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 September 30, 2004
[ ] 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)
69 Mall Drive Commack, New York 11725
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(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 [_]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES [_] NO [X]
As of the close of business on November 12, 2004, there were 24,967,166 shares
of the Registrant's $.01 par value per share Common Stock outstanding.
INTERPHARM HOLDINGS, INC.
TABLE OF CONTENTS
PART I Financial Information Page
Item 1. Financial Statements & Notes ...................................1-13
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations..................14-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk........19
Item 4. Controls and Procedures........................................20-21
PART II Other Information Required in Report
Items 1 through 6 not Applicable
Forward Looking Statements and Associated Risks...............................22
Signatures Page...............................................................23
Exhibits/Certifications....................................................24-27
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
ASSETS
September 30, June 30,
2004 2004
--------------- ---------------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 3,537,936 $ 2,884,639
Marketable securities, at fair market value 39,984 36,791
Accounts receivable, net 4,481,738 6,849,778
Inventories, net 5,861,213 5,530,161
Prepaid expenses and other current assets 776,114 453,157
Deferred tax assets 1,037,000 1,280,000
----------- -----------
Total Current Assets 15,733,985 17,034,526
Land, building and equipment, net 15,512,512 15,007,132
Deferred tax assets 2,902,000 2,902,000
Deposits 589,033 224,287
----------- -----------
TOTAL ASSETS $34,737,530 $35,167,945
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
1
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2004 2004
----------- -----------
(Unaudited) (Audited)
CURRENT LIABILITIES
Current maturities of bank debt payable $ 370,000 $ 764,014
Accounts payable, accrued expenses, and other liabilities 4,182,110 4,545,345
----------- -----------
Total Current Liabilities 4,552,110 5,309,359
----------- -----------
OTHER LIABILITIES
Bank debt, less current maturities 6,968,333 7,060,833
Other liabilities 17,836 14,968
----------- -----------
Total Other Liabilities 6,986,169 7,075,801
----------- -----------
TOTAL LIABILITIES 11,538,279 12,385,160
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued and
outstanding - 6,902,963; aggregate liquidation preference
of $5,494,080 348,042 348,042
Common stock, $.01 par value, 70,000,000 shares
authorized; shares issued - 25,591,311 255,913 255,913
Additional paid-in capital 19,184,291 19,184,291
Accumulated other comprehensive income (loss) 3,102 (92)
Retained earnings 4,205,771 3,792,499
Treasury stock at cost, 624,145 shares (797,868) (797,868)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 23,199,251 22,782,785
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,737,530 $35,167,945
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
2
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended September 30,
-------------------------------
2004 2003
----------- -----------
SALES, Net $ 9,053,132 $ 6,875,348
----------- -----------
COST OF SALES (including related party rent expense
of $102,000 for the three months ended
September 30, 2004 and 2003, respectively) 7,113,028 5,443,518
----------- -----------
GROSS PROFIT 1,940,104 1,431,830
----------- -----------
OPERATING EXPENSES
Selling, general and administrative expenses 1,086,673 1,033,775
Related party rent expense 18,000 18,000
Research and development 175,459 35,000
----------- -----------
TOTAL OPERATING EXPENSES 1,280,132 1,086,775
----------- -----------
OPERATING INCOME 659,972 345,055
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (3,178) (6,147)
Interest income -- 2,759
----------- -----------
TOTAL OTHER EXPENSE (3,178) (3,388)
----------- -----------
INCOME BEFORE INCOME TAXES 656,794 341,667
PROVISION FOR INCOME TAXES 243,522 114,228
----------- -----------
NET INCOME $ 413,272 $ 227,439
=========== ===========
EARNINGS PER SHARE
Basic earnings per share $0.01 $0.01
=========== ===========
Diluted earnings per share $0.01 $0.00
=========== ===========
Basic weighted average shares outstanding 24,967,166 16,328,011
=========== ===========
Diluted weighted average shares and
equivalent shares outstanding 67,978,896 68,612,676
=========== ===========
See Notes To Condensed Consolidated Financial Statements.
