UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D. C. 20549
------
FORM 10-QSB
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended Commission File Number
September 30, 2003 000-28876
INTEGRATED BIOPHARMA, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-2407475
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
225 Long Avenue
Hillside, New Jersey 07205
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (973) 926-0816
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes|X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of October 28, 2003
----------------------- ----------------------------------
Common Stock, Par Value 10,341,839
INTEGRATED BIOPHARMA, INC.
INDEX
--------------------------------------------------------------------------------
Part I: Financial Information
Item 1: Consolidated Financial Statements
Independent Accountant's Review Report 1
Consolidated Balance Sheet as of September 30, 2003 [Unaudited] 2 ... 3
Consolidated Statements of Operations for the three months
ended September 30, 2003 and 2002 [Unaudited] 4
Consolidated Statement of Stockholders' Equity
for the three months ended September 30, 2003 [Unaudited] 5
Consolidated Statements of Cash Flows for three months ended
September 30, 2003 and 2002 [Unaudited] 6 ... 7
Notes to Consolidated Financial Statements [Unaudited] 8 ...17
Item 2: Management's Discussion and Analysis or Plan of Operation 18 ...22
Item 3: Controls and Procedures 23
Part II: Other Information 24
Signatures 25
. . . . . . . .
Independent Accountants' Review Report
We have reviewed the accompanying condensed consolidated balance sheet of
Integrated BioPharma, Inc. and Subsidiaries (formerly Integrated Health
Technologies, Inc.) as of September 30, 2003, and the related condensed
consolidated statements of operations and cash flows for the three months ended
September 30, 2003 and 2002, and condensed consolidated statement of
stockholders' equity for the three months ended September 30, 2003. These
condensed consolidated financial statements are the responsibility of the
company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial statements in order for them to be in
conformity with generally accepted accounting principles.
/s/ Amper, Politziner & Mattia P.C.
November 4, 2003
Edison, New Jersey
1
Part 1-FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003
[UNAUDITED]
--------------------------------------------------------------------------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 7,502,625
Accounts Receivable - Net 1,998,441
Deferred Income Taxes 57,000
Inventories 3,645,484
Deposit on Inventories 1,568,507
Loan Receivable 87,500
Refundable Federal Income Taxes 44,640
Prepaid Expenses and Other Current Assets 693,110
------------
Total Current Assets 15,597,307
------------
Property and Equipment - Net 5,155,792
------------
Other Assets:
Deferred Tax Asset 84,000
Intellectual Property 543,059
Patents and Unpatented Technological Expertise-Net 477,000
Prepaid Rent 130,000
Investment in Joint Venture 123,879
Security Deposits and Other Assets 247,302
============
Total Other Assets 1,605,240
============
Total Assets $ 22,358,339
============
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 2003
[UNAUDITED]
--------------------------------------------------------------------------------
Liabilities and Stockholders' Equity:
Current Liabilities:
Accounts Payable $ 2,292,559
Note Payable-Bank 4,500,000
Accrued Expenses and Other Current Liabilities 559,130
Federal and State Income Taxes Payable 36,720
Customer Advances 90,126
Capital Lease Obligation 94,172
------------
Total Current Liabilities 7,572,707
------------
Non-Current Liabilities:
Loan Payable-Trade Investment Services, LLC, related party 172,260
------------
Total Non-Current Liabilities 172,260
------------
Commitments and Contingencies [13] --
------------
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued --
Series A non-redeemable Convertible Preferred Stock-
Authorized 20,000 shares $.002 Par Value, 9,500 Shares Issued and
Outstanding, Liquidation preference of $9,595,000 19
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 10,321,839 Shares Issued and Outstanding 20,644
Additional Paid-in-Capital 13,091,151
Retained Earnings 1,530,389
------------
14,642,203
Less, Treasury Stock at cost, 25,800 shares (28,831)
------------
Total Stockholders' Equity 14,613,372
------------
Total Liabilities and Stockholders' Equity $ 22,358,339
============
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
[UNAUDITED]
--------------------------------------------------------------------------------
Three months ended
September 30,
2003 2002
---- ----
Sales $ 4,980,006 $ 4,848,190
Cost of Sales 3,962,680 3,892,514
------------ ------------
Gross Profit 1,017,326 955,676
------------ ------------
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs 620,307 --
Selling and Administrative Expenses 1,263,067 727,031
------------ ------------
Total Selling and Administrative Expenses 1,883,374 727,031
------------ ------------
Operating [Loss] Income (866,048) 228,645
------------ ------------
Other Income [Expense]:
Other Income 60,000 70,127
Consulting Fee Income 12,000 12,000
Interest Expense (23,679) (2,049)
Interest and Investment Income 38,257 2,955
------------ ------------
Total Other Income 86,578 83,033
------------ ------------
[Loss] Income Before Income Taxes (779,470) 311,678
Federal and State Income Tax [Benefit] (23,175) 125,168
------------ ------------
Net [Loss] Income (756,295) 186,510
Accretion of Preferred Stock Dividends (95,000) --
------------ ------------
Net [Loss] Income applicable to common shareholders
per common share $ (851,295) $ 186,510
============ ============
Net [Loss] Income Per Common Share:
Basic $ (.08) $ .03
============ ============
Basic $ (.08) $ .03
============ ============
Average Common Shares Outstanding 10,306,335 6,228,720
Dilutive Potential Common Shares:
Warrants and Options -- 942,063
------------ ------------
Average Common Shares
Outstanding-assuming dilution 10,306,335 7,170,783
============ ============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2003
[UNAUDITED]
--------------------------------------------------------------------------------
Convertible Additional Total
Common Stock Preferred Preferred Paid-In Retained Treasury Stock Stockholders'
Shares Par Value Stock Stock Capital Earnings Shares Cost Equity
------ --------- ----- ----- ------- -------- ------ ---- ------
Balance-
July 1, 2003 10,241,439 $ 20,483 -- $ 19 $ 15,882,080 $ 2,381,684 25,800 $ (28,831) $ 18,255,435
Exercise of
Stock Options
For cash 80,400 161 -- -- 70,139 -- -- -- 70,300
Reduction of
paid in
capital due to
common control
accounting
related to in
acquisition of
47% of Paxis,
Inc. (2,956,068) (2,956,068)
Preferred
Stock-Accretion
of Dividends 95,000 (95,000) --
Net Loss for
the three
months ended
September 30,
2003 -- -- -- -- -- (756,295) -- -- (756,295)
