stock and warrants sold to the Buyer are
convertible and/or exercisable for 8,802 shares of common stock. The B-1
shares
are convertible into common shares at a conversion price of $1.5338, and
have an
annual dividend rate of 8.25%, payable quarterly, which can be paid, at the
Company’s option, in cash or the Company’s common stock. In addition, the B-1
shareholders have the right to require the Company to redeem all or a portion
of
the B-1 shares upon the occurrence of certain triggering events, as defined,
at
a price per preferred share to be calculated on the day immediately preceding
the date of a triggering event. At June 30, 2006, the Company has accrued
approximately $77,000
of Series B-1 dividends, which was paid in July 2006 through the issuance
of approximately 63,000 shares of the Company's common stock.
With
respect to the Company’s accounting for the preferred stock, EITF Topic D-98,
paragraph 4, states that Rule 5-02.28 of Regulation S-X requires securities
with redemption features that are not solely within the control of the issuer
to
be recorded outside of permanent equity. As described above, the terms of
the
Preferred Stock include certain redemption features that may be triggered
by events that are not solely within the control of the Company, such as
a
potential default with respect to any indebtedness, including borrowings
under
the WFBC financing arrangement. Accordingly, the Company has classified the
B-1
shares as temporary equity and the value ascribed to the B-1 shares upon
initial
issuance in May 2006 was the amount received in the transaction less the
relative fair value ascribed to the warrants and direct costs associated
with
the transaction. The Company allocated $1,704 of the gross proceeds of the
sale
of B-1 shares to the warrants based on estimated fair value. In accordance
with
EITF Issue No. 00-27 "Application of EITF Issue No. 98-5 to Certain Convertible
Instruments," ("EITF 00-27") the Company recorded a non-cash charge of $1,418
to
retained earnings (deficit). The non-cash charge measures the difference
between
the relative fair value of the B-1 shares and the fair market value of the
Company's common stock issuable pursuant to the conversion terms on the date
of
issuance. The Company is not currently, nor expects in the future to be,
in
default on its WFBC credit facility (the only redemption feature outside
of its
control) nor does it plan to redeem the Series B-1 preferred stock. As such
the
Company believes it is not probable that the Series B-1 preferred stock
will become redeemable
In
addition, on May 15, 2006, in connection with the sale of the B-1 shares
the
Company entered into a Registration Rights Agreement with the Buyer. Under
the
terms of this Registration Rights Agreement the Company is subject to penalties
(a) if, within 60 days after a request to do so is made by the holders of
such
preferred stock, the Company does not timely file with the Securities and
Exchange Commission a registration statement covering the resale of shares
of its common stock issuable to such holders upon conversion of the
preferred stock, (b) if a registration statement is filed, such registration
statement is not declared effective within 180 days after the request is
made or
(c) if after such a registration is declared effective, after certain grace
periods the holders are unable to make sales of its common stock because of
a failure to keep the registration statement effective or because of a
suspension or delisting of its common stock from the American Stock
Exchange or other principal exchange on which its common stock is traded.