3
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
--------------------------------------------------------------------------------
For the Three Months Ended September 30, 2004
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Capital Income
------------- ------------ -------------- -------------- ----------------- -------------------
BALANCE - July 1, 2004 6,902,963 $348,042 25,591,311 $255,913 $19,184,291 $ (92)
Unrealized gain on marketable
securities, net -- -- -- -- -- 3,194
Net income -- -- -- -- -- --
--------- -------- ---------- -------- ----------- ----------
BALANCE -
September 30, 2004 6,902,963 $348,042 25,591,311 $255,913 $19,184,291 $ 3,102
========= ======== ========== ======== =========== ==========
Total
Retained Treasury Stock Stockholders'
Earnings Shares Amount Equity
-------------- ---------- -------------- -----------------
BALANCE - July 1, 2004 $3,792,499 624,145 $(797,868) $22,782,785
Unrealized gain on marketable
securities, net -- -- -- 3,194
Net income 413,272 -- -- 413,272
---------- ------- --------- -----------
BALANCE -
September 30, 2004 $4,205,771 624,145 $(797,868) $23,199,251
========== ======= ========= ===========
See Notes To Condensed Consolidated Financial Statements.
4
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
(UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended
September 30,
---------------------------
2004 2003
------------- -------------
NET INCOME $413,272 $227,439
OTHER COMPREHENSIVE INCOME
Unrealized gain on marketable securities, net
3,194 1,180
-------- --------
TOTAL COMPREHENSIVE INCOME $416,466 $228,619
======== ========
See Notes To Condensed Consolidated Financial Statements.
5
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended
September 30,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 413,272 $ 227,439
------------- -------------
Adjustment to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 262,159 193,237
Deferred tax expense 243,000 --
Tax expense in connection with exercise of employee
stock options credited to additional paid-in-capital -- 120,000
Changes in operating assets and liabilities
Accounts receivable 2,368,040 845,530
Inventories (331,052) (2,286,231)
Prepaid expenses and other current assets (322,957) (329,681)
Accounts payable, accrued expenses and other liabilities (360,366) 538,274
------------- -------------
TOTAL ADJUSTMENTS 1,858,824 (918,871)
------------- -------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 2,272,096 (691,432)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from notes receivable -- 1,524,092
Purchases of building and equipment (767,539) (1,121,746)
Deposits (364,746) (216,387)
------------- -------------
NET CASH (USED IN) PROVIDED BY
INVESTING ACTIVITIES (1,132,285) 185,959
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in line of credit, bank (424,847) (1,639,946)
Repayments of bank notes payable (61,667) (461,762)
Cash received in reverse merger transaction -- 3,791
Proceeds from options and warrants exercised -- 2,698,764
------------- -------------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES $ (486,514) $ 600,847
------------- -------------
See Notes To Condensed Consolidated Financial Statements.
6
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
--------------------------------------------------------------------------------
Three Months Ended
September 30,
2004 2003
----------- ------------
NET INCREASE IN CASH AND CASH
EQUIVALENTS $ 653,297 $ 95,374
CASH AND CASH EQUIVALENTS - Beginning 2,884,639 2,336,203
----------- ------------
CASH AND CASH EQUIVALENTS - Ending
$ 3,537,936 $ 2,431,577
=========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 42,817 $15,449
=========== ============
Income taxes $ 522 $84,456
=========== ============
Non-cash investing and financing activities:
Conversion of Series J preferred stock to common stock $ -- $ 1,050
=========== ============
Valuation Adjustment related to reverse merger $ -- $50,000
=========== ============
See Notes To Condensed Consolidated Financial Statements.
7
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 1 - Condensed Consolidated Financial Statements
The accompanying interim unaudited 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 months ended
September 30, 2004 are not necessarily indicative of the results that may
be expected for the fiscal year ending June 30, 2005. 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,
2004.
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. The majority of the Company's sales have
been derived from sales of Ibuprofen tablets in both over-the-counter and
prescription strength.
Earnings Per Share
Basic earnings per share ("EPS") of common stock is computed by dividing
net income available to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted
EPS reflects the amount of earnings 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.
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 and inventory overhead costing estimates.
