Unassociated Document
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Quarter Ended March 31, 2007
o
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the
Transition Period from to
Commission
File Number 0-22710
INTERPHARM
HOLDINGS, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
13-3673965
|
State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
corporation
or organization)
|
|
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
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 requirements
for
the past 90 days.
YES
x
NO o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the
Act).
Large
accelerated filer o Accelerated
filer o Non-accelerated filer 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
As
of the
close of business on May 11, 2007, there were 65,813,668 shares of the
Registrant's $0.01 par value per share Common Stock outstanding.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
TABLE
OF
CONTENTS
|
|
Page
|
PART
I
|
Financial
Information
|
|
|
|
|
Item
1.
|
Financial
Statements & Notes
|
1-26
|
|
|
|
Item
2.
|
Managements
Discussion & Analysis of Financial Condition and Results of
Operations
|
27-37
|
|
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
37
|
|
|
|
Item
4.
|
Controls
and Procedures
|
38
|
|
|
|
PART
II |
Other
Information Required in Report
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
39
|
|
|
|
Item
6.
|
Exhibits
|
40
|
|
|
|
Signatures
Page
|
41
|
|
|
|
Exhibits/Certifications
|
42-45
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
|
Cash
|
|
$
|
184
|
|
$
|
1,438
|
|
Accounts
receivable, net
|
|
|
14,109
|
|
|
14,212
|
|
Inventories
|
|
|
12,117
|
|
|
8,706
|
|
Prepaid
expenses and other current assets
|
|
|
1,564
|
|
|
1,316
|
|
Assets
held for sale
|
|
|
538
|
|
|
—
|
|
Deferred
tax assets
|
|
|
83
|
|
|
1,321
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
28,595
|
|
|
26,993
|
|
|
|
|
|
|
|
|
|
Land,
building and equipment, net
|
|
|
32,385
|
|
|
29,069
|
|
Deferred
tax assets
|
|
|
7,744
|
|
|
4,849
|
|
Investment
in APR, LLC
|
|
|
1,023
|
|
|
1,023
|
|
Other
assets
|
|
|
1,168
|
|
|
933
|
|
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
70,915
|
|
$
|
62,867
|
|
See
Notes To Condensed Consolidated Financial
Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands)
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
Current
maturities of long-term debt
|
|
$
|
2,090
|
|
$
|
1,686
|
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
15,027
|
|
|
12,650
|
|
Liabilities
held for sale
|
|
|
377
|
|
|
—
|
|
Deferred
revenue
|
|
|
—
|
|
|
3,399
|
|
Total
Current Liabilities
|
|
|
17,494
|
|
|
17,735
|
|
|
|
|
|
|
|
|
|
OTHER
LIABILITIES
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
|
14,585
|
|
|
13,952
|
|
Contract
termination liability
|
|
|
1,330
|
|
|
—
|
|
Other
liabilities
|
|
|
—
|
|
|
125
|
|
|
|
|
|
|
|
|
|
Total
Other Liabilities
|
|
|
15,915
|
|
|
14,077
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
33,409
|
|
|
31,812
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B-1 Redeemable Convertible Preferred Stock:
15
shares authorized; issued and outstanding - 10 at March 31, 2007
and
June 30, 2006; liquidation preference of $10,000
|
|
|
8,155
|
|
|
8,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
C-1 Redeemable Convertible Preferred Stock:
10
shares authorized; issued and outstanding - 10 at March
31, 2007; liquidation preference of $10,000
|
|
|
8,352
|
|
|
—
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
Preferred
stocks, 10,000 shares authorized; issued and outstanding
- 5,132 and 5,141 at March 31, 2007 and June 30, 2006, respectively;
aggregate liquidation preference of $3,588 and $4,291 at March
31, 2007 and June 30, 2006, respectively
|
|
|
51
|
|
|
51
|
|
Common
stock, $0.01 par value, 150,000 and 65,569 shares authorized and
issued, respectively, at March 31, 2007, and 70,000 and 64,537
shares
authorized and issued, respectively, at June 30, 2006.
|
|
|
656
|
|
|
645
|
|
Additional
paid-in capital
|
|
|
28,885
|
|
|
24,196
|
|
Stock
subscription receivable
|
|
|
—
|
|
|
(90
|
)
|
Accumulated
other comprehensive income
|
|
|
114
|
|
|
98
|
|
Accumulated
deficit
|
|
|
(8,707
|
)
|
|
(2,070
|
)
|
|
|
|
|
|
|
|
|
TOTAL
STOCKHOLDERS’ EQUITY
|
|
|
20,999
|
|
|
22,830
|
|
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$
|
70,915
|
|
$
|
62,867
|
|
See
Notes To Condensed Consolidated Financial Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In
thousands, except per share data)
|
|
Three
Months Ended
March
31,
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
SALES,
Net
|
|
$
|
19,910
|
|
$
|
16,110
|
|
$
|
60,215
|
|
$
|
46,869
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
(including related-party rent expense of $204 and $446 for the
three and
nine months ended March 31, 2007 and $102 and $306 for the three
and nine
months ended March 31, 2006, respectively)
|
|
|
13,535
|
|
|
12,111
|
|
|
40,828
|
|
|
33,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
6,375
|
|
|
3,999
|
|
|
19,387
|
|
|
13,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
3,882
|
|
|
3,263
|
|
|
9,675
|
|
|
7,901
|
|
Related
party rent
|
|
|
36
|
|
|
18
|
|
|
79
|
|
|
54
|
|
Research
and development
|
|
|
4,711
|
|
|
2,975
|
|
|
13,001
|
|
|
7,006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
8,629
|
|
|
6,256
|
|
|
22,755
|
|
|
14,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(2,254
|
)
|
|
(2,257
|
)
|
|
(3,368
|
)
|
|
(1,800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
(EXPENSE) INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract
termination expense
|
|
|
—
|
|
|
—
|
|
|
(1,655
|
)
|
|
—
|
|
Interest
expense, net
|
|
|
(289
|
)
|
|
(170
|
)
|
|
(816
|
)
|
|
(359
|
)
|
Asset
impairment
|
|
|
(101
|
)
|
|
—
|
|
|
(101
|
)
|
|
—
|
|
Other
|
|
|
46
|
|
|
2
|
|
|
(75
|
)
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSE
|
|
|
(344
|
)
|
|
(168
|
)
|
|
(2,647
|
)
|
|
(364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
BEFORE INCOME TAXES
|
|
|
(2,598
|
)
|
|
(2,425
|
)
|
|
(6,015
|
)
|
|
(2,164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BENEFIT
FROM INCOME TAXES
|
|
|
(746
|
)
|
|
(926
|
)
|
|
(1,668
|
)
|
|
(828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(1,852
|
)
|
|
(1,499
|
)
|
|
(4,347
|
)
|
|
(1,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
C-1 preferred stock beneficial conversion feature
|
|
|
—
|
|
|
—
|
|
|
1,094
|
|
|
—
|
|
Preferred
stock dividends
|
|
|
454
|
|
|
98
|
|
|
1,196
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$
|
(2,306
|
)
|
$
|
(1,597
|
)
|
$
|
(6,637
|
)
|
$
|
(1,517
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
(LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
$
|
(0.10
|
)
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares and equivalent shares outstanding
|
|
|
65,380
|
|
|
32,464
|
|
|
65,052
|
|
|
32,423
|
|
See
Notes To Condensed Consolidated Financial Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In
thousands)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
Paid-In
|
|
Subscription
|
|
Accumulated Other Comprehensive
|
|
Accumulated
|
|
Stockholders’
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Shares
|
|
|
Amount
|
|
|
Capital |
|
|
Receivable |
|
|
Income |
|
|
Deficit
|
|
|
Equity
|
|
BALANCE-
July 1, 2006
|
|
|
5,141
|
|
$
|
51
|
|
|
64,537
|
|
$
|
645
|
|
$
|
24,196
|
|
$
|
(90
|
)
|
$
|
98
|
|
$
|
(2,070
|
)
|
$
|
22,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
dividends - Series B-1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(206
|
)
|
|
(206
|
)
|
Accrued
dividends - Series C-1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(206
|
)
|
|
(206
|
)
|
Series
C-1 Preferred beneficial conversion feature
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,094
|
|
|
—
|
|
|
—
|
|
|
(1,094
|
)
|
|
—
|
|
Series
B-1 dividends paid with common stock
|
|
|
—
|
|
|
—
|
|
|
299
|
|
|
3
|
|
|
488
|
|
|
—
|
|
|
—
|
|
|
(413
|
)
|
|
78
|
|
Series
C-1 dividends paid with common stock
|
|
|
|
|
|
|
|
|
122
|
|
|
2
|
|
|
245
|
|
|
—
|
|
|
—
|
|
|
(247
|
)
|
|
—
|
|
Dividends
declared - Series A-1
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(124
|
)
|
|
(124
|
)
|
Shares
issued for options exercised
|
|
|
—
|
|
|
—
|
|
|
602
|
|
|
6
|
|
|
387
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
393
|
|
Conversion
of Series A preferred stock
|
|
|
(7
|
)
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Conversion
of Series B preferred stock
|
|
|
(2
|
)
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair
value of warrants issued
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,641
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,641
|
|
Stock
based compensation and modification expense
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
834
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
834
|
|
Collections
on stock subscription receivable
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
90
|
|
|
—
|
|
|
—
|
|
|
90
|
|
Change
in fair value of interest rate swap
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
16
|
|
Net
loss
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,347
|
)
|
|
(4,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
-
March 31, 2007
|
|
|
5,132
|
|
$
|
51
|
|
|
65,569
|
|
$
|
656
|
|
$
|
28,885
|
|
$
|
—
|
|
$
|
114
|
|
$
|
(8,707
|
)
|
$
|
20,999
|
|
See
Notes To Condensed Consolidated Financial Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In
thousands)
|
|
Three
Months Ended
March
31,
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,852
|
)
|
$
|
(1,499
|
)
|
$
|
(4,347
|
)
|
$
|
(1,336
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value of interest rate swap
|
|
|
31
|
|
|
(12
|
)
|
|
16
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
COMPREHENSIVE LOSS
|
|
$
|
(1,821
|
)
|
$
|
(1,511
|
)
|
$
|
(4,331
|
)
|
$
|
(1,348
|
)
|
See
Notes To Condensed Consolidated Financial Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In
thousands)
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
Net
loss from continuing operations
|
|
$
|
(4,347
|
)
|
$
|
(1,336
|
)
|
Adjustments
to reconcile net loss to net cash (used in) provided by operating
activities:
|
|
|
|
|
|
|
|
Bad
debt expense
|
|
|
55
|
|
|
11
|
|
Asset
impairment
|
|
|
101
|
|
|
—
|
|
Accreted
non-cash interest expense
|
|
|
54
|
|
|
—
|
|
Depreciation
and amortization
|
|
|
1,671
|
|
|
1,062
|
|
Stock
based compensation expense
|
|
|
834
|
|
|
1,004
|
|
Contract
termination expense
|
|
|
1,655
|
|
|
—
|
|
Deferred
tax benefit
|
|
|
(1,657
|
)
|
|
(800
|
)
|
Loss
on disposal of fixed assets
|
|
|
75
|
|
|
5
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
49
|
|
|
(2,258
|
)
|
Inventories
|
|
|
(3,412
|
)
|
|
(346
|
)
|
Prepaid
expenses and other current assets
|
|
|
(272
|
)
|
|
(635
|
)
|
Accounts
payable, accrued expenses and other liabilities
|
|
|
1,743
|
|
|
6,803
|
|
Deferred
revenue
|
|
|
(3,399
|
)
|
|
2,296
|
|
Total
adjustments
|
|
|
(2,503
|
)
|
|
7,142
|
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(6,850
|
)
|
|
5,806
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
Purchases
of building and equipment, net
|
|
|
(4,992
|
)
|
|
(6,621
|
)
|
Proceeds
from sale of equipment
|
|
|
129
|
|
|
—
|
|
Deposits
and other long-term assets
|
|
|
(706
|
)
|
|
(604
|
)
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(5,569
|
)
|
|
(7,225
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
Proceeds
from sale of Series C-1 preferred stock and warrants, net
|
|
|
9,993
|
|
|
—
|
|
Expenditures
relating to sale of Series B-1 preferred stock and
warrants
|
|
|
(70
|
)
|
|
—
|
|