The penalties will accrue on a daily basis so long as the Company is in default
of the Registration Rights Agreement as amended. The maximum amount of a
registration delay penalty as defined in the Registration Rights Agreement
is
18% of the aggregate purchase price of the Buyers registrable securities
included in the related registration statement. Unpaid registration delay
penalties shall accrue interest at the rate of one and one-half percent (1.5%)
per month until paid in full. If the Company fails to get a registration
statement effective penalties shall accrue at an amount equal to 1.67% per
month
of the aggregate purchase price of the Buyers registrable securities included
in
the related registration statement. If the effectiveness failure continues
for
more than 180 days the penalty rate shall increase to 3.33% per month. In
addition, if the Company fails to maintain the effectiveness of a registration
statement, penalties shall accrue at a rate of 3.33% per month of the aggregate
purchase price of the registrable securities included in the related
registration. The Company is also subject to penalties if there is a failure
to
timely deliver to a holder (or credit the holder’s balance with Depository Trust
Company if the common stock is to be held in street name) a certificate for
shares of our common stock if the holder elects to convert its preferred
stock
into common stock. Therefore, upon the occurrence of one or more of the
foregoing events the Company’s business and financial condition could be
materially adversely affected and the market price of its common stock
would likely decline.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
10 -
Series
B-1 Redeemable Convertible Preferred Stock, continued
The
Company’s Series B-1 redeemable convertible preferred stock is summarized as
follows at June 30, 2006:
|
|
|
Shares
Issued
|
|
|
|
|
|
|
|
Shares
|
|
|
And
|
|
|
Par
Value
|
|
|
Liquidation
|
|
Authorized
|
|
|
Outstanding
|
|
|
Per
Share
|
|
|
Preference
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000
|
|
|
10,000
|
|
$
|
100
|
|
$
|
10,000
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Equity
Securities
Preferred
Stocks
The
Company’s preferred stocks consist of the following at June 30,
2006:
|
|
|
|
|
|
Shares
Issued
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
and
|
|
|
|
|
|
Liquidation
|
|
|
|
|
Authorized
|
|
|
Outstanding
|
|
|
Par
Value
|
|
|
Preference
|
|
June
30, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stocks:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Series
A cumulative convertible
|
|
|
29
|
|
|
7
|
|
$
|
--
|
|
$
|
688
|
|
*Series
B convertible
|
|
|
13
|
|
|
2
|
|
|
--
|
|
|
15
|
|
*Series
C convertible
|
|
|
350
|
|
|
277
|
|
|
3
|
|
|
277
|
|
Series
A-1 cumulative convertible
|
|
|
5,000
|
|
|
4,855
|
|
|
48
|
|
|
3,311
|
|
Total
preferred stocks issued and
outstanding
|
|
|
5,392
|
|
|
5,141
|
|
$
|
51
|
|
$
|
4,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Classes
of preferred stock assumed in the ATEC reverse merger
One
condition of the Agreement was to convert all outstanding shares of Series
A
Cumulative Convertible Preferred Stock (the “Series A”) and Series B Cumulative
Convertible Stock (the Series B”) into the Company’s common stock. As such, on
June 19, 2006, the Company filed an Information Statement pursuant to Section
14
(c) of the Securities and Exchange Act of 1934, as amended, (the “Information
Statement”). The Information Statement informs stockholders of actions to
approve the amendments to the Certificate of Incorporation of the Company
of
actions taken and approved on May 25, 2006, by the holders of (a) voting
stock
of the Company holding shares entitling such holders to cast more than a
majority of the votes entitled to be cast with respect to such actions, (b)
a
majority of the outstanding shares of Series A and (c) more than two-thirds
of
the outstanding
shares of Series B, to make all of the Series A and Series B convertible
into
the Company’s common stock. Another condition of the Agreement requires the
Company to increase its authorized common shares from 70,000 shares to 150,000
shares.
Originally,
each share of Series A was convertible at the option of the holder into shares
of common stock at the conversion rate in effect at the time the holder elects
to convert. The conversion rate is subject to adjustment upon the occurrence
of
certain events, including, among other things, subdivisions or combinations
of
the Company’s common stock, the payment by the Company of stock dividends on the
common stock, and the issuance of shares of common stock for a consideration
below an amount calculated under a formula. As of June 30, 2006 the conversion
rate was approximately 1.6 shares of common stock for each share of Series
A.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Equity
Securities,
continued
Preferred
Stocks,
continued
The
dividend rate on the Series A is $10.00 per share per year. At June 30, 2006,
there were 7 shares of Series A outstanding with accumulated dividends of
approximately $757, which could only have been paid when and if
declared by the Company’s Board of Directors.
On
July
18, 2006, the Company filed an amendment to its Article of Incorporation
which
had the effect of (i) automatically converting all outstanding shares of
the
Company’s Series A into two shares of common stock or an aggregate of 8 common
shares. A Series A shareholder elected to have his 3 shares canceled.
Accordingly, no shares of the Company’s common stock were issued to him as part
of this conversion; (ii) eliminating the Series A from the Articles of
Incorporation; (iii) automatically converting each of the 2 outstanding shares
of the Company’s Series B into one share of common stock thus issuing 2 common
shares; and (iv) eliminating the Series B from the Articles of Incorporation.