8
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
Capitalization of Interest and Other Costs
The Company capitalizes interest and certain other direct cost during the
active construction period of major capital projects. Capitalized costs
are added to the cost of the underlying assets and will be depreciated
over the useful lives of the assets. The Company capitalized
approximately $40,000 of interest during the three month period ended
September 30, 2004 in connection with its capital improvements to the
Brookhaven, NY facility.
Stock Based Compensation
At September 30, 2004, the Company had two stock-based employee plans. As
permitted under Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123, "Accounting for Stock- Based
Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations including Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation," an interpretation of APB No.
25. No stock-based employee compensation cost is reflected in operations,
as all options granted under those plans have an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
Three Months Ended
September 30,
-------------------------
2004 2003
---------- ---------
Net income, as reported $ 413,272 $ 227,439
Less: Stock-based employee
compensation expense
determined under fair value-based
method for all awards, net of income tax
656,470 167,000
---------- ---------
Pro forma $(243,198) $ 60,439
========== =========
Basic net income (loss) per share
As reported $ 0.01 $ 0.01
========== =========
Pro forma $ (0.01) $ 0.00
========== =========
Diluted net income (loss) per share
As reported $0.01 $ 0.00
========== =========
Pro forma $ (0.01) $ 0.00
========== =========
9
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - Summary of Significant Accounting Policies, continued
Stock Based Compensation, continued
The fair values of Company common stock options granted to employees were
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility of 145% and
124% for the three months ended September 30, 2004 and 2003, respectively
(2) risk-free interest rate of 4.25% and 3.4% for the three months ended
September 30, 2004 and 2003, respectively and (3) expected average lives
of 10 and 5 years for the three months ended September 30, 2004 and 2003,
respectively .
NOTE 3 - Inventories
Inventories consist of the following:
September 30, June 30,
2004 2004
----------- ----------
Finished goods $ 189,638 $ 534,175
Work in process 2,841,173 2,710,270
Raw materials 2,500,445 1,932,971
Packaging materials 329,957 352,745
----------- ----------
Total $ 5,861,213 $5,530,161
=========== ==========
NOTE 4 - Land, Building and Equipment
Land, building and equipment consists of the following:
Estimated
September 30, June 30, Useful
--------------------- -------------------
2004 2004 Lives
--------------------- ------------------- ---------------
Land $ 4,924,000 $ 4,924,000
Building, improvements and construction in progress(a) 4,626,252 4,475,482 20 Years
Machinery and equipment 6,062,980 5,457,395 5-7 Years
Furniture and fixtures 323,304 319,762 5 Years
Leasehold improvements 2,630,845 2,623,203 5-15 Years
----------- ------------
18,567,381 17,799,842
Less: accumulated
depreciation and amortization 3,054,869 2,792,710
----------- ------------
Land, Building and Equipment, net $15,512,512 $ 15,007,132
=========== ============
(a) Not yet placed in service.
10
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 5- Income Taxes
At September 30, 2004 the Company has remaining Federal net operating
loss carryforwards ("NOLs") of approximately $11,500,000 and State NOLs
of approximately $10,950,000 expiring through 2024. Pursuant to Section
382 of the Internal Revenue Code regarding substantial changes in Company
ownership, utilization of these NOLs is limited to approximately
$2,690,000 per year, plus any prior years' amount not utilized, if any.
As of September 30, 2004, the Company has determined that it is more
likely than not, that the Company will utilize all of the Federal NOLs in
the future. The Company reserved approximately 30% of the State NOLs
which the Company does not anticipate utilizing due to State limitations.
In calculating its tax provision for the three month period ended
September 30, 2004, the Company applied an aggregate effective tax rate
of approximately 37% thereby creating an approximate $243,000 income tax
expense and reduced its current deferred tax asset by a like amount.