---------- -------- ------- ---- ------------ ----------- ------ ---------- ------------
Balance-
September 30,
2003 10,321,839 $ 20,644 -- $ 19 $ 13,091,151 $ 1,530,389 25,800 $ (28,831) $ 14,613,372
========== ======== ======= ==== ============ =========== ====== ========== ============
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Three months ended
September 30,
2003 2002
---- ----
Operating Activities:
Net [Loss] Income $ (756,295) $ 186,510
------------ ------------
Adjustments to Reconcile Net Income (Loss) to Net Cash
[Used for] Provided by Operating Activities:
Depreciation and Amortization 109,877 93,380
Deferred Income Taxes (4,000) (5,000)
Allowance for Inventory 2,500 --
Bad Debt Expense 2,500 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Refundable Federal Income Taxes (44,640) --
Accounts Receivable (137,035) 132,380
Inventories 652,041 (6,647)
Deposit for Inventory (112,000) --
Due From Paxis Pharmaceuticals, Inc.-Related Party (908,000) 97,128
Prepaid Expenses and Other Current Assets (17,983) (52,705)
Security Deposits and Other Assets 74,839 (220,000)
[Decrease] Increase in:
Accounts Payable (125,580) (267,111)
Federal and State Income Taxes Payable (17,049) 14,049
Accrued Expenses and Other Liabilities 65,282 (9,096)
------------ ------------
Total Adjustments (459,248) (223,622)
------------ ------------
Net Cash - Operating Activities (1,215,543) (37,112)
------------ ------------
Investing Activities:
Investment in Joint Venture (123,879) --
Loans to Stockholders -- (4,028)
Acquisition of Paxis Pharmaceuticals, Inc.,
less cash received (483,256) --
Purchase of Property and Equipment (1,122,509) (221,623)
------------ ------------
Net Cash-Investing Activities (1,729,644) (225,651)
------------ ------------
Financing Activities:
Proceeds from Exercise of Stock Options 70,300 --
Proceeds from Notes Payable -- 1,595,715
Repayment of Notes Payable (28,878) (1,619,394)
------------ ------------
Net Cash-Financing Activities 41,422 (23,679)
------------ ------------
Net [Decrease] in Cash and Cash Equivalents (2,903,765) (286,442)
Cash and Cash Equivalents - Beginning of Periods 10,406,390 2,063,323
------------ ------------
Cash and Cash Equivalents - End of Periods $ 7,502,625 $ 1,776,881
============ ============
See accompanying notes to condensed consolidated financial statements.
6
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
[UNAUDITED]
--------------------------------------------------------------------------------
Three months ended
September 30,
2003 2002
---- ----
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 12,187 $ 2,049
Income Taxes $ 32,114 $ 105,425
See accompanying notes to condensed consolidated financial statements.
7
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[UNAUDITED]
--------------------------------------------------------------------------------
[1] Business
Basis of Reporting - The accompanying unaudited interim financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-QSB and
Item 310(b) of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, such interim
statements include all adjustments, which are considered necessary in order to
make the interim financial statements not misleading. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto, together with management's discussion and analysis of financial
condition and results of operations, contained in the Company's annual report to
stockholders incorporated by reference in the Company's annual report on Form
10-KSB for the fiscal year ended June 30, 2003. The results of operations for
the three months ended September 30, 2003 are not necessarily indicative of the
results for the entire fiscal year ending June 30, 2004.
Integrated BioPharma, Inc. [the "Company"] is engaged primarily in the
manufacturing, marketing and sales of vitamins, nutritional supplements and
herbal products. Its customers are located primarily throughout the United
States. The Company considers all subsidiaries as one segment of business.
On July 22, 2003 the Company acquired ninety-seven (97%) percent of the shares
of common stock of Paxis Pharmaceuticals, Inc. ("Paxis"). Paxis manufactures and
distributes Paclitaxel, which is the primary chemotherapeutic agent in the
treatment of breast cancer.
Paxis acquired from Hauser Inc. ("Hauser") its cGMP-(company good manufacturing
practices) compliant Paclitaxel production facilities, processing equipment, and
intellectual assets. Paxis also purchased Paclitaxel intellectual property
("Technology") from Hauser.
To date, Paxis has devoted the majority of its efforts to setting up the
manufacturing operation. Paxis is subject to various risks associated with a
start-up operation, including, among others, setting up and operating
manufacturing facilities, complying with regulatory requirements for
manufacturing pharmaceutical products, manufacturing cGMP API Paclitaxel,
marketing and selling the cGMP Paclitaxel to customers, and operating
profitably. The Company can give no assurance that it can be operated
profitably.
The sales by type for the quarter ended September 30,
2003 2002
---- ----
Manufacturing Sales $ 4,053,322 $ 3,764,197
Distribution Sales $ 814,912 $ 951,912
Other $ 111,772 $ 132,081
[2] Summary of Significant Accounting Policies
Principles of Consolidation - The accompanying consolidated financial statements
include the accounts of the Company and its subsidiaries, all of which are
wholly-owned except Paxis. Intercompany transactions and balances have been
eliminated in consolidation. Minority interest is insignificant.
Fair Value of Financial Instruments
Generally accepted accounting principles require disclosing the fair value of
financial instruments to the extent practicable for financial instruments which
are recognized or unrecognized in the balance sheet. The fair value of the
financial instruments disclosed herein is not necessarily representative of the
amount that could be realized or settled, nor does the fair value amount
consider the tax consequences of realization or settlement.
8
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #2
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies (Continued)
In assessing the fair value of financial instruments, the Company uses a variety
of methods and assumptions, which are based on estimates of market conditions
and risks existing at the time. For certain instruments, including cash and cash
equivalents, accounts receivable, accounts payable, and accrued expenses, it was
estimated that the carrying amount approximated fair value because of the short
maturities of these instruments. All debt is based on current rates at which the
Company could borrow funds with similar remaining maturities and approximates
fair value.
Cash and Cash Equivalents - Cash equivalents are comprised of certain highly
liquid investments with a maturity of three months or less when purchased.
Inventories - Inventory is valued by the first-in, first-out method, at the
lower of cost or market.