Proceeds
from options exercised
|
|
|
393
|
|
|
—
|
|
Proceeds
from long-term debt
|
|
|
2,240
|
|
|
8,654
|
|
Payment
of Series A-1 dividends
|
|
|
(124
|
)
|
|
(165
|
)
|
Payment
of deferred financing costs
|
|
|
—
|
|
|
(270
|
)
|
Collections
on stock subscription receivable
|
|
|
90
|
|
|
21
|
|
Repayment
of bank line of credit, net
|
|
|
—
|
|
|
(6,728
|
)
|
Repayments
of long-term debt
|
|
|
(1,357
|
)
|
|
(376
|
)
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
11,165
|
|
|
1,136
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(1,254
|
)
|
|
(283
|
)
|
CASH
-
Beginning
|
|
|
1,438
|
|
|
537
|
|
CASH
-
Ending
|
|
$
|
184
|
|
$
|
254
|
|
See
Notes To Condensed Consolidated Financial Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
(In
thousands)
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION
|
|
|
|
|
|
Cash
paid during the periods for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
934
|
|
$
|
273
|
|
Income
taxes
|
|
$
|
—
|
|
$
|
15
|
|
Non-Cash
Investing or Financing Transactions:
|
|
|
|
|
|
|
|
Issuance
of common stock in exchange for subscription receivable
|
|
$
|
—
|
|
$
|
133
|
|
Acquisition
of machinery and equipment in exchange for capital lease
payable
|
|
$
|
156
|
|
$
|
128
|
|
Reclassification
of equipment deposits to building and equipment
|
|
$
|
410
|
|
$
|
771
|
|
Series
B-1 dividends paid with common stock
|
|
$
|
491
|
|
$
|
—
|
|
Series
C-1 dividends paid with common stock
|
|
$
|
247
|
|
$
|
—
|
|
Accrual
of Series B-1 dividends
|
|
$
|
206
|
|
$
|
—
|
|
Accrual
of Series C-1 dividends
|
|
$
|
206
|
|
$
|
—
|
|
Change
in fair value of interest rate swap
|
|
$
|
16
|
|
$
|
12
|
|
Repayment
of debt with proceeds from new credit facility
|
|
$
|
—
|
|
$
|
20,445
|
|
Declaration
of preferred dividends
|
|
$
|
—
|
|
$
|
124
|
|
See
Notes To Condensed Consolidated Financial
Statements.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
1 - Condensed
Consolidated Financial Statements
The
accompanying interim unaudited condensed consolidated financial statements
include the accounts of Interpharm Holdings, Inc. and its subsidiaries that
are
hereafter referred to as the “Company”. All intercompany accounts and
transactions have been eliminated in consolidation.
These
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, such interim statements reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and the results of operations and cash flows
for
the interim periods presented. The operating results for the three and nine
months ended March 31, 2007 are not necessarily indicative of the results that
may be expected for the fiscal year ending June 30, 2007. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company’s Form 10-K for the year ended June 30,
2006.
NOTE
2 - Summary
of Significant Accounting Policies
Nature
of Business
Interpharm
Holdings, Inc., through its wholly-owned subsidiary, Interpharm, Inc.
(“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.
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.
In
addition, the Company is party to supply agreements with certain pharmaceutical
companies under which, in addition to the selling price of the product, the
Company receives payments based on sales or profits associated with these
products realized by its customer. The Company recognizes revenue related to
the
initial selling price upon shipment of the products as the selling price is
fixed and determinable and no right of return exists. The additional revenue
component of these agreements is recognized by the Company at the time its
customers record their sales and is based on pre-defined formulas contained
in
the agreements. Receivables related to this revenue of $816 and $620 at March
31, 2007 and June 30, 2006, respectively, are included in “Accounts receivable,
net” in the accompanying Condensed Consolidated Balance Sheets.
Earnings
(Loss) Per Share
Basic
earnings (loss) per share (“EPS”) of common stock is computed by dividing net
income (loss) 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 (loss) 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
Emerging Issues Task Force (“EITF”) Issue No. 03-6, “Participating Securities
and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share,”
during the fiscal year ended June 30, 2006, in periods when there was net income
and Series K preferred stock was outstanding, the Company used the Two-Class
Method to calculate the effect of the participating Series K on the calculation
of basic EPS and the if-converted method was used to calculate the effect of
the
participating Series K on diluted EPS. In periods when there was a net loss,
the
effect of the participating Series K was excluded from both basic and diluted
EPS. Additionally, in May 2006, the Series K preferred stock was converted
into the Company’s common stock; therefore the use of the Two-Class Method is
not required for the three and nine months ended March 31,
2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
2 - 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 deferred tax asset valuations, reserve for
chargebacks, deferred revenue, fair values of stock based compensation awards
and inventory overhead costing estimates.
Stock
Based Compensation
Effective
July 1, 2005, the Company adopted the fair value recognition provisions of
Statement of Financial Accounting Standards (“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 loss
before taxes for the three months ended March 31, 2007 and its net income before
taxes for the three month period ended March 31, 2006 is lower by $248 and
$588,
respectively, and $834 and $1,004 for the nine months ended March 31, 2007
and
2006, respectively, 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”).
Sales
Incentives
In
accordance with the terms and conditions of an agreement entered into during
the
fiscal year ended June 30, 2006, 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 required the customer to purchase a minimum quantity of the Company's
products during a specified period of time. The incentive offered was based
upon
a fixed dollar amount per unit sold to the customer. The Company made an
estimate of the ultimate amount of the incentive the customer would earn based
upon past history with the customer and other facts and circumstances. The
Company had the ability to estimate this volume incentive price adjustment,
as
there did 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 was recognized immediately using a cumulative catch-up adjustment.
In
accordance with EITF 01-9, the Company recorded the provision for this sales
incentive when the related revenue is recognized. 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. The specific terms of this agreement which related to sales incentives
expired in October 2006. For the three and nine months ended March 31, 2007,
the
Company recognized $0 and $3,399 sales incentive revenue related to this
agreement.
Impairment
of Long-Lived Assets
In
accordance with SFAS No. 144, the Company accounted for certain long lived
assets and related liabilities that will be disposed or that met all of the
“held for sale” criteria, as a disposal group which has been classified as “held
for sale” and presented separately in the Current Assets and Current Liabilities
sections, respectively, of the accompanying Condensed Consolidated Balance
Sheet
as of March 31, 2007. The major classes of assets and liabilities classified
as
“held for sale” are separately discussed in Note 17. The “held for sale”
classification required having appropriate approvals by the Company's management
and Board of Directors, as applicable, and meeting other criteria.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
2 - Summary
of Significant Accounting Policies,
continued
Reclassifications
Certain
reclassifications have been made to the audited condensed consolidated financial
statements for the prior period in order to have them conform to the current
period’s classifications. These reclassifications have no effect on previously
reported net income.
The
Company reclassified certain components of stockholders’ equity section to
reflect the elimination of deferred compensation arising from unvested
share-based compensation pursuant to the requirements of Staff Accounting
Bulletin No. 107, regarding Statement of Financial Accounting Standards No.
123(R), “Share-Based Payment.” This deferred compensation was previously
recorded as an increase to additional paid-in capital with a corresponding
reduction to stockholders’ equity for such deferred compensation. This
reclassification has no effect on net income or total stockholders’ equity as
previously reported. The Company will record an increase to additional paid-in
capital as the share-based payments vest.
Recently
Issued Accounting Pronouncements
New
Accounting Pronouncements
In
November 2006, The Emerging Issues Task Force (“EITF”) reached a final consensus
in EITF Issue 06-6 “Debtor’s Accounting for a Modification (or Exchange) of
Convertible Debt Instruments” (“EITF 06-6”). EITF 06-6 addresses the
modification of a convertible debt instrument that changes the fair value of
an
embedded conversion option and the subsequent recognition of interest expense
for the associated debt instrument when the modification does not result in
a
debt extinguishment pursuant to EITF 96-19, “Debtor’s Accounting for a
Modification or Exchange of Debt Instruments,”. The consensus should be applied
to modifications or exchanges of debt instruments occurring in interim or annual
periods beginning after November 29, 2006. The adoption of EITF 06-6 did not
have a material effect on the Company’s consolidated financial position, results
of operations or cash flows.
In
November 2006, The Financial Accounting Standards Board (“FASB”) ratified EITF
Issue No. 06-7, “Issuer’s Accounting for a Previously Bifurcated Conversion
Option in a Convertible Debt Instrument When the Conversion Option No Longer
Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities” (“EITF 06-7”). At the time of
issuance, an embedded conversion option in a convertible debt instrument may
be
required to be bifurcated from the debt instrument and accounted for separately
by the issuer as a derivative under of Financial Accounting Standards (“FAS”)
133, based on the application of EITF 00-19. Subsequent to the issuance of
the
convertible debt, facts may change and cause the embedded conversion option
to
no longer meet the conditions for separate accounting as a derivative
instrument, such as when the bifurcated instrument meets the conditions of
Issue
00-19 to be classified in stockholders’ equity. Under EITF 06-7, when an
embedded conversion option previously accounted for as a derivative under FAS
133 no longer meets the bifurcation criteria under that standard, an issuer
shall disclose a description of the principal changes causing the embedded
conversion option to no longer require bifurcation under FAS 133 and the amount
of the liability for the conversion option reclassified to stockholders’ equity.
EITF 06-7 should be applied to all previously bifurcated conversion options
in
convertible debt instruments
that no longer meet the bifurcation criteria in FAS 133 in interim or annual
periods beginning after December 15, 2006, regardless of whether the debt
instrument was entered into prior or subsequent to the effective date of EITF
06-7. Earlier application of EITF 06-7 is permitted in periods for which
financial statements have not yet been issued. The adoption of EITF 06-7 did
not
have a material effect on the Company’s consolidated financial position, results
of operations or cash flows.