NOTE 6- Earning Per Share
The calculations of basic and diluted EPS are as follows:
Three Months Ended
September 30,
---------------------------
2004 2003
------------- ------------
Numerator:
Net income $ 413,272 $ 227,439
Less: Preferred stock dividends 41,392 41,392
Less: Net income attributable to Series K
preferred stockholders 24,456 19,619
------------ -----------
Numerator for basic EPS 347,424 166,428
Effect of dilutive securities:
Net income attributable to Series K preferred
stockholders 24,456 19,619
------------ -----------
Numerator for diluted EPS $ 371,880 $ 186,047
============ ===========
Denominator:
Denominator for basic EPS weighted average
shares outstanding 24,967,166 16,328,011
Effect of dilutive securities:
Convertible Series K preferred stock 37,648,651 42,684,688
Convertible Series A, B, C and J preferred stocks 7,438 23,452
Stock options 5,355,641 9,576,525
------------ -----------
Denominator for diluted EPS 67,978,896 68,612,676
============ ===========
Basic EPS $ 0.01 $ 0.01
============ ===========
Diluted EPS $ 0.01 $ 0.00
============ ===========
11
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 6 - Earning Per Share - Continued
As of September 30, 2004, 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 - September 30, 2004 24,967,166
Stock options and Warrants outstanding 10,535,000
Common stock issuable upon conversion of preferred stocks:
Series A 1,526
Series A-1 (maximum contingent conversion) - (a) 4,855,389
Series B 292
Series C 5,620
Series K - (b) 37,648,651
----------
Total - (c) 78,013,642
==========
(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.
(b) On June 4, 2004 one seventh of the 2,050,393 Series K shares, or 292,913
shares, converted into 6,274,775 of the Company's common stock. On June
4, 2005 and on each anniversary date thereof, through June 4, 2010,
292,913 Series K shares will automatically convert into 6,274,775 shares
of the Company's common stock.
(c) 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 December 31,
2011 (the end of the current vesting and conversion periods).
NOTE 7 - Equity Securities
Common Stock and Stock Options
During the three months ended September 30, 2004, 75,000 options were
granted to a non executive new employee to purchase a like amount of the
Company's common shares. These options are exercisable at a price of
$2.73 per share, vest 20% on each December 31, of 2004 through 2008.
NOTE 8 - Economic Dependency
Major Customers
The Company had the following customer concentrations for the three month
periods ended September 30, 2004 and 2003:
12
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Sales - Percent of Revenue
Three Months Ended September 30,
----------------------------------
2004 2003
----------------- ----------------
Customer "A" 16% 29%
Customer "B" 32% 28%
Customer "C" -- 12%
NOTE 8 - Economic Dependency - Continued
Accounts Receivable
September 30, 2004
-------------------
Customer "A" $ 770,025
Customer "B" 1,863,345
Customer "C" --
The Company complies with its supply agreement to sell various strengths
of Ibuprofen to the Department of Veteran Affairs through one of their
primary customers who is the intermediary wholesale prime vendor.
Major Suppliers
For the three month periods ended September 30, 2004 and September 30,
2003, the Company purchased materials from three suppliers totaling
approximately 69% and 86% of the Company's total purchases. At September
30, 2004 and 2003, aggregate amounts due to these suppliers included in
accounts payable, were approximately $2,030,250 and $3,380,000
respectively.
NOTE 9 - Related Party Lease
The Company leases its business premises located in Hauppauge, New York,
("Premises") from an entity controlled by three stockholders of the
Company under a noncancelable lease expiring in October 2019, and is
obligated to pay minimum annual rent of $480,000, plus property taxes,
insurance, maintenance and other expenses related to the Premises. The
Company believes that the aggregate lease costs for the premises are less
that those for comparable facilities in the area.
Upon a change in ownership of the Company, and every three years
thereafter, the annual rent will be adjusted to fair market value, as
determined by an independent third party.
13
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 10 - Contingencies
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.
14
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of operations
Overview
Interpharm Holdings, Inc. ("Interpharm," "we," or "us"), through its
wholly-owned subsidiary, Interpharm, Inc., is engaged in the business of
developing, manufacturing and marketing generic over-the-counter and
prescription strength pharmaceutical products. We make sales both under our own
label and to wholesalers and distributors which sell our products under their
labels.
We market our products primarily to wholesalers, drug distributors, repackagers,
and other manufacturers through our internal sales staff as well as independent
sales representatives. Some of our wholesalers and distributors purchase
products that are warehoused for drug chains, independent pharmacies, state and
federal governmental agencies and managed healthcare organizations. Sales are
recognized when the product is shipped and appropriate provisions are made for
returns and charge backs.