Depreciation - The Company follows the general policy of depreciating the cost
of property and equipment over the following estimated useful lives:
Building 15 Years
Leasehold Improvements 15 Years
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Machinery and equipment are depreciated using accelerated methods while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $99,877 and $93,380 for the three months ended September 30, 2003
and 2002, respectively and amortization of patents and unpatented technology was
$10,000 and -0- for the three months ended September 30, 2003 and 2002,
respectively. Amortization of equipment under capital leases is included with
the depreciation expense.
Estimates - 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 or
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition - The Company recognizes revenue upon shipment of the
product. The Company's Paxis subsidiary had not completed its renovation of the
manufacturing facilities as of September 30, 2003 and has not recognized any
income to date. The Company believes that recognizing revenue at shipment is
appropriate because the Company's sales policies meet the four criteria of SAB
101 which are: (i) persuasive evidence that an arrangement exists, (ii) delivery
has occurred, (iii) the seller's price to the buyer is fixed and determinable
and (iv) collectability is reasonably assured. The Company's sales policy is to
require customers to provide purchase orders establishing selling prices and
shipping terms, which are F.O.B shipping point with the title and risk of loss
passing to the customer at point of shipment. The Company evaluates the credit
risk of each customer and establishes an allowance of doubtful accounts for any
credit risk. Sales returns and allowances are estimated upon shipment.
The Company realized fee income from managing warehouse and office operations
for an unrelated company of $60,000 and $70,127 for the three months ended
September 30, 2003 and 2002 respectively. Such is included in "Other income."
9
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #3
[UNAUDITED]
--------------------------------------------------------------------------------
[2] Summary of Significant Accounting Policies (Continued)
License of Technology - The Company has a limited, non-exclusive license to use
the Technology acquired from Hauser for a term of ten years. The Company is
obligated to pay a License Fee of $90,000 payable within ten days from the date
Hauser provides the Company with written notice that it has demonstrated that
the Technology can be used to manufacture lab scale Paclitaxel from taxus
canadensis, or Canadian yew trees. In addition the Company is obligated to pay a
fee of $50,000 upon the commercial sale by the Company of products comprising
Paclitaxel extracted, isolated or purified using the Technology. The Company is
also obligated to pay an annual license maintenance fee of $250,000 (the annual
maintenance fee) one year after the first commercial sale. The Company is
further obligated to pay a royalty fee based on a percentage of sales, less the
annual maintenance fee.
At the conclusion of the License Term the Technology License shall be considered
fully paid and the Company shall have the rights granted under the Technology
License without further payment of an annual royalty.
As of September 30, 2003, approximately $540,000 has been paid to Hauser under
this agreement which has been recorded as intellectual property. The Company has
not amortized this amount since operations have not commenced, but will begin
amortizing over the remaining period of the 10 year agreement when operations
have commenced.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $17,090 and $4,593 for the three
months ended September 30, 2003 and 2002 respectively.
[3] Inventories
Inventories consist of the following at September 30, 2003:
Raw Materials $ 1,544,567
Work-in-Process 1,024,318
Finished Goods 1,076,599
-------------
Total $ 3,645,484
----- =============
[4] Deposits on Inventory
The Company has advanced $1,348,507 to Natex Georgia LLC, and $220,000 to
Chathem Biotech Ltd. for the purchase of biomass to be used by the Company for
the production of Paclitaxel.
[5] Property and Equipment
Property and equipment comprise the following at September 30, 2003:
Land and Building $ 1,250,000
Leasehold Improvements 1,897,565
Machinery and Equipment 5,062,644
Machinery and Equipment Under Capital Leases 159,128
Transportation Equipment 37,714
-------------
Total 8,407,051
Less: Accumulated Depreciation and Amortization 3,251,259
-------------
Total $ 5,155,792
----- =============
10
INTEGRATED HEALTH TECHNOLGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #4
[UNAUDITED]
--------------------------------------------------------------------------------
[6] Patented and Unpatented Technological Expertise
Gross Carrying Accumulated
Amount Amortization
Amortized intangible assets
Unpatented Technology $ 547,000 $ 70,000
--------- --------
Aggregate Amortization Expense:
For the quarter ended September 30, 2003 $10,000
-------
[7] Notes Payable
Notes Payable are summarized as follows at September 30, 2003:
Commerce Bank (a) $ --
Bank of America (b) 4,500,000
------------
Total 4,500,000
Less: Current Portion 4,500,000
Non-current Portion $ -0-
------------------- ============
(a) Under the terms of a revolving credit note which expires on June 10, 2005,
the Company may borrow up to $1,000,000 at the prime lending rate. The loan is
collateralized by the inventory, receivables and equipment of Integrated
BioPharma, Inc. and its operating subsidiaries, and by the personal guarantee of
E. Gerald Kay, the chairman of the board of the Company. At September 30, 2003
there were no borrowings under the revolving credit note.
The loan agreement with Commerce Bank contains certain financial covenants
relating to the maintenance of tangible net worth as defined and Debt Service
Coverage Ratios. At September 30, 2003 the Company was in compliance with its
tangible net worth covenant but not its debt service coverage ratio.
(b) Revolving line of credit loan provided by Bank of America dated August 6,
2003 in the amount of $4,500,000 with interest at a variable rate. The loan is
due on September 4, 2004. The loan is guaranteed by Mr. Carl DeSantis, a
shareholder of the Company. At September 30, 2003 the interest rate was 2.37%.
[8] Loan Payable-Trade Investment Services
Demand loan provided by Trade Investment Services, LLC ("TIS"), a former
shareholder of Paxis Pharmaceuticals, Inc, dated July 1, 2002 with interest at
9%. Interest for the three months ended September 30, 2003 has been waived.
[9] Research and Development Expense
The Company incurred $37,583 in research and development expenses due to the
acquisition of NuCycle Therapy, Inc. in February of 2003. Such costs are
expensed as incurred and included in selling and administrative expenses.
[10] Capital Lease
The Company acquired laboratory equipment under the provisions of a short-term
lease. The lease expires in January 2004. The equipment under the capital lease
as of September 30, 2003 has a cost of $159,128 and accumulated depreciation of
$-0- with a net book value of $159,128.