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 155 clarifies certain issues relating to embedded derivatives
and
beneficial interests in securitized financial assets. The provisions of SFAS
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 155 will have on
its financial position and results of operations.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
2 - Summary
of Significant Accounting Policies,
continued
Recently
Issued Accounting Pronouncements,
continued
New
Accounting Pronouncements,
continued
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 assessing the impact
that the adoption of FIN 48 will have on its financial position and results
of operations.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets” (“SFAS
156”),
which
amends SFAS 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
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
the Company's financial position and results of operations.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
157"). SFAS 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures
about
fair value measurements. It codifies the definitions of fair value included
in
other authoritative literature; clarifies and, in some cases, expands on the
guidance for implementing fair value measurements; and increases the level
of
disclosure required for fair value measurements. Although SFAS 157 applies
to
(and amends) the provisions of existing authoritative literature, it does not,
of itself, require any new fair value measurements, nor does it establish
valuation standards. SFAS 157 is effective for financial statements issued
for
fiscal years beginning after November 15, 2007, and interim periods within
those
fiscal years. This statement will be effective for the Company's fiscal year
beginning July 2008. The Company will evaluate the impact of adopting SFAS
157
but does not expect that it will have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
In
September 2006, the staff of the Securities and Exchange Commission issued
Staff
Accounting Bulletin No. 108 ("SAB 108") which provides interpretive guidance
on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. SAB 108 became
effective in fiscal 2007.
Adoption of SAB 108 is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash
flows.
In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF 00-19-2
“Accounting for Registration Payment Arrangements” (“FSP EITF 00-19-2”) which
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement should be
separately recognized and measured in accordance with SFAS No. 5,
“Accounting for Contingencies.” Adoption of FSP EITF 00-19-02 is required for
fiscal years beginning after December 15, 2006. The Company does not expect
the adoption of FSP EITF 00-19-2 to have a material impact on its consolidated
financial position, results of operations or cash flows.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
2 - Summary
of Significant Accounting Policies,
continued
Recently
Issued Accounting Pronouncements,
continued
New
Accounting Pronouncements,
continued
In
February 2007, the FASB issued Statement (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities - including an amendment
of FASB Statement No. 115”
(“SFAS
159”). This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The fair value option established by this Statement permits all
entities to choose to measure eligible items at fair value at specified election
dates. A business entity shall report unrealized gains and losses on items
for
which the fair value option has been elected in earnings (or another performance
indicator if the business entity does not report earnings) at each subsequent
reporting date. Most of the provisions of this Statement apply only to entities
that elect the fair value option. However, the amendment to FASB Statement
No.
115, Accounting for Certain Investments in Debt and Equity Securities, applies
to all entities with available-for-sale and trading securities. Some
requirements apply differently to entities that do not report net income. This
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. The Company does not expect the adoption of
SFAS
No. 159 to have a material impact on its consolidated financial
statements.
NOTE
3 - 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 $53 at March 31, 2007 and
$101 at June 30, 2006. 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 $3,310 and $2,315 at March 31, 2007 and June 30, 2006, 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
3 - Accounts
Receivable,
continued
The
changes in the allowance for customer chargebacks, discounts and other credits
that reduced gross revenue for nine months ended March 31, 2007 and 2006
is as
follows:
|
|
Nine
Months Ended March
31,
|
|
|
|
2007
|
|
2006
|
|
Reserve
balance - beginning
|
|
$
|
2,315
|
|
$
|
425
|
|
|
|
|
|
|
|
|
|
Actual
chargebacks, discounts and other credits taken in the current period
(a)
|
|
|
(8,359
|
)
|
|
(3,620
|
)
|
|
|
|
|
|
|
|
|
Current
provision related to current period sales
|
|
|
9,354
|
|
|
5,105
|
|
|
|
|
|
|
|
|
|
Reserve
balance - ending
|
|
$
|
3,310
|
|
$
|
1,910
|
|
(a) |
Actual
chargebacks discounts and other credits are determined based upon
the
customer’s application of amounts taken against the accounts receivable
balance.
|
NOTE
4 - Inventories
Inventories
consist of the following:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
Finished
goods
|
|
$
|
2,124
|
|
$
|
1,781
|
|
Work
in process
|
|
|
5,618
|
|
|
3,685
|
|
Raw
materials
|
|
|
3,952
|
|
|
2,928
|
|
Packaging
materials
|
|
|
423
|
|
|
312
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,117
|
|
$
|
8,706
|
|
NOTE
5 - Land,
Building and Equipment
Land,
building and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Land
|
|
$
|
4,924
|
|
$
|
4,924
|
|
|
—
|
|
Building
|
|
|
12,460
|
|
|
12,460
|
|
|
39
Years
|
|
Machinery
and equipment
|
|
|
15,560
|
|
|
12,657
|
|
|
5-7
Years
|
|
Computer
equipment
|
|
|
1,228
|
|
|
151
|
|
|
5
Years
|
|
Construction
in Progress
|
|
|
243
|
|
|
587
|
|
|
—
|
|
Furniture
and fixtures
|
|
|
765
|
|
|
660
|
|
|
5
Years
|
|
Leasehold
improvements
|
|
|
3,913
|
|
|
3,206
|
|
|
5-15
Years
|
|
|
|
|
39,093
|
|
|
34,645
|
|
|
|
|
Less:
accumulated depreciation and amortization
|
|
|
6,708
|
|
|
5,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land,
Building and Equipment, net
|
|
$
|
32,385
|
|
$
|
29,069
|
|
|
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
5 - Land,
Building and Equipment,
continued
Depreciation
and amortization expense for the three and nine months ended March 31, 2007,
was
approximately $542 and $1,571, respectively, and for the three and nine months
ended March 31, 2006, was approximately $370 and $1,062,
respectively.
NOTE
6 - Accounts
Payable, Accrued Expenses and Other Current
Liabilities
Accounts
payable, accrued expenses and other current liabilities consist of the
following:
|
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Inventory
purchases
|
|
$
|
7,141
|
|
$
|
5,734
|
|
Research
and development expenses
|
|
|
1,978
|
|
|
2,068
|
|
Other
|
|
|
5,908
|
|
|
4,848
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
15,027
|
|
$
|
12,650
|
|
NOTE
7 - Debt
Long-term
Debt
A
summary
of the outstanding long-term debt is as follows:
|
|
March
31,
2007
|
|
June
30,
2006
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
Revolving
credit facility
|
|
$
|
—
|
|
$
|
—
|
|
Real
estate term loan
|
|
|
11,133
|
|
|
11,734
|
|
Machinery
and equipment term loans
|
|
|
5,386
|
|
|
3,833
|
|
Capital
leases
|
|
|
197
|
|
|
72
|
|
|
|
|
16,716
|
|
|
15,639
|
|
Less:
amount representing interest on capital leases
|
|
|
41
|
|
|
1
|
|
Total
long-term debt
|
|
|
16,675
|
|
|
15,638
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
2,090
|
|
|
1,686
|
|
|
|
|
|
|
|
|
|
Long-term
debt, less current maturities
|
|
$
|
14,585
|
|
$
|
13,952
|
|
During
February, 2006, the Company entered into a new four-year financing arrangement
with Wells Fargo Business Credit (“WFBC”). This financing agreement provided an
original maximum credit facility of $41,500 comprised of:
· $22,500
revolving credit facility (the “facility”)
· $12,000
real estate term loan
· $
3,500
machinery and equipment (“M&E”) term loan
· $
3,500
additional / future capital expenditure facility
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
7 - Debt,
continued
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 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 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 March 31, 2007, there was approximately $690 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 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. 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 sale of $10,000 of Series
B-1
redeemable convertible preferred stock in May 2006, the limited personal
guarantees were reduced by $3,670. The sale of the $10,000 Series C-1 redeemable
convertible preferred stock in September 2006, resulted in elimination of the
balance of the personal pledges of marketable securities of $3,830.
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 March 31, 2007, the interest rate on this debt was 7.75%. Pursuant to the
requirements of the WFBC agreement, the Company put in place a lock-box
arrangement, which 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 Company’s assets.
In addition, the Company is required to comply with certain financial covenants
and as of March 31, 2007, was not in compliance with one of these financial
covenants which required that unfinanced capital expenditures not exceed $2,500.
Such expenditures were approximately $3,500 for the nine month period ended
March 31, 2007. The Company received a waiver from WFBC of the financial
covenant non-compliance and entered into an amendment to the WFBC loan documents
to accommodate the Company’s unfinanced capital expenditures.
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 March 31, 2007, was
approximately $114 and
is
included in Other assets.
NOTE
8- Income
Taxes
At
March
31, 2007 the Company has remaining Federal net operating losses (“NOLs”) of
$23,676 and State NOLs of $22,789 available through 2027. Pursuant to Section
382 of the Internal Revenue Code regarding substantial changes in Company
ownership, utilization of these NOLs is limited. As of March 31, 2007, the
Company has determined that it is more likely than not, that the Company will
utilize all of the Federal NOLs in the future. Additionally,
as of March 31, 2007, as a result of changes in New York State tax law, the
benefit of the future utilization of State NOLs has been reduced.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
8- Income
Taxes,
continued
In
calculating its tax provision for the nine month periods ended March 31, 2007
and 2006, the Company applied aggregate effective tax rates of approximately
28%
and 38%, respectively, thereby creating a $1,668 and
$828
income tax benefit, respectively, and adjusted its deferred tax assets by like
amounts. The decrease in effective tax rates is the result of permanent tax
differences relating to Incentive Stock Options and changes in New York State
tax law.
NOTE
9- Earnings
(Loss) Per Share
The
calculations of basic and diluted EPS are as follows:
|
|
Three
Months Ended
March
31,
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,852
|
)
|
$
|
(1,499
|
)
|
$
|
(4,347
|
)
|
$
|
(1,336
|
)
|
Less:
Preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A-1
|
|
|
(42
|
)
|
|
(98
|
)
|
|
(124
|
)
|
|
(181
|
)
|
Series
B-1
|
|
|
(206
|
)
|
|
—
|
|
|
(619
|
)
|
|
—
|
|
Series
C-1
|
|
|
(206
|
)
|
|
—
|
|
|
(453
|
)
|
|
—
|
|
Less:
Series C-1 beneficial conversion feature
|
|
|
—
|
|
|
—
|
|
|
(1,094
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to
common stock stockholders
|
|
|
(2,306
|
)
|
|
(1,597
|
)
|
$
|
(6,637
|
)
|
$
|
(1,517
|
)
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Denominator
for basic and diluted EPS weighted
average shares outstanding
|
|
|
65,380
|
|
|
32,464
|
|
|
65,052
|
|
|
32,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted loss per share:
|
|
$
|
(0.04
|
)
|
$
|
(0.05
|
)
|
$
|
(0.10
|
)
|
$
|
(0.05
|
)
|
Stock
options, warrants and convertible preferred stock, equivalent to 30,245 and
12,813 shares of the Company’s common stock, were not included in the
computation of diluted earnings per share for the three and nine months ended
March 31, 2007 and 2006, respectively, as their inclusion would be
antidilutive.
As
of
March 31, 2007, 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
|
|
|
65,569
|
|
Stock
options outstanding
|
|
|
12,636
|
|
Warrants
outstanding
|
|
|
4,564
|
|
Common
stock issuable upon conversion of preferred stocks:
|
|
|
|
|
Series
C
|
|
|
6
|
|
Series
A-1 (maximum contingent conversion) (a)
|
|
|
4,855
|
|
Series
B-1
|
|
|
6,520
|
|
Series
C-1
|
|
|
6,520
|
|
|
|
|
|
|
Total
(b)
|
|
|
100,670
|
|
(a) |
The
Series A-1 shares are convertible only if the Company reaches
$150 million
in annual sales or upon a merger, consolidation, sale of assets
or similar
transaction.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
9- Earnings
(Loss) Per Share,
continued
(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 November
16, 2016
(the end of the current vesting and conversion
periods).
|
NOTE
10 - Series
B-1 Redeemable Convertible Preferred Stock
In
May
2006, the Company entered into a Securities Purchase Agreement (the “Agreement”)
with Tullis-Dickerson Capital Focus III, L.P. ( “Tullis”). Under the Agreement,
the Company agreed to issue and sell to Tullis, and Tullis agreed to purchase
from the Company, for a purchase price of $10,000 (net proceeds of $9,858)
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 Tullis are convertible
and/or exercisable into a total of 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. Through March 31, 2007, the Company issued
299
shares of common stock as payment of $491 of previously accrued dividends.