We believe that key components of our growth have been, and, will continue to be
our commitment to quality, capital investment and expansion of our product line.
This is evidenced by:
o The purchase of a 92,000 square foot facility in Brookhaven, New
York in June, 2004. Once FDA approval is obtained, this facility
will double our available space to approximately 200,000 square
feet. The second facility rests on 37 acres and provides us with
sufficient additional acreage for potential further expansion of
our facilities in the future. Until we obtain FDA approval for
manufacturing at the Brookhaven facility, we may use the new
facility for warehousing and other activities, which would enable
us to free up space for additional manufacturing in our current
plant.
o Obtaining FDA approval for our ANDA for Hydrocodone Bitartrate and
Ibuprofen Tablets, 5 mg/200 mg in May, 2004. This product is a new
lower strength version of Hydrocodone Bitartrate and Ibuprofen
Tablets, 7.5 mg/200 mg, which is the generic equivalent to the
branded drug Vicoprofen(R). Since we were the first company to
receive approval to manufacture and market this product in this
strength, we were provided the opportunity to market the product
as a branded generic drug. We began marketing the product as a
branded generic under the name Reprexain(R) in June 2004, pursuant
to a contract with Watson Pharmaceuticals, Inc. Pursuant to the
terms of the contract, we will manufacture and supply the product
to Watson, which will market, sell and distribute the product in
the United States. We will receive payment from Watson based on
the amount of Reprexian ordered by it for sale as well as a
percentage of sales that Watson generates through its marketing
efforts.
o Receiving FDA approval for Hydrocodone Bitartrate and Ibuprofen
Tablets, 7.5 mg / 200 mg which is the generic equivalent to the
branded drug Vicoprofen(R) on October 12, 2004.
15
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
As we continue to implement our plan, we are focusing our efforts to (i)
continue increasing our market share in our existing product lines by utilizing
our manufacturing efficiency, cost competitiveness, and customer loyalty, (ii)
obtain FDA approval for the drugs currently under development, (iii)
successfully implement our research and development strategy with a view to
expanding and diversifying our product line to focus on higher margin products,
(iv) leverage off of our competitive strengths in manufacturing to capture
market share on our new product lines, (v) increase production capacity in our
current plant, (vi) obtain FDA approval for our new facility in a timely manner,
(vii) utilize our manufacturing efficiencies to enter into additional
manufacturing and supply arrangements, (viii) enter into joint ventures and
strategic alliances with companies whose strengths compliment ours, and (ix)
create marketing and distribution channels for our existing and future products.
However, there are no assurances that we will be able to successfully implement
all components of our plan.
Presented below are some of our financial highlights for the three month period
ended September 30, 2004, as compared to the same period in 2003.
Results of Operations
Three Months Ended September 30,
---------------------------------------------------------------------------
2004 2003
----------------- -------------------
(Unaudited) (Unaudited)
----------------- -------------------
Total Revenue Increased 31.7% $9,053,132 $6,875,348
Gross Profit Increased 35.5% $1,940,104 $1,431,830
Operating Income Increased 91.3% $ 659,972 $ 345,055
Net Income Increased 81.7% $ 413,272 $ 227,439
Three months ended September 30, 2004, compared to September 30, 2003
Revenues
Net Sales for the three-month period ended September 30, 2004 were approximately
$2.2 million greater than in the three-month period ended September 30, 2003.
Net sales by product are set forth below. In comparing net sales, it should be
noted that sales for the three-month period ended September 30, 2003 were
impacted by delays in shipment of approximately $1 million of products which
were not shipped until October, 2003 due to a packaging bottleneck which was
resolved with the purchase of additional packaging lines.
Net sales by product (in thousands of dollars):
Three Months Ended September 30,
--------------------------------
2004 2003
Sales % Sales % Variance $
------ -- ------ -- ----------
Ibuprofen $6,171 68% $4,413 64% $1,758
Allopurinol & Atenolol 1,317 15 1,766 26 (449)
Naproxen 496 5 424 6 72
All Other Products 1,069 12 272 4 797
------ ------ ------
Total $9,053 $6,875 $2,178
====== ====== ======
16
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
As indicated in the table above, there was a significant increase in sales of
Ibuprofen and a small increase in sales of Naproxen during the three month
period ended September 30, 2004 compared to the three-month period ended
September 30, 2003. During the same period, there was a decrease in sales of
Atenolol, and Allopurinol, which are manufactured for one customer.