11
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #5
[UNAUDITED]
--------------------------------------------------------------------------------
[10] Captial Lease [Continued]
The future minimum lease payments under capital leases and the net present value
of the future minimum lease payments at September 30, 2003 are as follows:
Total Minimum Lease Payments $ 96,382
Amount Representing Interest (2,210)
----------
Present Value of Net Minimum Lease Payment 94,172
----------
Current Portion (94,172)
Long-Term Capital Lease Obligation $ -0-
---------------------------------- ==========
[11] Significant Risks and Uncertainties
[A] Concentrations of Credit Risk - Cash - The Company aintains balances at
several financial institutions. Accounts at each institution are insured by the
Federal Deposit Insurance Corporation up to $100,000. At September 30, 2003 the
Company's uninsured cash balances totaled approximately $7,180,000. The Company
does not require collateral in relation to cash credit risk.
[B] Concentrations of Credit Risk - Receivables - The Company routinely assesses
the financial strength of its customers and, based upon factors surrounding the
credit risk of its customers, establishes an allowance for uncollectible
accounts and, as a consequence, believes that its accounts receivable credit
risk exposure beyond such allowances is limited. The Company does not require
collateral in relation to its trade accounts receivable credit risk. The amount
of the allowance for uncollectible accounts at September 30, 2003 is $31,960.
[12] Major Customer
For the three months ended September 30, 2003 and 2002 approximately 69% and 59%
of revenues were derived from one customer. The loss of this customer would have
an adverse effect on the Company's operations. Two other customers accounted for
11% of consolidated sales for the three months ended September 30, 2003 and 14%
of consolidated sales for the three months ended September 30, 2002. Accounts
receivable from these customers comprised approximately 71% and 74% of total
accounts receivable at September 30, 2003 and 2002, respectively.
[13] Commitments and Contingencies
[A] Leases
Related Party Leases - Warehouse and office facilities are leased from Vitamin
Realty Associates, L.L.C., a limited liability company, which is 90% owned by
the Company's Chairman of the Board and principal stockholder and certain family
members and 10% owned by the Company's Chief Financial Officer. The lease was
effective on January 10, 1997 and provides for a minimum annual rental of
$346,000 through January 10, 2002 plus increases in real estate taxes and
building operating expenses. At its option, the Company has the right to renew
the lease for an additional five year period. On April 28, 2000 the lease was
amended reducing the square footage and extending the lease to May 31, 2015.
Rent expense for the three months ended September 30, 2003 and 2002 on this
lease was approximately $124,000 and $116,000 respectively.
12
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #6
[UNAUDITED]
--------------------------------------------------------------------------------
[13] Commitments and Contingencies [Continued]
Other Lease Commitments - The Company leases manufacturing and office facilities
through March 31, 2007. The lease was effective on April 1, 2002 and provided
for minimum monthly rental of $32,500 per month through March 31, 2007 plus
increases in real estate taxes and building operating expenses. Rent expense has
been straight-lined over the life of the lease. At its option, the Company has
the right to renew the lease for an additional five year period. On August 27,
2002 the lease was amended reducing the square footage from approximately 32,500
to 22,500 and reducing the monthly rent to $22,483 per month for the balance of
the lease. Rent expense for the three months ended September 30, 2003 was
$90,218. There were no corresponding expenses for in 2002 because the
manufacturing and office facility was not a part of the consolidated group.
The Company leases warehouse equipment for a five-year period providing for an
annual rental of $15,847, telephone equipment for a five-year period providing
for an annual rental of $13,142 and office equipment for a five year period
providing for an annual rental of $8,365.
The Company leases automobiles under non-cancelable operating lease agreements
which expire through 2006.
The minimum rental commitment for long-term non-cancelable leases is as follows:
Related
Lease Party Lease
September 30, Commitment Commitment Total
----------- ----------- -----------
2004 $ 350,800 $ 323,559 $ 674,359
2005 322,196 323,559 645,755
2006 177,619 323,559 501,178
2007 18,047 323,559 341,606
2008 10,952 323,559 334,511
Thereafter -- 2,130,097 2,130,097
----------- ----------- -----------
Total $ 879,614 $ 3,747,892 $ 4,627,506
=========== =========== ===========
Total rent expense, including real estate taxes and maintenance charges, was
approximately $154,000 and $141,000 for the three months ended September 30,
2003 and 2002, respectively. Rent expense is stated net of sublease income of
approximately $4,000 and $1,200 for the three months ended September 30, 2003
and 2002, respectively.
[B] Development and Supply Agreement - On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
["Herbalife"] whereby the Company will develop, manufacture and supply certain
nutritional products to Herbalife through December 31, 2002. On December 31,
2002 the agreement was modified extending the term of the agreement to December
31, 2005 and providing that Herbalife is required to purchase a minimum quantity
of Supplied Products each year of $18,000,000 for the term of the agreement. If
Herbalife purchases the minimum amount then it will be entitled to certain
rebates of an amount not exceeding $300,000. Accrual of these rebates are done
quarterly.
[C] Employment Agreement - Effective February 24, 2003 the Company entered into
an employment agreement with an executive, which expires on December 31, 2004
and provides for an aggregate annual salary of $100,000.
[D] Consultant Agreement-The Company has oral agreements with subcontractors to
supply labor on an as needed basis.
13
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #7
[UNAUDITED]
--------------------------------------------------------------------------------
[14] Related Party Transactions
The Company has two consulting agreements with the brothers of the Company's
Chairman of the Board. One agreement is on a month to month basis for $1,100 per
month. The total consulting expense recorded per this verbal agreement for the
three months ended September 30, 2003 and 2002 was $3,300 respectively.
The second agreement is with EVJ, LLC a limited liability company controlled by
Robert Kay, an employee of the Company. The total consulting expense under this
agreement was $30,000 for the two months ended September 30, 2003.
[15] New Accounting Pronouncements
In July 2001,S FAS No. 141, "Business Combinations" (SFAS 141) and SFAS No. 142
"Goodwill and Other Intangible Assets" (SFAS 142) were issued. SFAS 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS 141 also specifies the criteria that
intangible assets acquired in a purchase method business combination must meet
to be recognized and reported apart from goodwill. SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment, at least annually, in
accordance with the provisions of SFAS 142.
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
effective July 1, 2002. Under SFAS 142, goodwill is not amortized but is tested
for impairment on an annual basis. The impairment test is a two-step process.