These amendments were approved by written consent of a majority of the
Company’s outstanding common stock and Series A Cumulative Convertible Preferred
Stock and by the holder of all of the outstanding Series B Convertible Preferred
shares.
In
2003
the Company authorized the satisfaction of loans due to the Company’s then Chief
Executive Officer and one of its stockholders, by issuing 5 shares of a Series
A-1 cumulative convertible preferred (the Series A-1”). The A-1 shares convert
on a 1:1 basis into Company common stock subject to the definitive terms
in the
list of designations upon (i) the Company reaching $150,000 in sales or (ii)
a
merger, consolidation, sale of assets or similar transaction. The holders
of
shares shall not be entitled to any voting rights and have dissolution rights
upon liquidation of $0.682 per share. The Series A-1 shares have a cumulative
annual dividend of $0.0341 per share. In September 2005 and December 2005,
the
Board of Directors, declared dividends of $42 and $83, respectively. The
declared dividends were cumulative through December 31, 2005. Cumulative
declared and unpaid dividends through June 30, 2005 totaling $165 were paid
in
December, 2005. In June 2006, the Company paid $83 of declared dividends
for the
period July through December, 2005. As of June 30, 2006 the Company’s Board of
Directors had not declared any dividend on the Series A-1 shares for the
period
January 1, 2006 through June 30, 2006. Such undeclared dividends amounted
to
$83.
On
June
4, 2004, the Company was deemed by AMEX to be in compliance with applicable
listing standards, and as a result, a “Triggering Event” occurred. Upon the
occurrence of the Triggering Event, the holders of the Series K Convertible
preferred shares (the “K shares”) (entities owned by certain relatives of the
Company’s Chairman of the Board of Directors), in accordance with a defined
formula, converted one seventh or 293 of the K shares into 6,275 restricted
shares of the Company’s common stock. The K shares automatically converted a
like amount on June 4, 2005. In May 2006 the Company agreed to convert the
remaining 1,465 Series K shares into 31,374 restricted common shares. The
holders of the K shares have demand registration rights with respect to the
common stock to be issued upon conversion. As of June 30, 2006 the former
Series
K stockholders own or control approximately 50,175 shares or 78% of the total
shares outstanding of the Company.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Equity
Securities,
continued
Stock
Options
In
2003,
Interpharm, Inc., as a part of the ATEC reverse merger transaction, assumed
options to acquire ATEC’s common stock which were granted previously by ATEC
pursuant to two Stock Option Plans. The two option plans are the 1997 Stock
Option Plan (“1997 Plan”) and the 2000 Flexible Stock Option Plan (“2000 Plan”).
Both plans provide for the issuance of qualified and non-qualified options
as
those terms are defined by the Internal Revenue Code.
The
1997
Plan provides for the issuance of 6,000 shares of common stock. All options
issued, pursuant to the 1997 Plan, cannot have a term greater than ten years.
Options granted under this plan vest over periods established in option
agreements. As of June 30, 2006,
1,412
options are outstanding under this plan. No additional shares can be granted
under this plan.
The
2000
Plan provides for the issuance of 10,000 shares of common stock plus an annual
increase, effective on the first day of each calendar year, equal to 10%
of the
number of outstanding shares of common stock as of the first day of such
calendar year, but in no event, more than 20,000 shares in the aggregate.
All
options issued, pursuant to the 2000 Plan, cannot have a term greater than
ten
years. Options granted under the 2000 Plan vest over periods established
in
option agreements. As of June 30, 2006, the 2000 Plan provides for the issuance
of 19,676 shares of common stock. As of that date, 10,671 options are
outstanding under this plan.