At
March 31, 2007, the Company had accrued $206 of Series B-1 dividends, which
was
paid in April 2007 through the issuance of 122 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
accumulated deficit during the quarter ended June 30, 2006. 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, and
the
Company made an assessment that it is not probable that it will 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, in May 2006, in connection with the sale of the B-1 shares the Company
entered into a Registration Rights Agreement, as amended, with Tullis. 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. The maximum amount
of a registration delay penalty as defined in the Registration Rights Agreement
is 18% of the aggregate purchase price of Tullis’ registrable securities
included in the related registration statement. Unpaid registration delay
penalties shall accrue interest at the rate of 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 Tullis’ 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%. 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
(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 March 31, 2007:
|
|
Shares
Issued
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
15
|
|
10
|
|
$100
|
|
$10,000
|
NOTE
11 - Series
C-1 Redeemable Convertible Preferred Stock
On
September 11, 2006, the Company entered into a Securities Purchase Agreement
(the “C-1 Agreement”) with Aisling Capital, L.P. (the “Buyer”). Under the C-1
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 (net
proceeds of $9,993) an aggregate of 10 shares of a newly designated series
of
the Company’s preferred stock (“C-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 C-1 Stock and warrants
sold to the Buyer are convertible and/or exercisable into a total of 8,802
shares of common stock. The C-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 C-1 shareholders have the right to require the
Company to redeem all or a portion of the C-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.
Through March 31, 2007, the Company issued 122 shares of common stock as payment
of $247 of previously accrued dividends. At March 31, 2007, the Company had
accrued $206 of Series C-1 dividends, which was paid in April 2007 through
the
issuance of 122 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
C-1
shares as temporary equity and the value ascribed to the
C-1
shares upon initial issuance in September 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 $1,641of the gross
proceeds of the sale of C-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 $1,094 to Accumulated deficit during the quarter ended
September 30, 2006. The non-cash charge measures the difference between the
relative fair value of the C-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, and the Company made an assessment that it is not
probable that it will be, in default on its WFBC credit facility (the only
redemption feature outside of its control) nor does it plan to redeem the Series
C-1 preferred stock. As such the Company believes it is not probable that
the Series C-1 preferred stock will become redeemable.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
11 - Series
C-1 Redeemable Convertible Preferred Stock,
continued
In
addition, on September 11, 2006, in connection with the sale of the C-1 shares
the Company entered into a Registration Rights Agreement, as amended, 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. 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 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%. 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.
The
Company’s Series C-1 redeemable convertible preferred stock is summarized as
follows at March 31, 2007:
|
|
Shares
Issued
|
|
|
|
|
Shares
|
|
And
|
|
Par
Value
|
|
Liquidation
|
Authorized
|
|
Outstanding
|
|
Per
Share
|
|
Preference
|
|
|
|
|
|
|
|
10
|
|
10
|
|
$100
|
|
$10,000
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
12 - Equity
Securities
Preferred
Stocks
On
July
18, 2006, the Company filed an amendment to its Articles of Incorporation which
had the effect of (i) increasing the Company’s authorized common stock to
150,000; (ii) automatically converting all outstanding shares of the Company’s
Series A preferred stock (“Series A”) into two shares of common stock or an
aggregate of 7 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; (iii) eliminating the Series A from
the Articles of Incorporation; (iv) automatically converting each of the
outstanding shares of the Company’s Series B into one share of common stock,
thus issuing 2 common shares; and (v) eliminating the Series B convertible
preferred stock (“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 and by the holder of all of the
outstanding Series B shares.
During
the quarter ended September 30, 2006, 64 shares of the Company’s common stock
were issued in payment of Series B-1 dividends of $78 earned through June 30,
2006.
During
the quarter ended December 31, 2006, the Company issued 141 and 28 shares of
the
Company’s common stock to the Series B-1 and C-1 holders, respectively, for
dividends earned for the quarter ended September 30, 2006 of $206 and $41 of
Series B-1 dividends and Series C-1 dividends, respectively.
During
the quarter ended December 31, 2006, the Company paid to the holders of Series
A-1 preferred stock $124 of declared dividends which covered the period January
1, 2006 through September 30, 2006. As of March 31, 2007, the Company’s Board of
Directors had not declared any dividend on the Series A-1 shares for the period
October 1, 2006 through March 31, 2007. Such undeclared dividends amounted
to
$82.
During
the quarter ended March 31, 2007, the Company issued 94 shares of the Company’s
common stock to each of the Series B-1 and C-1 stockholders, respectively,
for
dividends earned for the quarter ended December 31, 2006 of $206 for each of
the
Series B-1 and Series C-1 stockholders, respectively.
At
March
31, 2007, the Company had accrued approximately $206 and $206 of Series B-1
and
Series C-1 dividends, respectively, which were paid in April 2007 through the
issuance of 122 shares of the Company’s common stock to each of the Series B-1
and C-1 stockholders, respectively.
Common
Stock
During
the nine months ended March 31, 2007, the Company issued shares of its common
stock as follows:
|
· |
602
shares, resulting in $393 proceeds, in connection with exercises
of
options to purchase the Company’s common
stock;
|
|
· |
299
and 122 shares were issued to Series B-1 and C-1 preferred stock
shareholders, respectively, in settlement of dividends earned through
December 31, 2006;
|
|
· |
7
and 2 shares were issued to Series A and B shareholders, respectively,
in
connection with the conversion of Series A and B resulting from the
July
18, 2006, amendment to the Company’s Article of
Incorporation.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
12 - Equity
Securities,
continued
Stock
Options and Appreciation Rights
As
of
March 31, 2007 and during the nine month period ended March 31, 2007:
|
· |
the
Company recognized approximately $24 as an expense in connection
with 100
previously issued stock appreciation rights (“SARs”). The SARs must be
exercised between July 1, 2008 and December 31, 2008. The SARs are
recorded at fair value and are marked to market at each reporting
period.
As of March 31, 2007, the total liability related to the SARs is
$83;
|
|
· |
total
unrecognized compensation cost related to stock options granted was
$2,083. The unrecognized stock option compensation cost is expected
to be
recognized over a weighted-average period of approximately 2.56
years;
|
|
· |
total
options outstanding and total vested options outstanding to purchase
the
Company’s common stock as of March 31, 2007, amounted to
12,636 and
9,516, respectively;
|
|
· |
162
options to purchase the Company’s common stock were issued to members of
the Company’s Board of Directors at the market price on the date of the
grant and had vesting periods ranging from immediate to one year
from the
date of issuance;
|
|
· |
in
connection with separation agreements involving two employees, the
Company
extended the exercise period of 155 options, 10 of which were exercised
prior to December 31, 2006; 90 were forfeited as of December 31,
2006, the
balance of 55 has been extended to September 20, 2008. As a result
of
these transactions, the Company recognized $12 expense during the
quarter
ended December 31, 2006.
|
|
· |
1,243
options to purchase the Company’s common stock were issued to employees of
the Company at the market price on the date of the grant and vest
over
3.28 years from the date of issuance. Of this amount, 445 were
performanced based options.
|
The
Company disclosed in its 10-Q for the quarter ended September 30, 2006, that
on
October 26, 2006, it granted 1,474 stock options to certain employees. After
conferring with independent counsel, it was determined that these stock option
grants were not finalized and effectuated under the terms of the Company’s stock
option plan pursuant to which the options were to be granted. Therefore, the
Company determined that these stock options were not actually granted. Other
than a subsequent event disclosure, there had been no accounting recognition
given to the options at September 30, 2006. As a result, no adjustments to
the
Company’s financial statements are required.
NOTE
13 - 401k
Plan
In
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 $89 and $225 for the three and nine month periods ended March
31,
2007, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
14 - Economic
Dependency
Major
Customers
The
Company had the following customer concentrations for the three and nine month
periods ended March 31, 2007 and 2006:
Sales
- Percent of Revenue
|
|
Three
Months Ended
March
31,
|
|
Nine
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
Customer
“A”
|
|
|
22
|
%
|
|
*
|
|
|
17
|
%
|
|
*
|
|
Customer
“B”
|
|
|
13
|
%
|
|
10
|
%
|
|
16
|
%
|
|
12
|
%
|
Customer
“C”
|
|
|
*
|
|
|
24
|
%
|
|
11
|
%
|
|
14
|
%
|
Customer
“D”
|
|
|
*
|
|
|
15
|
%
|
|
*
|
|
|
14
|
%
|
Customer
“E”
|
|
|
*
|
|
|
*
|
|
|
*
|
|
|
10
|
%
|
* |
Sales
to customer were less than 10%
|
Accounts
Receivable
|
|
March
31,
2007
|
|
|
|
|
|
Customer
“A”
|
|
$
|
3,113
|
|
Customer
“B”
|
|
$
|
2,118
|
|
Customer
“C”
|
|
$
|
488
|
|
Customer
“D”
|
|
$
|
1,257
|
|
Customer
“E”
|
|
$
|
1,372
|
|
The
Company has supply agreements 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.
Major
Suppliers
For
the
three and nine months ended March 31, 2007, the Company purchased materials
from
three suppliers totaling approximately 60% and 55% of purchases, respectively.
For the three and nine months ended March 31, 2006, the Company purchased
materials from three suppliers totaling approximately 67% and 71% of purchases,
respectively. At March 31, 2007 and 2006, aggregate amounts due to these
suppliers included in accounts payable, were approximately $4,200 and $4,400,
respectively.
NOTE
15 - Related
Party Transactions
Rents
The
Company leases one of its business premises located in Hauppauge, New York,
(“Premises”) from an entity owned by three stockholders (“Landlord”), one of
whom is Raj Sutaria, an officer of the Company, under a noncancelable lease
expiring in October 2019.
Under
the
terms of the lease for the Premises, upon a transfer of a majority of the
issued
and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
2003, and every three years thereafter, the annual rent may be adjusted to
fair
market value, as determined by an independent appraiser. Effective October
1,
2006, the Company and its Landlord agreed to adjust the base rent for the
premises based upon two independent appraisals. Accordingly the Company incurred
base rent expense of $240 and $525 for the three and nine months ended March
31,
2007, respectively. For the three and nine months ended March 31, 2006, the
rents paid in accordance with this lease were $120 and $360, respectively.
However, the appraisals obtained were not tied to market price in May, 2006,
the
time period during which the rent was to be adjusted to market value. As
a
result, at a meeting of the Company’s Board of Directors on March 20, 2007, the
Board resolved, with the Chairman abstaining, that the Audit Committee would
obtain an appraisal of the lease price for the Premises as of May 30,
2006.
In
a
letter dated April 20, 2007, the Landlord’s counsel advised that the Company was
obligated to pay rent to the Landlord at the rate contained in an appraisal
obtained in November 2006 and based on rental prices at that time, which
were
higher than those in May 2006. The Landlord’s counsel also advised that the
Landlord is asserting a claim against the Company for $236 in back rent and
to
set the current rent at $821 per annum.