The first step identifies potential impairment by comparing an entity's fair
value, including goodwill, to its carry amount. If the entity's carrying amount
exceeds its fair value, a second step is performed which compares the fair value
of the entity's goodwill to the carrying amount of that goodwill. If the
carrying amount of goodwill exceeds the fair value, an impairment loss is
recognized. Upon adoption, any impairment loss identified is presented as a
change in accounting principle and recorded as of the beginning of the fiscal
year adoption. After adoption, any impairment loss recognized is recorded as a
charge to income from operations. The adoption of SFAS 142 did not have a
significant impact on the Company's financial statements.
Effective July 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment Or Disposal of Long Lived Assets," which is effective for financial
statements issued for fiscal years beginning after December 15, 2001. SFAS 144
supersedes SFAS No. 121, "Accounting for the Impairment or Disposal of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of
SFAS 144 did not have a significant impact on the Company's financial
statements.
In April 2002, the Financial Accounting Standard Board ("FASB") issued SFAS No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13 and Technical Corrections." SFAS No. 145 provides guidance for
income statement classification of gains and losses of debt and accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
SFAS No. 145 is effective for years beginning after December 15, 2002. There was
no impact from adoption of this statement.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit of Disposal Activities," which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supersedes
EITF Issue 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)." SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when the liability is incurred.
There was no impact from the adoption of this statement.
14
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #8
[UNAUDITED]
--------------------------------------------------------------------------------
[15] New Accounting Pronouncements [Continued]
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation", which amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock based compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting", to require disclosure of those effects in
interim financial statements. SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, but early adoption is permitted. Accordingly, the
Company has adopted the applicable disclosure requirements of this statement
within this report.
In November 2002, the FASB issued interpretation No. ("FIN") 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others", which requires that guarantees within the
scope of FIN 45 issued or amended after December 31, 2002, a liability for the
fair value of the obligation undertaken in issuing the guarantee, be recognized
at the inception of the guarantee. Disclosures required by FIN 45 are included
in the accompanying consolidated financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities," which is effective for interim periods beginning after June 15, 2003.
This interpretation changes the method of determining whether certain entities
additional subordinated financial support from other parties, or (2) equity
investors that cannot make significant decisions about the entity's operations
or that do not absorb the expected losses or receive the expected returns of the
entity. All other entities are evaluated for consolidation under SFAS No. 94,
"Consolidation of All Majority-Owned Subsidiaries." A VIE is consolidated by its
primary beneficiary, which is the party involved with the VIE that has a
majority of the expected losses or a majority of the expected residual returns
or both. The Company is currently evaluating the impact of FIN 46.
On April 30, 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 33 on
Derivative Instruments and Hedging Activities." SFAS 149 is intended to result
in more consistent reporting of contracts as either freestanding derivative
instruments subject to SFAS 133 in its entirety, or as hybrid instruments with
debt host contracts and embedded derivative features. In addition, SFAS 149
clarifies the definition of a derivative by providing guidance on the meaning of
initial net investments related to derivatives. SFAS 149 is effective for
contracts entered into or modified after June 30, 2003. The adoption of SFAS 129
did not have a material effect on our consolidated financial position, results
of operations, or cash flows.
On May 15, 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for classifying and measuring as liabilities certain
financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. SFAS 150 represents a
significant change in practice in the accounting for a number of financial
instruments, including mandatorily redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. SFAS 150 is effective for all financial instruments created or
modified after May 31, 2003. We currently do not have any such instruments.
There was no impact from the adoption of this statement.
[16] Equity Transactions
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan
because the exercise price of employee stock options equals the market prices of
the underlying stock on the date of grant. Had compensation cost been determined
based on the fair value at the grant date for awards in the three months ended
September 30, 2003 and 2002, respectively, consistent with the provision of SFAS
No. 123, the
15
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #9
[UNAUDITED]
--------------------------------------------------------------------------------
[16] Equity Transactions [Continued]
Company's net income and earnings per share would have been reduced to the pro
forma amounts indicated below.
Three months ended
September 30,
2003 2002
------------- -----------
Net (loss), income as reported $ (756,295) $ 186,510
Add: Stock based employee compensation
expense included in net (loss), income
net of related tax effects -- --
Deduct: Total stock based employee
Compensation expense determined
under fair value based method for all
awards, net of related tax effects -- --
------------- -----------
Pro forma net (loss) income $ (756,295) $ 186,510
============= ===========
Earnings per share:
Basic-as reported $ (.08) $ (.03)
============= ===========
Basic-pro forma $ (.08) $ (.03)
============= ===========
Diluted-as reported $ (.08) $ (.03)
============= ===========
Diluted-pro forma $ (.08) $ (.03)
============= ===========
Paxis Acquisition- On July 22, 2003 the Company completed its acquisition of
ninety-seven (97%) percent of the shares of common stock of Paxis
Pharmaceuticals, Inc. a Delaware corporation ("Paxis") based in Boulder,
Colorado. Paxis was organized to manufacture and distribute cGMP API Paclitaxel,
a leading cancer therapy drug. The Company acquired 47% of the shares of Paxis
in exchange for its 50% interest in Natex Georgia LLC, a company organized in
the Republic of Georgia to harvest from Gerogian government lands organic
biomass from which Paclitaxel is made. The Company acquired 50% of the shares of
Paxis from Trade Investment Services, LLC, which funded Paxis's and Natex's
development pursuant to the terms of a certain Purchase Agreement dated as of
February 1, 2003 (the "Purchase Agreement"), in consideration for TIS receiving
from the Company $500,000 and twenty-five (25%) of the after-tax profits of
Paxis until TIS has received an additional $49,500,000.
In addition, TIS assigned to the Company a loan receivable from Paxis, and the
Company assumed Paxis' loan payable in the principal amount of $4,500,000 to the
Bank of America, pursuant to an Assignment and Assumption Agreement dated as of
July 1, 2003 by and among the Company, TIS and Paxis. The Company also assumed
an obligation of $172,260 advanced by TIS to Paxis.
The accounting for the Paxis acquisition followed controlled related party
carryover basis accounting. The excess of the debt of $4,500,000 assumed plus
the $500,000 cash paid plus the $172,260 obligation assumed totaling
($5,172,260) over the net assets acquired of $2,216,171 was recorded as a
reduction of additional paid-in capital of $2,956,089. At this time, the Company
is unable to estimate the amount or timing of any potential contingent payments.