During
the fiscal year ended June 30, 2006, 431 options were granted, as
follows:
· |
100
performance-based options to employees having exercise prices ranging
from
$1.24 to $1.26 and which vest 25% June 30, 2006 and each subsequent
June
30th
through June 30, 2009;
|
· |
245
non performance-based options to employees having an exercise prices
ranging from $1.21 to $1.49 and which vest ratably over periods
ranging
from three to five years from December 31, 2005 to June 30, 2011;
|
· |
8
fully-vested options to a former Director of the Company, having
an
exercise price of $1.64;
|
· |
78
options were granted in settlement of a contractual
obligation.
|
As
consideration for past services provided by an executive officer of the Company
who passed away, the Company’s board of directors modified a previous grant of
450 options by immediately vesting the unvested portion as well as extending
the
date upon which they can be exercised to March, 2009. The Company also granted
100 SARs exercisable at $1.55 and having a maximum cash value of $250 payable
to
the executive officers’ estate. The SARs are recorded at fair value and are
marked to market at each reporting period. At June 30, 2006, the Company
recognized approximately $59 as expense. The
SARs
must be exercised between July 1, 2008 and December 31,
2008.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Equity
Securities,
continued
The
following table summarizes the options activity for the period July 1, 2003
to
June 30, 2006.
|
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Options
outstanding at July 01, 2003
|
|
|
12,546
|
|
$
|
1.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,444
|
|
$
|
4.03
|
|
|
|
|
Exercised
|
|
|
(3,478
|
)
|
$
|
1.04
|
|
|
|
|
Forfeited
|
|
|
(23
|
)
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2004
|
|
|
10,489
|
|
$
|
1.62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
(a)
|
|
|
8,116
|
|
$
|
1.53
|
|
|
|
|
Exercised
|
|
|
(1,097
|
)
|
$
|
0.57
|
|
|
|
|
Forfeited
(a)
|
|
|
(4,854
|
)
|
$
|
3.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2005
|
|
|
12,654
|
|
$
|
1.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
430
|
|
$
|
1.16
|
|
|
|
|
Exercised
|
|
|
(700
|
)
|
$
|
0.68
|
|
|
|
|
Forfeited
|
|
|
(301
|
)
|
$
|
1.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2006
|
|
|
12,083
|
|
$
|
1.02
|
|
$
|
5,489
|
|
(a)
Includes 4,854,325 options repriced at June 30, 2005
For
all
of the Company’s stock-based compensation plans, the fair value of each grant
was estimated at the date of grant using the Black-Scholes option-pricing
model.
Black-Scholes utilizes assumptions related to volatility, the risk-free interest
rate, the dividend yield (which is assumed to be zero, as the Company has
not
paid any cash dividends) and employee exercise behavior. Expected volatilities
utilized in the model are based mainly on the historical volatility of the
Company’s stock price and other factors. The risk-free interest rate is derived
from the U.S. Treasury yield curve in effect in the period of grant. The
model
incorporates exercise and post-vesting forfeiture assumptions based on an
analysis of historical data. The expected life of the fiscal 2006 grants
is
derived from historical and other factors. As a policy, the Company issues
shares for exercised options upon receipt of the required funds, as stated
in
the Stock Option Agreement, and a properly executed intent-to-exercise form
(Exhibit C of the Stock Option Agreement).
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
11 -
Equity
Securities,
continued
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
At
June
30, 2006
|
|
|
|
|
$0.45
- $0.68
|
|
|
5,962
|
|
|
6.20
|
|
$
|
0.64
|
|
|
4,699
|
|
$
|
0.63
|
|
$1.21
- $1.99
|
|
|
5,913
|
|
|
6.78
|
|
$
|
1.26
|
|
|
5,023
|
|
$
|
1.26
|
|
$3.13
- $6.80
|
|
|
208
|
|
|
2.17
|
|
$
|
5.16
|
|
|
208
|
|
$
|
5.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,083
|
|
|
6.42
|
|
|
|
|
|
9,930
|
|
|
|
|
For
the
year ended June 30, 2006, the fair values of Company common stock options
granted to employees were estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: (1) expected volatility
ranging from 70% to 75% (2) risk-free interest rate ranging from 4.32% to
5.13%
(3) Weighted-average volatility of 74% and (4) expected average lives ranging
from 1.5 to 7.5 years.