As
of May
14, 2007, no action has been commenced against the Company, however, the
Company
believes that a claim by the Landlord based on the April 20, 2007 letter
from
the Landlord's counsel would be without merit. In accordance with SFAS No
5, “Accounting for Contingencies”, no amounts have been accrued at March 31,
2007 related to this matter.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
15 - Related
Party Transactions,
continued
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 $1,023 (including costs of $23) 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.
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.
Purchase
from APR, LLC
During
the nine months ended March 31, 2007, the Company placed an order valued at
$160
for a certain raw material from APR. The Company currently purchases the same
raw material from an overseas supplier at a price 37% greater than the price
APR
is currently willing to offer. The Company believes sourcing the raw material
from APR would not only resolve intermittent delays in obtaining this material
from overseas but would also improve gross margins on products using the raw
material. Upon receipt of the raw material, the Company will analyze them and
determine whether the materials from APR will be suitable for use. Accordingly,
the Company is unable at this time to predict whether the raw material
associated with this purchase order will be usable. As of March 31, 2007, the
Company has advanced $80 to APR in connection with this order.
NOTE
16 - Commitments
and Contingencies
Litigation
An
action
was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of
the State of New York, County of Suffolk (Index No. 13985/06). The action
alleged that plaintiff was owed an amount exceeding $10 million in unpaid
“finder’s fees” under an advisory agreement between plaintiff and Atec Group,
Inc.
By
motion
dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
entirety. Vuono cross-moved to disqualify the Company's counsel due to an
alleged conflict of interest. By recent decision and order dated March 29,
2007,
the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
related to a reverse merger of Interpharm, Inc. and the Company and declined
to
dismiss other claims. The dismissed claims represent approximately $7 million
of
the total of $10 million claimed by Vuono. The Court deferred a decision on
Vuono’s motion to disqualify counsel pending a hearing and further proceedings.
The
Company will continue to vigorously defend the action.
In
November 2006, a former employee commenced an action against the Company in
the Supreme Court of the State of New York, County of Suffolk (Index No.
06/31481). The complaint against the Company alleges violations
of the New York State Human Rights Law and other unidentified rules,
regulations, statutes and ordinances. Specifically, the former employee alleges
claims of sex discrimination and gender retaliation. The total sought by the
former employee in the action is unspecified. The Company believes that the
claims are without merit and the Company is vigorously defending the action.
Currently, the Company cannot predict with certainty the outcome of this
litigation.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
16 - Commitments
and Contingencies,
continued
The
testing, manufacturing and marketing of pharmaceutical products subject the
Company to 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.
Operating
Leases
Property
Lease
In
January 2007 the Company entered into a seven year lease for approximately
20
square feet of office space. The lease provides the Company an option to extend
the lease for a period of three years. According to the terms of the lease
the
base annual rental for the first year will be $261 and will increase by 3%
annually thereafter. Further, the Company is required to pay for renovations
to
the facility, currently estimated at approximately $300.
Significant
Contracts
Tris
Pharmaceuticals, Inc.
During
October 2006, the Company entered into a new agreement (“New Liquids Agreement”)
with Tris Pharma, Inc. (“Tris”), which terminated the agreement entered into in
February 2005, which was for the development and licensing of up to twenty-five
liquid generic products (“Liquids Agreement”). According to the terms of the New
Liquids Agreement, Tris will, among other things, be required to develop and
deliver the properties, specifications and formulations (“Product Details”) for
fourteen generic liquid pharmaceutical products (“Liquid Products”). The Company
will then utilize this information to obtain all necessary approvals. Further,
under the terms of the New Liquids Agreement Tris will manufacture, package
and
label each product for a fee. The Company was required to pay Tris $1,000,
whether or not regulatory approval is obtained for any of the liquid products.
The Company has paid in full the $1,000; $250 having been paid during the term
of the initial Liquids Agreement; $500 paid upon the execution of the New
Liquids Agreement, and the balance of $250 paid December 15, 2006. In addition,
Tris is to receive 40% of the net profits, as defined, in accordance with the
terms in the New Liquids Agreement.
During
February 2005, the Company entered into an agreement (“Solids Agreement”), for
solid dosage products (“solids”) with Tris. In July 2005, the Solids Agreement
was amended. According to the terms of the Solids Agreement, as amended, 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 soft-gel products and one
additional solid dosage product. 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 Solids Agreement 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
16 - Commitments
and Contingencies,
continued
Significant
Contracts,
continued
Tris
Pharmaceuticals, Inc.,
continued
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.
The
Company further amended the Solids Agreement in October 2006, modifying the
manner in which certain costs will be shared as well as clarifying the parties’
respective audit rights.
For
the
three and nine month periods ended March 31, 2007, the Company recorded as
research and development expense approximately $233 and $1,715, respectively,
in
connection with these agreements. Further, since their inception, the Company
has incurred approximately $5,225 of research and development costs associated
with the Tris
agreements of which the Company has paid $5,125 as of March 31, 2007. The
balance on the solids agreement, as amended, is approximately $675. The combined
costs of these agreements aggregate to $5,800.
Watson
Pharmaceuticals, Inc.
On
October 3, 2006, the Company entered into a termination and release agreement
(the “Termination Agreement”) with Watson Laboratories, Inc. (“Watson”)
terminating the Manufacturing and Supply Agreement dated October 14, 2003 (the
“Supply Agreement”) pursuant to which the Company manufactured and supplied and
Watson distributed and sold generic Vicoprofen® (7.5 mg hydrocodone
bitartrate/200 mg ibuprofen) tablets, (the “Product”). Watson
was required to return all rights and agreements to the Company thereby enabling
it to market the Product. Further, Watson was required to turn over to the
Company its current customer list for this Product and agreed that, for a period
of six months from closing, neither Watson nor any of its affiliates is to
solicit sales for this product from its twenty largest customers.
In
accordance with the Termination Agreement, Watson returned approximately $141
of
the Product and the Company in turn invoiced Watson $42 for
repacking. The
net
affect was a reduction of $99 to the Company’s net sales during the nine months
ended March 31, 2007. In
consideration of the termination of Watson’s rights under the Supply Agreement,
the Company is to pay Watson $2,000 payable at the rate of $500 per year over
four years from the first anniversary of the effective date of the termination
agreement. The Company determined the net present value of the obligation and
accordingly increased Accounts payable, accrued expenses and other liabilities
and Contract termination liability by $372 and $1,304, respectively. The imputed
interest of $324 will be amortized over the remaining life of the obligation
using the effective interest rate method. At March 31, 2007, contract
termination liability of $379 and $1,330 are included in Accounts payable,
accrued expenses and other liabilities and Contract termination liability,
respectively.
In
February 2007 the Company entered into a termination and release agreement
with
Watson terminating the Manufacturing and Supply Agreement dated as of July
1, 2003 pursuant to which the Company manufactured and supplied and Watson
distributed and sold Reprexain® (5.0 mg hydrocodone bitartrate/200 mg ibuprofen)
tablets. Further,
in February 2007 the Company entered into an intellectual property purchase
agreement with Watson whereby the Company acquired the
registered trademark, domain name, and website content relating to the
pharmaceutical product Reprexain® (5.0 mg hydrocodone bitartrate/200 mg
ibuprofen) tablets as described in the agreement. As consideration the
Company shall pay Watson, on a quarterly basis, 1.5% of net sales derived
from sales of 5.0 mg hydrocodone bitartrate/200 mg ibuprofen tablets
sold under the Reprexain® trademark.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
NOTE
16 - Commitments
and Contingencies,
continued
Significant
Contracts,
continued
Centrix
Pharmaceutical, Inc.
On
October 27, 2006, the Company amended its agreement with Centrix
Pharmaceuticals, Inc., (“Centrix”) wherein Centrix has agreed to purchase over a
twelve month period, 40% more bottles of the Company’s female hormone therapy
products than the initial year of the agreement, commencing November 2006.
The
parties will share net profits, as defined in the agreement, with the Company’s
share being paid within 45 days of the end of each calendar month. The amendment
has a one year term, after which time the original Centrix agreement shall
again
be in full force and effect.
Applied
Pharma, LLC
In
October 2006 the Company
entered
into a consulting agreement with Applied Pharma, LLC in which the consultant
agreed to provide the Company with, among other things, analytical method
development services relating to the Company’s oral contraceptive products. The
Agreement is for thirty six months and may be terminated by either party with
90
days written notice. The agreement calls for monthly payments of $25, which
aggregate to a maximum of $900 along with a $75 payment which was issued upon
the execution of the agreement. The principal of Applied Pharma, LLC holds
a
minority interest in APR, LLC.
NOTE
17 - Subsequent
Events
On
April
25, 2007 the Company completed the sale of its subsidiary, Interpharm
Development Private Limited (“IDPL”) located in Ahmedabad, India to an entity
partially owned by two officers of the Company for $161. As previously disclosed
the Company elected not to move forward with the construction of a research
and
development facility in Ahmedabad, India. During the quarter ended March 31,
2007 management committed to a plan to dispose of its interest in the entity
which was incorporated specifically for the construction project in Ahmedabad.
In
accordance with SFAS No. 144, as of March 31, 2007 the assets and
liabilities of IDPL were classified as “held for sale”. As a result, in
accordance with SFAS 144 the Company recorded an impairment charge of $101
in
the quarter ended March 31, 2007. In addition, in advance of the closing of
the
IDPL sale the acquiring entity advanced IDPL cash of $172 which is included
in
the caption Due to related party below.
Assets
and liabilities of the discontinued operation classified as “held for sale” in
our consolidated balance sheet as of March 31, 2007 were as
follows:
Cash
|
|
$
|
233
|
|
Land
|
|
|
305
|
|
Assets
held for sale
|
|
$
|
538
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
205
|
|
Due
to related party
|
|
|
172
|
|
Liabilities
held for sale
|
|
$
|
377
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
ITEM
2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING
STATEMENTS AND ASSOCIATED RISK
Certain
statements in this document may constitute “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995, including
those concerning Management’s expectations with respect to future financial
performance, trends and future events, particularly relating to sales of current
products and the introduction of new products. Such statements involve known
and
unknown risks, uncertainties and contingencies, many of which are beyond the
control of the Company, which could cause actual results and outcomes to differ
materially from those expressed herein. These statements are often, but not
always, made typically by use of words or phrases such as “estimate,” “plans,”
“projects,” “anticipates,” “continuing,” “ongoing,” “expects,” “intends,”
“believes,” or similar words and phrases. Factors that might affect such
forward-looking statements set forth in this document include (i) increased
competition from new and existing competitors, and pricing practices from such
competitors, (ii) pricing pressures, (iii) the amount of funds available for
research and development, (iv) research and development project delays or delays
and unanticipated costs in obtaining regulatory approvals, (v) the continued
ability of distributed product suppliers to meet future demand, (vi) the costs,
delays involved in and outcome of any threatened or pending litigations, (vii)
and general industry and economic conditions. Any forward-looking statements
included in this document are made as of the date hereof only, based on
information available to us as of the date hereof, and, subject to applicable
law to the contrary, we assume no obligation to update any forward-looking
statements.
Investing
in our securities involves substantial risks and uncertainties. Therefore,
we
encourage you to review the “Risk Factors” contained in Item 1A of our Form 10-Q
filed with the SEC on February 14, 2007 and our Annual Report on Form 10-K
filed
with the SEC on September 28, 2006.