16
INTEGRATED BIOPHARMA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Sheet #10
[UNAUDITED]
--------------------------------------------------------------------------------
[16] Equity Transactions [Continued]
E. Gerald Kay, the Chief Executive Officer of INB and beneficial owner of
approximately fifty percent (50%) of the stock of INB (or, approximately
sixty-two percent (62%) if family trusts of which he is a trustee are attributed
to him), is the owner of one-third (1/3) of the equity of TIS. Robert Kay, the
brother of E. Gerald Kay, is also the owner of one-third (1/3) of the equity of
TIS. Carl DeSantis, the father of Dean DeSantis who is a director of INB, is the
owner of one-third (1/3) of the equity of TIS.
[17] Subsequent Events
Paxis entered into a letter of intent dated July 16, 2003 with Chatham Biotech,
Ltd. ("Chatham"), a Canadian company in the biomass harvesting and drying
business, to form a Canadian-based joint venture to produce extract and
intermediate precursor Paclitaxel from Canadian Taxus trees. Chatham is to
supply the Canadian Taxus trees using Paxis' extraction expertise in an existing
extraction facility currently controlled by Chatham. The joint venture will be
required to supply Paxis' requirements for extract at no cost from which Paxis
will produce its Paclitaxel and related products, and the joint venture will
sell extract and intermediate products to third parties. The Company can give no
assurance that Paxis will be able to consummate the joint venture or that the
joint venture can be operated successfully. As of September 30, 2003 the Company
has advanced $123,879 to the joint venture.
On October 8, 2003 the Company acquired the remaining three (3%) percent of
Paxis Pharmaceuticals, Inc. ("Paxis"). The Company issued 66,666 shares of its
common stock in exchange for the remaining three percent of Paxis.
On October 22, 2003, the Company completed the acquisition of various assets
related to the Naturally Aloe, Naturally oni and Avera Sport product lines from
Aloe Commodities International, Inc. ("Aloe"). The assets included trademarks,
copyrights, art work, formula for the products, labels, customer lists,
goodwill, inventories and books and records. Pursuant to the terms of a purchase
agreement dated October 22, 2003 by and between the Company and Aloe, the
purchase price for the Transferred Assets was $2,597,469.83, with $872,469.83
paid at closing and $1,725,000.00 paid in 203,085 shares of the Company's common
stock valued on the basis of the average closing price as reported on the
American Stock Exchange for the ten (10) trading days immediately preceding the
closing date. Such shares shall be held in escrow for a period of one (1) year
from the closing date and released pursuant to the terms of an Escrow Agreement
between and among the Company, Aloe and Vial, Hamilton, Koch & Knox, L.L.P.
17
Item 2.
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
The following discussion should be read in conjunction with the historical
information of the Company and notes thereto.
Critical Accounting Estimates
Allowances for Doubtful Accounts and Sales Returns
The Company makes judgments as to its ability to collect outstanding receivables
and provides allowances for the portion of receivables when collection becomes
doubtful. Provisions are made based upon a specific review of all significant
outstanding invoices. The Company continuously monitors payments from its
customers and maintains allowances for doubtful accounts for estimated losses in
the period they become known.
The Company's sales policy is to require customers to provide purchase orders
establishing selling prices and shipping terms. Shipping terms are F.O.B.
shipping point with title and risk of loss passing to the customer at point of
shipment.
The Company's return policy is to only accept returns for defective products. If
defective products are returned, it is the Company's agreement with its
customers that the Company cure the defect and reship the product. The policy is
that when the product is shipped the Company makes an estimate of any potential
returns or allowances.
If the historical data the Company uses to calculate the allowance provided for
doubtful accounts does not reflect the future ability to collect outstanding
receivables, additional provisions for doubtful accounts may be needed and the
future results of operations could be materially affected. In recording any
additional allowances, a respective charge against income is reflected in the
general and administrative expenses, and would reduce the operating results in
the period in which the increase is recorded.
Inventory Valuation
Inventories are stated at the lower of cost or market ("LCM"), which reflects
management's estimates of net realizable value. The Company is a contract
manufacturer and distributor, and only produces finished goods or purchases raw
materials on a purchase order basis. Consequently, the Company has minimal risk
for slow-moving or obsolete inventory. Raw materials are ordered from suppliers
when needed to complete customer's orders. Detail inventory levels and
composition are reviewed and evaluated for potential overstock or obsolescence
in light of current operations and sales. Any appropriate reserve is recorded on
a current basis.
Mail order inventory is expiration date sensitive. The Company reviews this
inventory and considers sales levels (by SKU), term to expiration date,
potential for retesting to extend expiration date and evaluates potential for
obsolescence or overstock.
Intangible Assets
Other purchased intangibles consisting of patents and unpatented technological
expertise, purchased as part of business acquisitions are presented net of
related accumulated amortization and are being amortized on a straight-line
basis over the remaining useful life of the patents (15 years).
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with
18
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Intangible Assets [Continued]
SFAS No 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
The Company reviews the value of its long-lived assets for impairment whenever
events or changes in business circumstances indicate that the carrying amount of
the assets may not be fully recoverable or that the useful lives of these assets
are no longer appropriate. Conditions that would necessitate an impairment
assessment include material adverse changes in operations, significant adverse
differences in actual results in comparison with initial valuation forecasts
prepared at the time of acquisition, a decision to abandon certain acquired
products, services or marketplaces, or other significant adverse changes that
would indicate the carrying amount of the recorded asset might not be
recoverable.
Results of Operations
Three months ended September 30, 2003 Compared to three months ended
September 30, 2002
The Company's net loss for the three months ended September 30, 2003 was
$(756,295) as compared to net income of $186,510 for the three months ended
September 30, 2002. This decrease in net income of approximately $940,000 is
primarily the result of a $1,090,000 decrease in operating income resulting from
a corresponding increase in gross profit of approximately $60,000, an increase
in selling and administrative expenses of approximately $1,156,000 and a
decrease in Federal and state income taxes of approximately $150,000.
Sales for the three months ended September 30, 2003 and 2002 were $4,980,006 and
$4,848,190, respectively, an increase of approximately $130,000 or 3%, but
because of the product mix, gross profit for the three months ended September
30, 2003 was $61,650 higher than the gross profit for the three months ended
September 30, 2002. For the three months ended September 30, 2003 the Company
had sales to one customer, who accounted for 69% of net sales in 2003 and 59% in
2002. The loss of this customer would have an adverse affect on the Company's
operations.