A
summary
of the status of the Company’s nonvested shares as of June 30, 2006, and changes
during the year ended June 30, 2006, is summarized as follows:
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Grant-
Date
|
|
Nonvested
Shares
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at July 1, 2005
|
|
|
3,656
|
|
$
|
0.72
|
|
Granted
|
|
|
430
|
|
$
|
0.86
|
|
Vested
|
|
|
(1,632
|
)
|
$
|
0.65
|
|
Forfeited
|
|
|
(301
|
)
|
$
|
2.36
|
|
Nonvested
at June 30, 2006
|
|
|
2,153
|
|
$
|
0.75
|
|
The
total
unearned compensation cost of $1,863 for the total nonvested options as of
June
30, 2006 of 2,153 will be recognized over a weighted average expected
period of 2.28 years.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
12 -
401K
Plan
In
January 2006, the Company initiated a pre-tax savings plan covering
substantially all employees, which qualifies under Section 401(k) of the
Internal Revenue Code. Under the plan, eligible employees may contribute
a
portion of their pre-tax salary, subject to certain limitations. The Company
contributes and matches 100% of the employee pre-tax contributions, up to
3% of
the employee’s compensation plus 50% of pre-tax contributions that exceed 3% of
compensation, but not to exceed 5% of compensation. The Company may also
make
profit-sharing contributions in its discretion which would be allocated among
all eligible employees, whether or not they make contributions. Company
contributions were approximately $128 for the year ended June 30, 2006.
NOTE
13 -
Commitments
and Contingencies
Legal
Proceedings
On
June
1, 2006, Ray Vuono (“Vuono”) commenced an action against the Company in the
Supreme Court of the State of New York, County of Suffolk (Index No. 13985/06).
Vuono’s complaint against the Company alleges, among other things, that Vuono is
entitled to receive additional compensation as a “finder” under an agreement
dated July 1, 2002 between Vuono and the Company (then known as Atec Group,
Inc.) with respect to a reverse merger transaction consummated by the Company
in
May 2003. Vuono also alleges that he is entitled to additional compensation
under the agreement in respect of a $41,500 credit facility from Wells Fargo
Business Credit, Inc. obtained by the Company in February 2006 and the sale
for
$10,000 of shares of a new series of convertible preferred stock and warrants
to
purchase common stock of the Company consummated by the Company with
Tullis-Dickerson
Capital Focus III, L.P. in May 2006. The total amount of damages sought by
Vuono
in the action is approximately $10,000.
The
Company believes that Vuono’s claims are without merit and the Company is
vigorously defending the action.
The
testing, manufacturing and marketing of pharmaceutical products subject the
Company the risk of product liability claims. The Company believes that it
maintains an adequate amount of product liability insurance, but no assurance
can be given that such insurance will cover all existing and future claims
or
that it will be able to maintain existing coverage or obtain additional coverage
at reasonable rates.
From
time
to time, the Company is a party to litigation arising in the normal course
of
its business operations. In the opinion of management, it is not anticipated
that the settlement or resolution of any such matters will have a material
adverse impact on the Company’s financial condition, liquidity or results of
operations.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Commitments
and Contingencies,
continued
Significant
Contracts - Tris Pharmaceuticals, Inc
The
Company entered into two agreements with Tris Pharma, Inc. (“Tris”). One of the
agreements is for the development and licensing of twenty-five liquid generic
products (“Liquids Agreement”). According to the terms of the Liquids Agreement,
Tris is to develop and deliver the properties, specifications and formulations
(“Technical Packages”) necessary to effectuate a technology transfer to the
Company for the twenty-five generic liquid pharmaceutical products. The Company
will then utilize this information to obtain all necessary approvals and
manufacture and market the products.
Further,
the Liquids Agreement provides the Company with a perpetual license of all
technology and components of the Technical Packages necessary to produce
the
liquid products that are the subject of the agreement. It also allows the
Company the use of the technology for other products in exchange for an
additional fee. In the event that Tris delivers twenty-five successful Technical
Packages, of which there can be no assurance, the Company will pay Tris
approximately $3,000. In accordance with the terms of this agreement, the
Company will make payments as various milestones are achieved. In addition,
Tris
is to receive a royalty of between 10% and 12% of net profits resulting from
the
sales of each product. The Company is entitled to offset the royalty payable
to
Tris each year, at an agreed upon rate, to recoup the development fees paid
to
Tris under the Liquids Agreement.