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.
Following
an FDA inspection in February 2007, we are packaging and have commenced some
manufacturing at our Yaphank facility. We plan to file almost all new product
ANDAs from the Yaphank facility. We have now commissioned our oral
contraceptives facility and will now start the manufacture of clinical supplies
for the purpose of filing the related ANDAs. As previously described in our
Annual Report on Form 10-K, part of our business plan is to focus on development
of products which present high barriers to entry for other market participants.
In furtherance of our plan, we have commissioned a specialized facility for
the
manufacture of high potency products (i.e., products which exhibit medicinal
or
toxic effects at low doses) and anticipate the commencement of manufacturing
for
clinical supplies shortly.
For
the
quarter ended March 2007, our net sales were $19,910 as compared to $16,110
in
the same quarter last year, for a year-over-year increase of 23.6%. The
increased sales are primarily due to (i) capturing distribution with a majority
of the top tier accounts in retail, wholesale, distributor, and managed care
trade classes, and (ii) an increase in production capacity year over year,
enabling us to better service our markets. Our Company’s gross profit percentage
for the three month period ended March 2007, improved to 32.0% as compared
to
24.8% for the quarter ended March 2006. We continue to take the necessary
corrective measures to minimize disruption from inadequate supplies of raw
materials in the future by qualifying additional sources and building up our
inventories. We made progress in the March 2007 quarter in obtaining adequate
supplies of raw materials for several finished products, which enabled
throughput to increase from
the
December 2006 quarter. We anticipate that we will be back to normal production
levels by the end of June 2007.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
For
the
quarter ended March 2007, we incurred a net loss of approximately $1,852 as
compared to a net loss of $1,499 for the three month period ended March 2006.
The net loss in the March 2007 quarter resulted from higher selling, general
and
administrative expenses, related to expansion of our infrastructure, and
increased research and development expenses.
Our
research and development efforts have progressed in the areas of oral
contraceptives, soft gelatin capsules and high potency products, and we are
planning to manufacture clinical supplies to commence bioequivalence studies
in
each of these areas by June 2007. We believe that we are also progressing well
in the product areas of special release, controlled substances, and products
coming off patent.
In
the
sales and marketing area, we launched the seven controlled substance products
during the March 2007 quarter. As a result of ongoing sales and marketing
efforts, we have captured distribution to a majority of the top tier accounts,
and by the September 2007 quarter, we believe gross margins for our existing
business and on anticipated product launches may begin to increase.
Results
of Operations — Summary
As
indicated in the tables below, our net sales increased $3,800, or 23.6%, when
comparing the three month periods ended March 2007 and 2006. Overall, the growth
in sales related to a combination of factors. We were able to work with our
key
suppliers and obtain increased amounts of raw materials in the March 2007
quarter, particularly for our female hormone product and Bactrim®. Production
throughput was therefore increased, and as a result, we were able to satisfy
most of our backorders for these products. In addition, as a result of its
ongoing sales and marketing efforts, we continue to gain distribution to a
majority of the top tier accounts. Net sales increased $13,346, or 28.5%, when
comparing the nine month periods ended March 2007 and 2006.
|
|
Three
Month Periods Ended March
|
|
|
|
2007
|
|
2006
|
|
|
|
Sales
|
|
|
|
Sales
|
|
|
|
Ibuprofen
|
|
$
|
7,014
|
|
|
35.2
|
|
$
|
8,888
|
|
|
55.2
|
|
Bactrim®
|
|
|
5,595
|
|
|
28.1
|
|
|
1,496
|
|
|
9.3
|
|
Naproxen
|
|
|
3,422
|
|
|
17.2
|
|
|
2,354
|
|
|
14.6
|
|
Female
hormone product
|
|
|
2,584
|
|
|
13.0
|
|
|
1,569
|
|
|
9.7
|
|
Hydrocodone/Ibuprofen
|
|
|
769
|
|
|
3.9
|
|
|
1,277
|
|
|
7.9
|
|
Hydrocodone/Acetaminophen
|
|
|
369
|
|
|
1.8
|
|
|
0
|
|
|
0.0
|
|
All
Other Products
|
|
|
157
|
|
|
0.8
|
|
|
526
|
|
|
3.3
|
|
Total
|
|
$
|
19,910
|
|
|
100.0
|
%
|
$
|
16,110
|
|
|
100.0
|
%
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
|
|
Nine
Month Periods Ended March
|
|
|
|
2007
|
|
2006
|
|
|
|
Sales
|
|
|
|
Sales
|
|
|
|
Ibuprofen
|
|
$
|
24,187
|
|
|
40.2
|
|
$
|
25,566
|
|
|
54.5
|
|
Bactrim®
|
|
|
14,899
|
|
|
24.7
|
|
|
3,412
|
|
|
7.3
|
|
Female
hormone product
|
|
|
9,374
|
|
|
15.5
|
|
|
5,471
|
|
|
11.7
|
|
Naproxen
|
|
|
8,943
|
|
|
14.9
|
|
|
5,751
|
|
|
12.2
|
|
Hydrocodone/Ibuprofen
|
|
|
1,799
|
|
|
3.0
|
|
|
2,941
|
|
|
6.3
|
|
Hydrocodone/Acetaminophen
|
|
|
369
|
|
|
0.6
|
|
|
0
|
|
|
0.0
|
|
All
Other Products
|
|
|
644
|
|
|
1.1
|
|
|
3,728
|
|
|
8.0
|
|
Total
|
|
$
|
60,215
|
|
|
100
|
%
|
$
|
46,869
|
|
|
100
|
%
|
· |
Net
sales of Ibuprofen for the three month period ended March 2007 decreased
$1,874, or 21.1%, as compared to sales for the three months ended
March
2006. We have been working with our suppliers to obtain adequate
supplies
of Ibuprofen raw material. We are currently attempting to qualify
an
additional source of Ibuprofen, and we are making efforts to ensure
that
our suppliers maintain adequate levels of inventory sufficient to
enable
us to increase our overall production. We believe sales of Ibuprofen
should increase for the balance of this fiscal year, however, there
can be
no assurance that this will occur. Net sales of Ibuprofen products
for the
nine month period ended March 2007 decreased by $1,379, or 5.4%,
when
compared to the nine month period ended March 2006, due largely to
the
material supply issues described
above.
|
· |
As
a result of our success in increasing the number of major accounts,
sales
of Naproxen continued to increase. Net sales for the three month
period
ended March 2007 increased $1,068, or 45.4%, as compared to sales
for the
three month period ended March 2006. During the nine month period
ended
March 2007, Naproxen net sales increased $3,192, or 55.5%, as compared
to
sales for the same nine month period of the prior fiscal year.
|
· |
Net
sales of our female hormone products in the three months ended March
2007
increased $1,015, or 64.7%, as compared to sales for the three month
period ended March 2006. The supply chain issues that delayed certain
of
our product shipments in the three months ended December 2006 were
corrected in the three months ended March 2007, which enabled the
Company
to satisfy the majority of our open orders in the March 2007 quarter.
Also, as previously reported and as a result of market conditions,
on
October 27, 2006, we amended our agreement with Centrix Pharmaceuticals,
Inc. (“Centrix”). Commencing November 2006, Centrix agreed to purchase
over a twelve month period, 40% more bottles than the initial year
of the
agreement at a discounted price with a provision for profit sharing.
Under
the amended agreement, the parties will share net profits as defined
in
the agreement. The amendment has a one year term, after which time
the original Centrix agreement shall again be in full force and effect.
Net sales of these products in the nine month period ended March
2007
increased $3,903, or 71.3%, as compared to sales for the nine month
period
ended March 2006, due primarily to a higher volume of units shipped
during
the current fiscal year to date period. As a result of the amended
agreement, we believe that net sales for the fiscal year ending June
2007
should exceed sales recorded during the fiscal year ended June 2006;
however, there can be no assurance that this will occur.
|
· |
For
both the three month period and nine month period ended March 2007,
we
significantly increased our market share of Sulfamethoxazole -
Trimethoprim in two strengths 400mg / 80mg commonly referred to as
generic
Bactrim® and 800mg / 160mg or commonly referred to as Bactrim-DS® (both,
“Bactrim”). Sales increased to $5,595 during the three month period ended
March 2007 from $1,496 in the three months ended March 2006, primarily
as
a result of two significant factors: (i) our entering into sales
and
marketing arrangements with two major distributors which include
net
profit sharing arrangements; and (ii) favorable pricing conditions
in the
market. Net sales of Bactrim for the nine month period ended March
2007
increased to $14,899, as compared to $3,412 for the nine month period
ended March 2006. The difficulties experienced in obtaining quantities
of
a key ingredient for these products during the three months ended
December
2006 have been addressed and corrected, and this facilitated the
higher
level of sales in the March 2007 quarter.
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
· |
On
October 3, 2006, we entered into a termination and release agreement
(the
“Termination Agreement”) with Watson terminating the Manufacturing and
Supply Agreement dated as of October 14, 2003 pursuant to which we
manufactured and supplied and Watson distributed and sold generic
Vicoprofen® (7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets. As a
result of the Termination Agreement we obtained all rights to market
this
product. Net sales of this product for the three month period ended
March
2007, decreased 39.8% to $769 as compared to $1,277 for the same
period in
2006. Net sales of this product for the nine month period ended March
2007
were $1,799, as compared to $2,941 during the nine month period ended
March 2006. While not a material factor affecting our overall net
sales
recognized during the current quarter, market prices for this product
have
significantly decreased, which will likely affect our net sales and
gross
margins at least until the end of our fiscal year or when market
conditions may change.
|
For
the
three month period ended March 2007, two significant customers accounted for
34.5% of total Company sales, compared to three significant customers accounting
for 48.8% of total Company sales for the three month period ended March 2006.
For the nine month period ended March 2007, three significant customers
accounted for 43.3% of total Company sales, compared to four significant
customers accounting for 50.4% of total Company sales for the nine month period
ended March 2006.
Cost
of sales / Gross Margins
Our
gross
profit percentage for the three months ended March 2007 was 32.0%, an increase
of 7.2 percentage
points as compared to 24.8% for the three months ended March 2006. During the
three and nine month periods ended March 2007, prices for raw materials remained
relatively constant when compared to the prior year. In the three months ended
March 2007, we were able to achieve increased manufacturing throughput which
enabled us to satisfy backorders, generate higher sales and improve
manufacturing efficiencies resulting in lower cost of goods sold as a percentage
of sales for the period. In addition, gross margin in the March 2007 quarter
was
positively impacted by a favorable product sales mix, i.e., sales of Bactrim
and
the female hormone product were higher than in the prior year period and these
products have somewhat higher margins than the our other products. We did not
experience any significant reduction in selling prices during the March 2007
quarter.
For
the
nine month period ended March 2007, the gross profit percentage of 32.2% was
4.1
percentage points higher than the gross profit percentage of 28.1% for the
nine
month period ended March 2006. While direct labor and most overhead expenses
have increased to accommodate higher manufacturing throughput in fiscal 2007,
the improvement in gross margin is primarily a function of (i) the Company
selling higher margin products during the current fiscal year and (ii) greater
throughput and relatively higher inventory levels as of March 2007 resulting
in
higher absorption of labor and overhead and thus, a positive impact on cost
of
goods sold.