Additionally, we received approximately $311,000 of revenue attributable to
sales of Reprexain(R) during the three-month period ended September 30, 2004.
Sales and marketing of Reprexain(R) commenced during the quarter, as such this
is the first time the Company has shown revenue for this product.
Cost of Sales
Our cost of sales for the three months ended September 30, 2004 as a percentage
of overall total revenue decreased slightly, 0.6 percentage point when compared
to the three month period ended September 30, 2003. Raw material prices have
remained relatively constant during the three months ended September 30, 2004
when compared to the same period in 2003. The remaining components of our cost
of sales, while increasing in dollar amounts, have on average, as a percentage
of sales, remained relatively constant.
Gross Profit
Our total gross profit percentage for the three-month period ended September 30,
2004 was 21.4%, an increase of 0.6 percentage points compared to 20.8% for the
three-month period ended September 30, 2004. This slight increase is primarily
due to improved operating efficiencies.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include salaries and related costs,
commissions, travel, administrative facilities, communications costs and
promotional expenses for our direct sales and marketing staff, administrative
and executive salaries and related benefits, legal, accounting and other
professional fees as well as general corporate overhead.
Selling, general and administrative expenses increased approximately $53,000 to
approximately $1,087,000, or 12.0% of net sales during the three months ended
September 30, 2004, from approximately $1,034,000, or 15.0% of net sales, during
the same period in 2003. The significant components of this increase are:
salaries, including payroll taxes and benefits ($51,000); selling commissions
($42,000), investor and public relations costs ($37,000), utilities ($35,000),
professional fees ($32,000); offset by reductions in our legal and accounting
costs of $133,000. The increase in salaries, payroll taxes, benefits,
professional fees and utilities are primarily attributable to our continuing
expansion. In early 2004 we engaged a public relations firm, resulting in
expenses during the current quarter with no matching costs incurred during the
same three months in 2003. We also incurred significant legal, accounting and
other professional costs as a result of the merger between ATEC Group, Inc. and
Interpharm, Inc. during the three months ended September 30, 2003. The increase
in selling commissions is primarily attributable to our increased sales.
17
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Income Taxes
The effective tax rate for the three month period ended September 30, 2004 of
approximately 37% resulted in an aggregate income tax provision of approximately
$244,000 compared to an effective aggregate tax rate of 33.4% for the three
month period ended September 30, 2003 which resulted in a provision for income
taxes of approximately $114,000.
Liquidity and Capital Resources
We currently finance our operations and capital expenditures through cash flows
from operations. Net cash provided by operating activities for the three month
period ended September 30, 2004 was $2,272,000 as compared to $691,000 net cash
used in operating activities for the same period last year. This increase in net
cash provided was a result of non-cash operating items of $505,000 added to net
income of $413,000, decrease in accounts receivable of $2,368,000, offset by a
decrease in accounts payable, accrued expenses and other liabilities of
$360,000, and increases in inventories and prepaid expenses and other current
assets of $331,000 and $323,000, respectively.
Net cash used in investing activities was $1,132,000 for the three months ended
September 30, 2004, which is as a result of increases in fixed assets and
building additions of $768,000 and deposits on machinery and equipment of
$365,000. A component of our current plan is the expansion of the production
capacity at our current facility as well as erecting a modern second facility.
Net cash used in financing activities of $487,000 for the three months ended
September 30, 2004, was a result of the pay down of a mortgage loan of $62,000
and working capital lines of credit by $425,000.