Contract manufacturing sales for the quarter ended September 30, 2003 and 2002
were $4,053,322 and $3,764,197, respectively, an increase of $289,125 or 8%. The
increase in sales is due to a change in the product mix. The Company is selling
higher priced separately packaged products in 2003 in contrast to bulk sales.
Retail and mail order sales for the three months ended September 30, 2003
totaled $19,880 as compared to $29,040 for the three months ended September 30,
2002, a decrease of 32%. The Company has been experiencing a decline in mail
order sales due to increased competition.
The Company has an agreement with DSM Nutritional Products, Inc. (a successor to
Roche Vitamins, Inc.). Sales under this agreement were $609,011 for the three
months ended September 30, 2003 as compared to $510,732 for the three months
ended September 30, 2002, an increase of $98,279 or 19%.
The Company offers distribution and sale of fine chemicals through a subsidiary,
IHT Health Products, Inc. Sales for the three months ended September 30, 2003
totaled $451,039 as compared to $499,082 for the three months ended September
30, 2002, a decrease of $48,043 or 10%.
On February 21, 2003 the Company acquired NuCycle Therapy, Inc. ("NuCycle").
NuCycle is engaged in the development and sale of nutritional formulations based
on plant-derived minerals through patented hyperaccumulation technology. Sales
for the three months ended September 30, 2003 were $9,231 and grant proceeds
received for the three months ended September 30, 2003 totaled $82,661.
19
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
Cost of sales increased to $3,962,680 for the three months ended September 30,
2003 as compared to $3,892,514 for the three months ended September 30, 2002.
Cost of sales decreased as a percentage of sales to 79.6% for the three months
ended September 30, 2003 from 80.3% for the three months ended September 30,
2002. The decrease in cost of sales is due to greater manufacturing
efficiencies.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Three Months Ended 30,
2003 2002 Change
---------- --------- ----------
Advertising Expense $ 17,050 $ 4,593 $ 12,457
Bad Debt Expense (3,032) -0- (3,032)
Royalty & Commission Expense 4,558 20,869 (16,311)
Officers Salaries 123,782 82,216 41,566
Auto, Travel & Entertainment 247,765 81,402 166,363
Office Salaries 184,265 191,824 (7,559)
Freight Out 24,646 36,366 (11,720)
Depreciation & Amortization 49,752 43,007 6,745
Consulting Fees 78,865 23,911 54,954
Regulatory Fees 10,500 -0- 10,500
Professional Fees 253,941 66,455 187,486
Research & Development Expense 37,583 -0- 37,583
Other selling and administrative expenses 233,392 176,388 57,004
Paxis Pharmaceuticals, Inc. 620,307 -0- 620,307
---------- --------- ----------
Total $1,883,374 $ 727,031 $1,156,343
========== ========= ==========
Advertising expenses increased because the Company had decided to spend more on
advertising in the current quarter and to attempt to increase its retail sales.
The decrease in bad debt expense is due to greater emphasis on the Company's
credit policies. Royalty and commission expense has decreased because the sales
of raw materials that incur royalty and commission expense has decreased by
$48,053. Officers' salaries increased because of the addition of a new corporate
Vice President. Auto, travel and entertainment expenses have increased because
of substantially increased travel in connection with its acquisition of Paxis
and its facility located in Boulder, Colorado, as well as the formation of its
Canadian-based joint venture as more fully described in footnote 17. Office
salaries have decreased because of the elimination of three positions, two in
the IHT Ideas, Inc. subsidiary and one in the IHT Health Products, Inc.
subsidiary. Freight out has decreased due to a reduction of sales in the
Company's IHT Health Products, Inc. subsidiary of $48,053. The increase in
consulting fees is due to consulting fees of $23,650 in the NuCycle Therapy,
Inc. Subsidiary which was acquired in February of 2003, and to the increase in
the fees paid for a review of the company's cGMP-(company good manufacturing
practices). Regulatory fees have increased due to the Company's listing on the
American Stock Exchange in April of 2003. Professional fees have increased
largely due to increased legal fees related to recent acquisitions and to
increased auditing and accounting fees related to SEC filings. Research and
development expenses have increased due to the acquisition of NuCycle Therapy,
Inc. in February 2003. The Paxis selling and administrative expenses represent
the expenditures made by Paxis for the two months ended September 30, 2003.
There were no corresponding expenses in 2002 because the Paxis acquisition was
completed on July 22, 2003.
Other income [expense] was $86,578 for the three months ended September 30, 2003
as compared to $83,033 for the three months ended September 30, 2002, an
increase of $3,545. This increase is attributable to an increase in interest
expense of $21,630 due to the assumption of the Bank of America debt of
$4,500,000 in the Paxis transaction, an
20
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Results of Operations [Continued]
increase in interest and investment income of $35,302 due to the increase in
cash from the proceeds received from the issuance of non-redeemable Convertible
Preferred Stock and Warrants on June 25, 2003 and a reduction of $10,127 in
other income.
Inventories
The inventory at September 30, 2003 decreased by $654,541 from the inventory at
June 30, 2003. The Company produces products on a purchase order basis. The
decrease in inventory is attributable to a decrease in finished goods inventory
of approximately $535,000 and a decrease in raw material inventory of
approximately $210,000. The decreases in finished goods are due to lower
inventory levels in the company's two subsidiaries that offer distribution
sales.
Prepaid Expenses
Prepaid expenses and other current assets decreased by $55,917 from June 30,
2003. The decrease is primarily attributable to an decrease in prepaid insurance
and a decrease in prepaid regulatory fees of $10,500 due to the Company's
listing on the American Stock Exchange.
Liquidity and Capital Resources
At September 30, 2003 the Company's working capital was $8,024,600, a decrease
of $6,779,946 over working capital at June 30, 2003. Cash and cash equivalents
were $7,502,625 at September 30, 2003, a decrease of $2,903,765 from June 30,
2003. The Company utilized $1,215,543 and $37,112 from operations for the three
months ended September 30, 2003 and 2002, respectively.