According
to the terms of the second agreement, as amended, for the solid dosage products
(“solids”), the Company will collaborate with Tris on the development,
manufacture and marketing of eight solid oral dosage generic products. The
amendment to this agreement requires Tris to deliver Technical Packages for
two
softgel products. Further, the terms of this amendment will require the Company
to pay to Tris $750, based upon various Tris milestone achievements. Some
of
products included in this
agreement,
as amended, may require the Company to challenge the patents for the equivalent
branded products. This agreement, as amended, provides for payments of an
aggregate of $4,500 to Tris, whether or not regulatory approval is obtained
for
any of the solids products. The agreement for solids also provides for an
equal
sharing of net profits for each product, except for one product, that is
successfully sold and marketed, after the deduction and reimbursement of
all
litigation-related and certain other costs. The excluded product provides
for a
profit split of 60% for the Company and 40% for Tris. Further, this agreement
provides the Company with a perpetual royalty-free license to use all technology
necessary for the solid products in the United States, its territories and
possessions.
In
April,
2006, the Company and Tris further amended the solids agreement. This second
amendment requires Tris to deliver a Technical Package for one additional
solid
dosage product. Further, terms of this second amendment will require the
Company
to pay to Tris an additional $300 after it has paid the initial aggregate
amounts associated with the original agreement.
For
the
years ended June 30, 2006, 2005 and 2004, the Company recorded as research
and
development expense approximately $2,110, 1,400, and none, respectively,
in
connection with these agreements. Further, since inception, we have incurred
approximately $3,510 of research and development costs associated with the
Tris
agreements of which the Company has paid $3,375 as of June 30, 2006. The
combined costs of these agreements could aggregate up to $7,800. The balance
on
the liquid agreement of $2,750 could be paid within three years if all
milestones are reached. The balance on the solids agreement, as amended,
of
$1,675 could be paid within two years if all milestones are
reached.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
13 -
Commitments
and Contingencies,
continued
Software
license
During
2005, the Company entered into a four year software license agreement which
will
require the Company to make quarterly payments of $29 plus applicable sales
taxes through December 31, 2008. Thereafter the Company may opt to remit
annual
fees in order to maintain a perpetual user’s license.
Future
minimum annual payments for the software license are as follows:
For
the Year Ended June 30,
|
|
|
Amount
|
|
2007
|
|
$
|
124
|
|
2008
|
|
|
124
|
|
2009
|
|
|
62
|
|
|
|
|
|
|
Total
|
|
$
|
310
|
|
NOTE
14 -
Economic
Dependency
Major
Customers
The
Company had the following customer revenue concentrations for the years ended
June 30, 2006, 2005 and 2004:
|
|
Year
Ended June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Customer
A
|
|
|
17
|
%
|
|
*
|
|
|
*
|
|
Customer
B
|
|
|
13
|
%
|
|
*
|
|
|
*
|
|
Customer
C
|
|
|
13
|
%
|
|
*
|
|
|
*
|
|
Customer
D
|
|
|
10
|
%
|
|
11
|
%
|
|
10
|
%
|
Customer
E
|
|
|
*
|
|
|
23
|
%
|
|
26
|
%
|
Customer
F
|
|
|
*
|
|
|
22
|
%
|
|
29
|
%
|
*
Sales
to customers were less than 10%
The
Company complies with its supply agreement to sell various strengths of
Ibuprofen, and commencing October 2005, various strengths of Naproxen, to
the
Department of Veteran Affairs through two intermediary wholesale prime vendors
whose data are combined and reflected in Customer “D” above.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
14 -
Economic
Dependency,
continued
|
|
Accounts
Receivable
|
|
|
June
30,
|
|
|
|
2006
|
|
|
2005
|
|
Customer
A
|
|
$
|
2,374
|
|
$
|
2
|
|
Customer
B
|
|
|
906
|
|
|
1,037
|
|
Customer
C
|
|
|
5,959
|
|
|
--
|
|
Customer
D
|
|
|
3,521
|
|
|
1,157
|
|
Customer
E
|
|
|
494
|
|
|
1,789
|
|
Customer
F
|
|
|
--
|
|
|
1,862
|
|
The
table
below sets forth sales for those products or classes of products that accounted
for 10% or more of our total product sales for the years ended June 30, 2006,
2005 and 2004:
|
|
Year
Ended June
30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Ibuprofen
|
|
$
|
33,836
|
|
$
|
27,970
|
|
$
|
24,507
|
|
Naproxen
|
|
|
9,401
|
|
|
*
|
|
|
4,031
|
|
Esterified
Estrogen
|
|
|
8,100
|
|
|
--
|
|
|
--
|
|
Allopurinol
|
|
|
*
|
|
|
*
|
|
|
5,507
|
|
Atenolol
|
|
|
*
|
|
|
4,819
|
|
|
4,270
|
|
|
|
|
|
|
|
|
|
|
|
|
*
Sales
of products were less than 10%
Major
Suppliers
The
Company purchased materials from two suppliers during the year ended June
30,
2006 totaling approximately 59%, and three suppliers during the years ended
June
30, 2005 and 2004, totaling approximately 70% and 82%, respectively. At June
30,
2006 and 2005, amounts due to these suppliers included in accounts payable
were
approximately $3,900 and $2,300, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
15 -
Quarterly
Financial Data (Unaudited)
Summarized
quarterly financial information consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
30, 2005
|
|
|
Dec.