In June 2004, we obtained a $21,000,000 credit facility which consists of:
o a $7,400,000 mortgage loan used for the purchase of the second
facilty. The loan is being repaid with 119 monthly installments,
based upon an amortization schedule of twenty years, and a balloon
payment due in ten years for the balance.
o two advised credit lines aggregating $6,600,000 primarily to
acquire new equipment and for renovations of the Company's new
Yaphank, NY plant. The balance of the funds accessed through these
credit lines will convert to fully amortizing five year term
loans.
o a $2 million advised non-revolving secured facility for equipment
purchases. Each advance cannot exceed 90% of the invoice amount of
the new equipment and is convertible into separate notes that
fully amortize over 60 months.
o a $5,000,000 advised line of credit primarily for working capital
and general corporate purposes.
At the option of the Company, interest will generally be calculated at (i) LIBOR
plus 1.5% for 3 to 36 month periods, or at (ii) the Bank's then fixed prime
rate. As of September 30, 2004, the interest rate on the mortgage note payable
was 3.20%. Other than for our mortgage loan, we have not yet drawn down on the
balance of the credit facility. In addition, the Company is required to comply
with certain financial covenants. The Bank will review the new credit facility
annually; the next review is scheduled to occur no later than November 30, 2004.
The credit lines are terminable by the Bank at any time as to undrawn amounts.
This new credit facility is collateralized by substantially all assets of the
Company and no longer requires personal guarantees of four of the Company's
stockholders.
18
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Working capital decreased $543,000 to $11,182,000 from $11,725,000 at June 30,
2004 primarily as a result of a decrease in net accounts receivable. This
decrease was mainly attributable to a decrease in sales during the current
quarter compared to the previous quarter ended June 30, 2004. A portion of the
cash proceeds were used for purchases of additional building and equipment and
deposits.
We have entered into agreements to renovate the second facility as well as to
purchase new equipment which, in the aggregate will require approximately an
additional $2.0 million, funding for which will be generated from operations,
draw downs from our advised credit facilities or a combination thereof.
According to current plans it is likely that we will require funds in excess of
the aforementioned $2.0 million, however, we cannot at this time reasonably
project that amount.
We believe the funds we generate from operations along with the financing
arrangements described above should allow us to continue our expansion plans and
be sufficient for us to meet our operating requirements during the next twelve
months. We may nevertheless, choose to raise additional funds or seek other
financing arrangements to facilitate more rapid expansion, to develop new
products at a faster pace, or to acquire or invest in complimentary businesses,
technologies, services or products.
At September 30, 2004, we had approximately $11,500,000 in Federal net operating
loss carryforwards ("NOLs") available to reduce future taxable income, subject
to certain limitations. These NOLs could result in savings of approximately
$4,150,000 in future income tax payments (although there will be no
corresponding benefit on income tax expenses).
Accounts Receivable
Our accounts receivable at September 30, 2004 was $4,482,000 compared to
$6,850,000 at June 30, 2004. This decrease is primarily attributable to a
decrease in sales during the three-month period ended September 30, 2004
compared to the three-month period ended June 30, 2004. Our accounts receivable
turnover ratio decreased 0.6 turns to 6.4 turns at September 30, 2004 from 7.0
turns at June 30, 2004. The quality of our accounts receivable is good, and as
such we have encountered little or no bad debt exposure
Inventory
At September 30, 2004, our inventory was $5,861,000, an increase of $331,000
from $5,530,000 at June 30, 2004. Our inventory turnover ratio of 5.2 annualized
turns at September 30, 2004 decreased when compared to June 30, 2004 - 6.2
average turns. We believe this to be within acceptable limits of our current
operating plan.
Accounts Payable
The accounts payable, accrued expenses and other liabilities decreased by
approximately $360,000 during the three month ended September 30, 2004 as
compared to June 30, 2004.
Cash and Cash Equivalents
Cash and cash equivalents increased approximately $653,000 from $2,885,000 at
June 30, 2004 to $3,538,000 at September 30, 2004. During the three months ended
September 30, 2004, we funded our business from operations - net cash provided
by operations was approximately $2,272,000. This was offset by acquisition of
new property and equipment and other additions of $1,132,000 and repayment of
various bank lines of credit and bank notes payable totaling approximately
$487,000.