The primary reasons for the decrease in cash used in operations for the three
months ended September 30, 2003 are net loss of approximately $760,000, an
increase in accounts receivable of approximately $137,000, a decrease in
inventories of approximately $650,000, an advance to Paxis Pharmaceuticals,
Inc., a related party of $908,000 and a decrease in accounts payable of
approximately $126,000.
The Company utilized $1,729,644 and $225,651 in investing activities for the
three months ended September 30, 2003 and 2002, respectively. The Company
generated $41,422 and utilized $23,679 from debt financing activities for the
three months ended September 30, 2003 and 2002, respectively.
The Company has a $1,000,000 revolving line of credit agreement which bears
interest the prime interest rate and expires on June 10, 2005. At September 30,
2003 there was no balance due under the revolving line of credit. At September
30, 2003 the Company was in compliance with its tangible net worth covenant but
not its debt service coverage ratio.
The Company's total annual commitment at September 30, 2003 for the next five
years of $4,627,506 consists of obligations under operating leases for
facilities and lease agreements for the rental of warehouse equipment, office
equipment and automobiles.
Capital Expenditures
The Company's capital expenditures for the three months ended 2003 and 2002 were
$1,122,509 and $221,623 respectively. The capital expenditures during these
periods are primarily attributable to the purchase of machinery and equipment.
21
INTEGRATED BIOPHARMA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
--------------------------------------------------------------------------------
Capital Expenditures [Continued]
The Company has budgeted approximately $1,200,000 for capital expenditures for
the remaining nine months of fiscal 2004. Such amount includes capital
expenditures or approximately $1,000,000 for the Paxis facility. Such amount
will be funded from working capital.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
22
Item 3.
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. An evaluation was
performed under the supervision and with the participation of the Company's
management, including the Chief Executive Officer (CEO) and Chief
Financial Officer (CFO), of the effectiveness of the design and
operation of the Company's disclosure controls and procedures within
45 days before the filing date of this Form 10-QSB. Based on their
evaluation, the Company's principal executive officer and principal
financial officer have concluded that the Company's disclosure controls
and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act") are effective to
ensure that information required to be disclosed by the Company in reports
summarized and reported within the time periods specified in Securities
and Exchange Commission rules and forms.
(b) Changes in Internal Control Over Financial Reporting. There have been
no significant changes in the Company's internal controls over financial
reporting or in other factors that could significantly affect internal
controls subsequent to their evaluation. There were no significant
deficiencies or material weaknesses, and therefore there were no corrective
actions taken.
23
Part II: Other Information
INTEGRATED BIOPHARMA, INC.
--------------------------------------------------------------------------------
Item 1: Legal Proceedings
None
Item 2: Changes in Securities
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8K
(a) Exhibits
31.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to Rule 13a-14 and 15d-14 of the Securities and Exchange
Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Periodic Report by Chief Financial Officer
Pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K filed on July 10, 2003 pursuant to Item
5 (Other Events), Item 7 (Financial Statements, Pro Forma Financial
Statements and Exhibits), and Item 9 (Regulation FD Disclosure).
Current Report of Form 8-K filed on August 6, 2003 pursuant to Item
2 (Acquisition or Disposition of Assets), Item 5 (Other Events),
and Item 7 (Financial Statements, Pro Forma Financial Statements
and Exhibits).
Current Report on Form 8-K filed on September 30, 2003 pursuant to
Item 7 (Financial Statements and Exhibits) and Item 9 (Regulation
FD Disclosure).
24
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.
INTEGRATED BIOPHARMA, INC.
Date: November 14, 2003 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay
Chief Executive Officer
Date: November 14, 2003 By: /s/ Eric Friedman
---------------------
Eric Friedman,
Chief Financial Officer
25
Exhibit 31.1
Certification of Chief Executive Officer
----------------------------------------
Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, E. Gerald Kay, certify that:
1. I have reviewed this report on Form 10-QSB of Integrated BioPharma,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
small business issuer and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures as of a date within 45 days
prior to the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as
of the Evaluation Date.
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation, to the small business
issuer's auditors and the audit committee of the small business
issuer's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the small business issuer's
ability to record, process, summarize and report financial data and
have identified for the small business issuer's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's internal control over financial reporting; and
6. The small business issuer's other certifying officer and I have
indicated in this report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2003 By:/s/ E. Gerald Kay
--------------------
Name: E. Gerald Kay
Title: Chief Executive Officer
26
Exhibit 31.2
Certification of Chief Financial Officer
----------------------------------------
Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act,
As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric Friedman, certify that:
1. I have reviewed this report on Form 10-QSB of Integrated BioPharma,
Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the small business issuer as of, and for, the periods presented in
this report;
4. The small business issuer's other certifying officer and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
small business issuer and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) evaluated the effectiveness of the small business issuer's
disclosure controls and procedures as of a date within 45 days
prior to the filing date of this report (the "Evaluation Date");
and
c) presented in this report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as
of the Evaluation Date.
5. The small business issuer's other certifying officer and I have
disclosed, based on our most recent evaluation, to the small business
issuer's auditors and the audit committee of small business issuer's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the small business issuer's
ability to record, process, summarize and report financial data and
have identified for the small business issuer's auditors any
material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the small business
issuer's nternal control over financial reporting; and
6. The small business issuer's other certifying officer and I have
indicated in this report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2003 By:/s/ Eric Friedman
--------------------
Name: Eric Friedman
Title: Vice President & Chief Financial Officer
27
Exhibit 32.1
CERTIFICATION OF PERIODIC REPORT
As adopted to Section 906 of the Sarbanes-Oxley Act of 2002
I, E. Gerald Kay, the Chief Executive Officer of Integrated BioPharma, Inc.
(the "Company"), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the quarterly
period ended September 30, 2003 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: November 14, 2003
By:/s/ E. Gerald Kay
--------------------
E. Gerald Kay
Chief Executive Officer
28
Exhibit 32.2
CERTIFICATION OF PERIODIC REPORT
As adopted to Section 906 of the Sarbanes-Oxley Act of 2002
I, Eric Friedman, the Vice President and Chief Financial Officer of Integrated
BioPharma, Inc. (the "Company"), certify, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2003, 18 U.S.C. Section 1350, that:
(1) the Quarterly Report on Form 10-QSB of the Company for the quarterly
period ended September 30, 2003 (the "Report") fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
Dated: November 14, 2003
By:/s/ Eric Friedman
--------------------
Eric Friedman
Vice President and Chief Financial Officer
29