31, 2005
|
|
|
March
31, 2006
|
|
|
June
30, 2006
|
|
Sales,
net
|
|
$
|
14,547
|
|
$
|
16,213
|
|
$
|
16,110
|
|
$
|
16,485
|
|
Gross
profit
|
|
|
3,983
|
|
|
5,179
|
|
|
3,999
|
|
|
4,267
|
|
Net
(loss) income
|
|
|
(447
|
)
|
|
609
|
|
|
(1,499
|
)
|
|
(2,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
(0.01
|
)
|
$
|
0.02
|
|
$
|
(0.05
|
)
|
$
|
(0.08
|
)
|
Diluted
EPS
|
|
$
|
(0.01
|
)
|
$
|
0.01
|
|
$
|
(0.05
|
)
|
$
|
(0.08
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sept.
30, 2004
|
|
|
Dec.
31, 2004
|
|
|
March
31, 2005
|
|
|
June
30, 2005
|
|
Sales,
net
|
|
$
|
9,053
|
|
$
|
8,838
|
|
$
|
10,670
|
|
$
|
11,350
|
|
Gross
profit
|
|
|
1,940
|
|
|
2,593
|
|
|
2,272
|
|
|
2,267
|
|
Net
income (loss)
|
|
|
413
|
|
|
626
|
|
|
(633
|
)
|
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
EPS
|
|
$
|
0.01
|
|
$
|
0.02
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
Diluted
EPS
|
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.03
|
)
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
unaudited interim financial information reflects all adjustments, which in
the
opinion of management, are necessary to fairly present the results of the
interim periods presented. All adjustments are of a normal recurring nature.
The
sum of the quarterly EPS amounts may not equal the full year amounts due
to
rounding.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
(In
thousands, except per share data)
NOTE
16 -
Subsequent
Event
In
September 2006, the Company entered into and consummated a Securities Purchase
Agreement with Aisling Capital II, LP (the “Buyer”). Under this agreement, the
Company issued and sold to Aisling, for a purchase price of $10,000, an
aggregate of 10 shares of the Company's newly designated Series C-1
Redeemable Convertible Preferred Stock together with 2,282 warrants to
purchase
shares of Company’s common stock with an exercise price of $1.639 per share. The
warrants have a five year term. The number of shares of common stock which
may
be purchased upon exercise of the warrants and the exercise price of the
warrants are subject to adjustment to protect the holder of the warrants
against
dilution upon the occurrence of certain events. The Series C-1 Redeemable
Convertible Preferred Stock will, among other things, accrue dividends
at the
rate of 8.25% per annum, be convertible at any time at the option of the
holder
into common stock of the Company and, at any time after March 31, 2007,
be
convertible into the Company’s common stock, at the option of the Company,
provided that certain conditions have been satisfied. The Series C-1 Convertible
Preferred Stock is convertible, at a conversion price of $1.5338, into
approximately 6,500 shares of common stock. In addition, the Series C-1
shareholders have the right to require the