As
sales
volumes may fluctuate for our higher margin products over the remainder of
the
year, we may experience a similar fluctuation in margins. Overall, we still
believe that our overall gross margin as a percentage of net sales for the
fiscal year ended June 2007, can exceed the overall gross margin as a percentage
of net sales reported for the fiscal year ended June 2006. However, there can
be
no assurances that market conditions or other factors might not negatively
impact our forecast.
Selling
and General and Administrative Expenses
Selling,
general and administrative (“SG&A”) 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.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
SG&A
expenses were $3,882 for the three month period ended March 2007, which
represented an increase of $619, or 19.0%, above $3,263 incurred in the three
month period ended March 2006. When stated as a percentage of net sales,
SG&A expenses decreased to 19.5% in the March 2007 quarter as compared to
20.3% in the March 2006 quarter.
The
dollar increase in SG&A expenses during the three months ended March 2007
was attributable to the following: increase of $218 in compensation and related
taxes and benefits of sales and administrative staff to support our growth;
increased rent and utilities (much of which is associated with our second
facility) of $131; an increase in depreciation of $161, primarily due to our
second facility becoming operational for general and administrative purposes
July 1, 2006; professional and consulting fees consisting of management advisory
services and information technology consulting increased $345; and
computer-related expenses increased $82 related to the increase in the number
of
employees.
During
the three month period ended March 2006 we granted 100 Stock Appreciation Rights
(“SARs”), having a maximum cash value of $250. The expense related to the SARs
are recorded at fair value and is marked to market each reporting period with
changes recorded as income or expense in the period will be marked to market.
Accordingly we reported income of $42 during the three month period ended March
2007 as a result of a decrease in the price of our stock as of March 31, 2007
when compared to December 31, 2006.
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. We reported non-cash expenses of $233 and $588 during
the three month periods ended March 2007 and March 2006, respectively. In the
March 2006 quarter, a non-recurring option expense of $316 was recorded related
to a compensation agreement with a former officer of the Company.
During
the nine month period ended March 2007 SG&A expenses were $9,675, an
increase of $1,774, or
22.5%,
above $7,901 for the nine month period ended March 2006. When stated as a
percentage of net sales, SG&A expenses decreased to 16.1% in the March 2007
quarter from 16.9% in the March 2006 quarter. The significant components the
dollar increase are: $753 increase in compensation and related employee benefit
expenses of sales and administrative staff to support our growth; $407 in
depreciation primarily the result of our second facility becoming operational
for general and administrative purposes in July 2006; $399 in professional
and
consulting fees; $270 in rents and utilities, primarily due to the second
facility; $73 in computer related expenses; $164 in board of director fees;
and
$139 in bank fees. Non-cash expense recorded in accordance with the provisions
of SFAS 123(R) decreased $313 as a result of the one-time charge recorded in
the
March 2006 quarter, as described above. Commissions paid that related to a
commission arrangement with a salesperson decreased $468; the arrangement ended
in the December 2006 quarter.
Research
and Development Expenses
We
incurred research and development expenses of $4,711 during the three month
period ended March 2007, which represented an increase of $1,736, or 58.4%,
above $2,975 incurred in the three month period ended March 2006. The increase
was due to: higher compensation expenses of $690 primarily related to the
expansion of analytical chemist and product formulation staff, and $1,046 of
increased costs related to bioequivalence studies for new generic pharmaceutical
products currently in development, materials and legal fees.
During
the nine month period ended March 2007, research and development expenses were
$13,001, which represented an increase of $5,995, or 85.6%, above $7,006
reported during the same period in the prior fiscal year. When stated as a
percentage of net sales, research and development expenses increased to 21.6%
in
the March 2007 quarter as compared to 14.9% in the March 2006 quarter. The
$5,995 increase was due to: higher compensation expenses of $1,655 primarily
related to the expansion of analytical chemist and product formulation staff,
and $4,340 of increased costs related to bioequivalence studies for new generic
drug products currently in development, materials and legal fees. Our research
and development efforts continue to focus in the areas of oral contraceptives,
soft gelatin capsules and high potency products, and we are planning to commence
bioequivalence studies in each of these areas by June 2007. Work is progressing
well in the product areas of special release, controlled substances, and
products coming off patent.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
As
previously reported, during October 2006, we entered into a new agreement (“New
Liquids Agreement”) with Tris Pharma, Inc. (“Tris”), which terminated the
agreement entered into February 2005, which in turn was for the development
and
licensing of up to twenty-five liquid generic products (“Liquids Agreement”).
According to the terms of the New Liquids Agreement, Tris will, among other
things, be required to develop and deliver the properties, specifications and
formulations (“Product Details”) for fourteen generic liquid pharmaceutical
products (“Liquid Products”). We will then utilize this information to obtain
all necessary approvals. Tris will manufacture, package and label each product
for a fee. In conjunction with this new liquids agreement we were required
to
pay Tris $1,000, whether or not regulatory approval is obtained for any of
the
liquid products. As of March 2007, all payments associated to this agreement
were made. In addition, Tris is to receive forty percent of the net profits,
as
defined, in accordance with the terms in the New Liquids Agreement.
During
February 2005, we entered into a second agreement (“Solids Agreement”), for
solid dosage products (“solids”) with Tris. In July 2005, the Solids Agreement
was amended. According to the terms of the Solids Agreement, as amended, 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 soft-gel products and one additional
solid dosage product. Some of the 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 Solids Agreement 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 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, we 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 us to pay to Tris an
additional $300 after we have paid the initial aggregate amounts associated
with
the original agreement.
We
further amended the Solids Agreement in October 2006, modifying the manner
in
which certain costs will be shared as well as clarifying respective audit
rights.
Interest
Expense, net
Our
net
interest expense increased approximately $119 and $457 when comparing the three
and nine months ended March 2007 with the three and nine month periods ended
March 2006, respectively, primarily as a result of increased borrowings to
fund
the Yaphank facility, renovations, additional purchases of new equipment and
increased research and development activities. It is likely that our net
interest expense will continue to increase when compared to prior periods as
a
result of anticipated additional borrowings.
Income
Taxes
In
calculating our tax provision for the three and nine month periods ended March
2007 we applied aggregate effective tax rates of approximately 29% and 28%
respectively, thereby creating $746 and $1,668 income tax benefits. For the
three and nine month periods ended March 2006 we applied aggregate effective
tax
rates of approximately 38%, thereby creating $926 and $828 income tax benefits.
We adjusted our deferred tax assets by like amounts. The decrease in effective
tax rates is the result of permanent tax differences relating to Incentive
Stock
Options and changes in New York State tax law.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
At
March
31, 2007 we had remaining Federal NOLs of $23,676 and State NOLs of $22,789
expiring through 2027. Pursuant to Section 382 of the Internal Revenue Code
regarding substantial changes of ownership; utilization of these NOLs is
limited. As of March 31, 2007, we determined that it is more likely than not,
that we will utilize all of the Federal NOLs in the future.
Additionally,
as of March 31, 2007, as a result of changes in New York State tax law, the
benefit of the future utilization of NOLs has been reduced.
Liquidity
and Capital Resources
We
currently finance our operations and capital expenditures through cash flows
from operations and bank loans. Net cash used in operating activities for the
nine month period ended March 2007, was $6,850 compared to net cash being
provided by operating activities of $5,806 for the nine month period ended
March
2006. Significant factors comprising the net cash used by operating activities
for the nine month period ended March 2007 include: a net loss of $4,347 and
a
net decrease to operating assets and liabilities of $5,291. The net change
in
operating assets is due, in part, to a reduction of deferred revenue of $3,399,
and an increase in inventory of $3,412 which was partially offset by an increase
in accounts payable, accrued expenses and other liabilities of $1,743.
Additionally, we reported depreciation and amortization of $1,671, an asset
impairment of $101 and a benefit from income taxes of $1,657. We also recognized
a non cash compensation charge of $834 in accordance with the provisions of
SFAS
123 (R). During the nine months ended March 2007, we recognized a non-cash
charge of $1,655 as a result of a termination agreement with Watson
Pharmaceuticals, Inc. Other items affecting our net cash used in continuing
operations aggregated a net increase of $184.
Funds
used in investing activities of $5,569 during the nine month period ended March
2007 were for new machinery, equipment and building renovations, compared to
$7,225 used in investing activities during the nine months ended March
2006.
The
most
significant component to our net cash provided by financing activities of
$11,165 was the sale of $10,000 of our Series C-1 redeemable convertible
preferred stock in September 2006, which generated $9,993 of cash. In addition
we received $393 from the exercise of employee stock options. Net proceeds
from
long-term debt for the nine months ended March 2007 was $883. Other items
affecting our net cash provided by financing activities aggregated a net
decrease of $104.
At
March
31, 2007, we had $184 in cash, compared to $1,438 at June 30, 2006.
It
should
be noted that as part of our business plan, during the three and nine month
periods ended March 2007 we incurred $4,711 and $13,001, respectively of
research and development expenses. We believe that our research and development
costs may exceed this current rate for the foreseeable future.
Our
expansion plan calls for continued spending on research and development and
capital improvements. We believe that our credit facility with Wells Fargo
Business Credit will be sufficient to support our working capital and capital
expenditure requirements for the next twelve months of our operations, however
there can be no assurance that events may occur which could require us to seek
additional funds either from additional borrowings or through possible sales
of
equity or other securities.
Bank
Financing
During
February 2006 we entered into a new four-year financing arrangement with Wells
Fargo Business Credit (“WFBC”). This financing agreement provided an original
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
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
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, 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 March 31, 2007, there
is
approximately $690 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 us 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 redeemable convertible preferred
stock in May 2006, the limited personal guarantees were reduced by $3,670.
The
sale of the $10,000 Series C-1 redeemable convertible preferred stock in
September 2006, resulted in elimination of the balance of the personal pledges
of marketable securities of $3,830.
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 March
31, 2007, the interest rate on this debt was 7.75%. We will incur a fee of
25
basis points per annum on any unused amounts of this credit facility. Pursuant
to the requirements of the WFBC agreement, we put in place a lock-box
arrangement. At March 31, 2007, there was no balance outstanding on the
revolving 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 and as
of
March 31, 2007, we were not in compliance with one of these financial covenants
which required that unfinanced capital expenditures not exceed $2,500. Such
expenditures were approximately $3,500 for the nine month period ended March
31,
2007. We received a waiver from WFBC of the financial covenant non-compliance
and entered into an amendment to the WFBC loan documents to accommodate our
unfinanced capital expenditures.
With
respect to the real estate term loan and the $3,500 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 March
31, 2007, was approximately $114 and is included in other assets.
Watson
Termination Agreement
On
October 3, 2006, we entered into a termination and release agreement (the
“Termination Agreement”) with Watson terminating the Manufacturing and Supply
Agreement dated October 14, 2003 (the “Supply Agreement”) pursuant to which we
manufactured and supplied and Watson distributed and sold generic Vicoprofen®
(7.5 mg hydrocodone bitartrate/200 mg ibuprofen) tablets, (the “Product”).