19
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that Interpharm
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, Interpharm evaluates
judgments and estimates made, including those related to revenue recognition,
inventories, income taxes and contingencies including litigation. Interpharm
bases its judgments and estimates on historical experience and on various other
factors that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing our
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
Revenue Recognition
Revenues from the sale of our products are recognized upon shipment of the
product. Revenues are recorded net of provisions for rebates, charge-backs,
discounts and returns, which are established at the time of sale. Estimates for
rebates, charge-backs, and discounts are calculated based on actual experience
and also cover chargebacks on sales to intermediary wholesale prime vendors for
the supply of Ibuprofen to the Department of Veterans Affairs.
We purchase raw materials from suppliers, which is then used in the
manufacturing of completed goods and sold back to the suppliers or by direct
drop shipment to the supplier's customers. The raw materials are also used in
the manufacturing of products for other customers.
We also (i) have the general inventory risk by taking title to all of the raw
material purchased, (ii) establish the selling price for the finished product
and, (iii) significantly change the raw materials into the finished product
under our specifications and formulas. 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.
20
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Inventory
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 overhwead. 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.
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
Our principal financial instrument currently is a $21.0 million credit facility.
In June 2004 the Company took a $7.4 million mortgage note payable for the
purchase of its second facilty,located in Brookhaven, New York, of which
approximately $7.3 million was outstanding at September 30, 2004. Any
obligations created under this credit facility incur interest calculated at our
option at (i) LIBOR plus 1.5% for periods ranging in length from 3 to 36 months,
or (ii) at the Bank's then fixed prime rate. As of September 30, 2004, the
interest rates on the mortgage note payable was 3.2%. The Company's current rate
is 3.66% and is fixed until February 2005. If our borrowings remained at the
same amount as of September 30, 2004, 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 $73,000 respectively. The Company anticipates that
during the next twelve months it will likely draw down from its existing credit
facility primarily to purchase equipment for both facilities. This likely
increase in our borrowings will increase our exposure to interest rate market
risk. The Company is required to comply with certain financial covenants. The
Bank will review the new credit facility annually; the next review is scheduled
to occur no later than November 30, 2004. The credit lines are terminable by the
Bank at any time as to undrawn amounts.
We do not use any derivative financial instruments to hedge our exposure to
adverse fluctuations in interest rates, fluctuations in commodity prices or
other market risks, nor do we invest in speculative financial instruments.
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
SEC's rules and forms, and that such information is accumulated and communicated
to our management to allow timely decisions regarding required disclosure.
Management necessarily applied its judgment in assessing the costs and benefits
of such controls and procedures, which, by their nature, can provide only
reasonable assurance regarding management's control objectives.
21
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
At the conclusion of the period ended September 30, 2004, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer, Chief Financial Officer and
General Counsel, of the effectiveness of the design and operation of our
disclosure controls and procedures. Based upon that evaluation, the Chairman and
Chief Executive Officer, Chief Financial Officer and General Counsel 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 but adopted additional disclosure controls and procedures to improve
the quality and timeliness of disclosure during our transition from a private to
a public company.
On September 20, 2004, our independent registered accounting firm Marcum &
Kliegman, LLP ("MK"), informed us and our Audit Committee of the Board of
Directors that in connection with their audit of our financial results for the
fiscal year ended June 30, 2004, MK had discovered a condition which they deemed
to be a material weakness in our internal controls (as defined by standards
established by the Public Company Accounting Oversight Board). MK noted the lack
of adequate internal control / review procedures required to properly and timely
record customer chargebacks. Management has informed MK and the Audit Committee
that it has modified its internal control / review procedures in such a manner
that it believes will prevent reoccurrences of this deficiency. The impact of
the above condition was isolated to the fiscal quarter ended June 30, 2004, and
did not affect the results of any prior period nor the current fiscal quarter
ended September 30, 2004.
22
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by reference
herein, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange Commission.
The words "believe, expect, anticipate, intend and plan" and similar expressions
identify forward-looking statements. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
23
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.
(Registrant)
Date: November 15, 2004
By: /s/ George Aronson
----------------------------
George Aronson,
Chief Financial Officer
(Duly authorized to sign on behalf of registrant)
24
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Exhibits
Number Description
31.1 Certification of Dr. Maganlal K. Sutaria 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 George Aronson 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;
25