Watson
was required to return all rights and agreements to us thereby enabling us
to
market the Product ourselves. Further, Watson was required to turn over to
us
its then current customer list for this product and agreed that, for a period
of
six
months from closing, neither Watson nor any of its affiliates is to solicit
sales for this Product from its twenty largest customers. In accordance with
the
Termination Agreement, Watson returned approximately $141 of the Product and
we
in turn invoiced Watson $42 for repacking. The net effect was a reduction of
$99
to our net sales during the three month ended December 2006. In consideration
of
the termination of Watson’s rights under the Supply Agreement, we are to pay
Watson $2,000 payable at the rate of $500 per year over four years from the
first anniversary of the effective date of the agreement. We determined the
net
present value of the obligation and accordingly included in Accounts payable,
accrued expenses and other liabilities and Contract termination liability $372
and $1,304, respectively. The imputed interest of $324 will be amortized over
the four year life of the obligation using the effective interest rate method.
At March 31, 2007, contract termination liability of $379 and $1,330 are
included in Accounts payable, accrued expensse and other liabilities and
Contract termination liability, respectively.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
Accounts
Receivable
As
of
March 31, 2007, less than 1% of our receivables had aged greater than 90 days.
We believe the quality of our accounts receivable is good, as such we believe
our allowance for doubtful accounts is adequate. Further, based upon current
information available to us we believe there is minimal exposure to bad debt
expense; however we can not be assured that future conditions may alter our
exposure.
Inventories
At
March
31, 2007, the value of our inventory was $12,117, an increase of $2,310 from
$9,807 at December 31, 2006 and an increase of $3,411 from $8,706 at June 30,
2006. These increases are primarily due to a planned buildup in safety-stock
levels of raw materials and finished goods, which we believe should enable
us to
provide improved customer service and facilitate the Company’s ability to
increase its market share. During the three month period ended December 2006
we
encountered numerous supply chain issues which caused manufacturing
inefficiencies as well as delays in shipping. As such, we believe the increase
in our inventory levels was necessary. The overall impact in the buildup of
inventory should not adversely affect our plan, but may negatively affect our
cash position.
Accounts
Payable, Accrued Expenses and Other Liabilities
Accounts
payable, accrued expenses and other current liabilities increased $2,377 from
June 30, 2006 to March 31, 2007. The increase is primarily attributable to
higher inventory levels, as discussed above, and increased SG&A and research
and development expenses.
Assets
held for sale / Liabilities held for sale
On
April
25, 2007, we completed the sale of our subsidiary, Interpharm Development
Private Limited (“IDPL”) located in Ahmedabad, India to an entity partially
owned by two officers of the Company for $161. As previously disclosed, we
elected not to move forward with the construction of a research and development
facility in Ahmedabad, India. During the quarter ended March 2007, management
committed to a plan to dispose of its interest in the entity which was
incorporated specifically for the construction project in Ahmedabad.
As
of
March 31, 2007, the assets and liabilities of IDPL were classified as “held for
sale”. As a result, the Company recorded an impairment charge of $101 in the
quarter ended March 2007. In addition, in advance of the closing of the IDPL
sale the acquiring entity advanced IDPL cash of $172 which is included in the
caption “Due to related party” below. Assets
and liabilities of the discontinued operation classified as “held for sale” in
our consolidated balance sheet as of March 31, 2007 were as
follows:
Cash
|
|
$
|
233
|
|
Land
|
|
|
305
|
|
Assets
held for sale
|
|
$
|
538
|
|
|
|
|
|
|
Accrued
expenses
|
|
$
|
205
|
|
Due
to related party
|
|
|
172
|
|
Liabilities
held for sale
|
|
$
|
377
|
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
Cash
Cash
decreased approximately $1,254 to $184 at March 31, 2007 from $1,438 at June
30,
2006 as more fully described in Liquidity and Capital Resources
above.
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 we 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 on-going basis, we evaluate judgments and estimates
made, including those related to revenue recognition, inventories, income taxes
and contingencies including litigation. We base our 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 our 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.
In
addition, we are party to supply agreements with certain pharmaceutical
companies under which, in addition to the selling price of the product, we
receive payments based on sales or profits associated with these products
realized by our customer. We recognize revenue related to the initial selling
price upon shipment of the products as the selling price is fixed and
determinable and no right of return exists. We recognize the additional revenue
component of these agreements at the time our customers record their sales
and
is based on pre-defined formulas contained in the agreements.
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) have
a
risk of loss associated with the raw materials purchased, (ii) convert the
raw
material into a finished product based upon our specifications, (iii) have
other
sources of supply of the raw material, and (iv) have 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”.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
Sales
Incentives
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”). Generally, the terms of a volume based sales incentive
we offer require the customer to purchase a minimum quantity of a product or
products during a specified period of time. The incentive offered would then
be
based upon a fixed dollar amount per unit sold to the customer. We make an
estimate of the ultimate amount of the incentive the customer would earn based
upon past history with the customer and other facts and circumstances.
Generally, 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 would be 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 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 our sales incentive liability, many factors, including
significant unanticipated changes in the purchasing volume of a customer, could
have significant impact on our liability for sales incentives and our reported
operating results. The terms of our agreement with our customer with such sales
incentives expired in October 2006.
Inventories
Our
inventories are valued at the lower of cost or market determined on a first-in,
first-out basis, and includes the cost of raw materials, labor and manufacturing
overhead. 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.
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.
Issues
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.
ITEM
3 - Quantitative and Qualitative Disclosures About Market
Risk
As
of
this filing, our principal financial instrument is a maximum $41,500 credit
facility, consisting of a real estate term loan of $12,000, two machinery and
equipment lines aggregating $7,000 and a revolving credit line of a maximum
of
$22,500, subject to certain asset levels. 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 $3,670. The sale of the Series
C-1
Convertible preferred stock in September 2006, resulted in elimination of the
balance of the personal pledges of marketable securities of $3,830.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
(IN
THOUSANDS, EXCEPT PER SHARE
DATA)
At
March
31, 2007, total obligations to our bank pertaining to the credit facility
described above were: (i) approximately $11,133 real estate term loan; and
(ii)
$5,386 owing on the machinery and equipment lines.
With
respect to the real estate 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 March 31, 2007 was
approximately $114.
If
our
combined variable rate borrowings of approximately $2,645 remained at the same
amount as of March 31, 2007, for the remainder of our fiscal year, for every
one
percent change, upward or downward in our borrowing rate, we would incur or
save
approximately $7 per quarter.
The
remaining borrowing capacity within the credit facility with WFBC will likely
be
used for such things as future research and development costs as well as the
purchase of new equipment for our facilities. Any additional borrowings could
effectively increase our exposure to interest rate market risk. In addition,
we
are required to comply with certain financial covenants.
ITEM
4 - 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
Securities and Exchange Commission’s (“SEC”) 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 three month period ended March 2007 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.
A
control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control systems are met.
Because of the inherent limitations in all control systems no evaluation of
controls can provide absolute assurance that all control issues, if any, within
a company have been detected. Such limitations include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal
control can occur because of human failures, such as simple errors or mistakes
or intentional circumvention of the established process.
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
PART
II - OTHER INFORMATION
Item
1. Legal
Proceedings
An
action
was commenced on June 1, 2006, by Ray Vuono (“Vuono”) in the Supreme Court of
the State of New York, County of Suffolk (Index No. 13985/06). The action
alleged that plaintiff was owed an amount exceeding $10 million in unpaid
“finder’s fees” under an advisory agreement between plaintiff and Atec Group,
Inc.
By
motion
dated July 26, 2006, the Company moved to dismiss Vuono’s complaint in its
entirety. Vuono cross-moved to disqualify the Company's counsel due to an
alleged conflict of interest. By recent decision and order dated March 29,
2007,
the Court dismissed Vuono’s claims as they pertain to any fees claimed by Vuono
related to a reverse merger of Interpharm, Inc. and the Company and declined
to
dismiss other claims. The dismissed claims represent approximately $7 million
of
the total of $10 million claimed by Vuono. The Court deferred a decision on
Vuono’s motion to disqualify counsel pending a hearing and further proceedings.
The
Company will continue to vigorously defend the action.
The
Company leases one of its business premises located in Hauppauge, New York,
(“Premises”) from an entity owned by three stockholders (“Landlord”), one of
whom is Raj Sutaria, an officer of the Company, under a noncancelable lease
expiring in October 2019.
Under
the
terms of the lease for the Premises, upon a transfer of a majority of the
issued
and outstanding voting stock of Interpharm, Inc., which occurred on May 30,
2003, and every three years thereafter, the annual rent may be adjusted to
fair
market value, as determined by an independent appraiser. Effective October
1,
2006, the Company and its Landlord agreed to adjust the base rent for the
premises based upon two independent appraisals. However, the appraisals obtained
were not tied to market price in May, 2006, the time period during which
the
rent was to be adjusted to market value. As a result, at a meeting of the
Company’s Board of Directors on March 20, 2007, the Board resolved, with the
Chairman abstaining, that the Audit Committee would obtain an appraisal of
the
lease price for the Premises as of May 30, 2006.
In
a
letter dated April 20, 2007, the Landlord’s counsel advised that the Company was
obligated to pay rent to the Landlord at the rate contained in an appraisal
obtained in November 2006 and based on rental prices at that time, which
were
higher than those in May 2006. The Landlord’s counsel also advised that the
Landlord is asserting a claim against the Company for $236 in back rent and
to
set the current rent at $821 per annum.
As
of May
14, 2007, no action has been commenced against the Company, however, the
Company
believes that a claim by the Landlord based on the April 20, 2007 letter
from
the Landlord's counsel would be without merit. In accordance with SFAS No.
5, “Accounting for Contingencies”, no amounts have been accrued at March 31,
2007 related to this matter.
Item
6. Exhibits
Exhibits
|
|
|
|
21.1 |
List
of Subsidiaries.
|
|
|
31.1
|
Certification of Chief
Executive
Officer pursuant to Rules 13a-14(a) as adopted, pursuant to Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
31.2 |
Certification of the
Chief
Financial Officer pursuant to Rules 13a-14(a) as adopted, pursuant
to
Section
302 of the Sarbanes-Oxley Act of 2002. |
|
|
32.1 |
Certifications of the
Chief
Executive Officer and the Chief Financial Officer pursuant to 18
U.S.C.
Section
1350 as adopted, pursuant to Section 906 of the Sarbanes-Oxley Act
of
2002. |
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
Signatures
Pursuant
to the requirements 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:
May 15, 2007
|
|
|
|
By: |
/s/
Peter
Giallorenzo |
|
Peter
Giallorenzo,
Chief
Financial Officer
(Duly
authorized to sign on behalf of
registrant)
|
INTERPHARM
HOLDINGS, INC. AND SUBSIDIARIES
Exhibits
Number
|
|
Description |
21.1 |
|
List
of Subsidiaries
|
Name
of Subsidiary
|
|
Jurisdiction
|
|
Ownership
Percentage
|
Interpharm,
Inc.
|
|
New
York
|
|
100%
|
Micro
Computer Store, Inc.
|
|
New
York
|
|
100%
|
Innovative
Business Micros, Inc.
|
|
New
York
|
|
100%
|
Logix
Solutions, Inc.
|
|
Colorado
|
|
90%
|
Saturn
Chemical, LLC
|
|
New
York
|
|
100%
|
Interpharm
Realty, LLC
|
|
New
York
|
|
100%
|
Interpharm
Development Private, LTD
|
|
India
|
|
100%
|
31.1 |
Certification
of Cameron Reid pursuant to Exchange Act Rules 13(a)-14(a) and 15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002;
|
31.2 |
Certification of Peter Giallorenzo pursuant to Exchange
Act Rules 13(a)-14(a) and 15d-14(a), 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; |