SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended March 31, 2005 Commission file number: 000-28876
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INTEGRATED BIOPHARMA, INC.
(Exact name of small business issuer 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 (Zip Code)
executive offices)
-----------------------------------------------
Check whether the issuer filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the preceding 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares outstanding of the issuer's Common Stock as of April 30,
2005 was 12,630,790 shares.
INTEGRATED BIOPHARMA, INC.
INDEX
Part I: Financial Information
Item 1: Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheet as of March 31, 2005 [Unaudited] 2...3
Consolidated Statements of Operations for the three and
nine months ended March 31, 2005 and 2004 [Unaudited] 4
Consolidated Statement of Stockholders' Equity for the
nine months ended March 31, 2005 [Unaudited] 5
Consolidated Statements of Cash Flows for nine months ended
March 31, 2005 and 2004 [Unaudited] 6...7
Notes to Consolidated Financial Statements [Unaudited] 8...16
Item 2: Management's Discussion and Analysis or Plan of Operation 17...21
Item 3: Controls and Procedures 22
Part II: Other Information 23
Signatures 24
. . . . . . . .
Report of Independent Registered Public Accounting Firm
We have reviewed the accompanying consolidated balance sheets of
Integrated BioPharma, Inc. and consolidated subsidiaries as of March 31, 2005
and the related consolidated statements of operations for the three-month and
nine-month period ended March 31, 2005, consolidated statement of stockholders'
equity for the nine-months ended March 31, 2005 and consolidated cash flows for
the nine-months ended March 31, 2005. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, 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 interim financial statements for them to be in
conformity with U.S. generally accepted accounting principles.
/s/ Amper, Politziner & Mattia P.C.
May 5, 2005
Edison, New Jersey
1
Part 1-FINANCIAL INFORMATION
Item 1. Financial Statements
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
(UNAUDITED)
Assets:
Current Assets:
Cash and Cash Equivalents ............... $ 2,906,396
Accounts Receivable - Net ............... 4,099,875
Inventories - Net ....................... 10,310,569
Prepaid Expenses and Other Current Assets 1,299,126
Other Assets ............................ 192,529
Deferred Income Taxes ................... 85,000
-----------
Total Current Assets .................... 18,893,495
-----------
Property and Equipment - Net ............... 7,450,370
-----------
Other Assets:
Goodwill ................................ 688,138
Intangible Assets, Net .................. 3,843,908
Investment in Joint Venture ............. 121,388
Deferred Income Taxes ................... 48,000
Security Deposits and Other Assets ...... 181,547
-----------
Total Other Assets ...................... 4,882,981
-----------
Total Assets ............................ $31,226,846
===========
See accompanying notes to condensed consolidated financial statements.
2
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 2005
(UNAUDITED)
Liabilities and Stockholders' Equity:
Current Liabilities:
Note Payable - Bank ...................................... $ 4,500,000
Accounts Payable ......................................... 3,506,945
Accrued Expenses and Other Current Liabilities ........... 1,187,500
Federal and State Income Taxes Payable ................... 28,500
Loan Payable-Trade Investment Services, LLC, related party 172,260
----------
Total Current Liabilities ................................ 9,395,205
----------
Commitments and Contingencies (See Note 11) ................ --
Series B 7% Redeemable Convertible Preferred Stock net of
beneficial conversion feature, warrants issued and issuance
costs - $.002 Par Value; 1,250 shares authorized; 700 shares
issued and outstanding - Liquidation Preference of $7,000,000 2,209,000
Minority interest ........................................... 370,978
Stockholders' Equity:
Preferred Stock - Authorized 1,000,000 Shares,
$.002 Par Value, No Shares Issued ........................ --
Common Stock - Authorized 25,000,000 Shares,
$.002 Par Value, 12,640,690 Shares Issued ................ 25,281
Additional Paid-in-Capital ............................... 28,268,892
Accumulated Deficit ...................................... (8,943,171)
Less, Treasury Stock at cost, 34,900 shares .............. (99,339)
-----------
Total Stockholders' Equity ............................... 19,251,663
-----------
Total Liabilities and Stockholders' Equity ............... $31,226,846
===========
See accompanying notes to condensed consolidated financial statements.
3
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
March 31, March 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Sales ............................................. $ 8,868,295 $ 6,560,784 $ 21,286,889 $ 18,313,616
Cost of Sales ..................................... 6,749,833 4,982,793 18,508,770 13,847,860
------------ ------------ ------------ ------------
Gross Profit ..................................... 2,118,462 1,577,991 2,778,119 4,465,756
------------ ------------ ------------ ------------
Selling and Administrative Expenses
Paxis Pharmaceuticals, Inc. Start Up Costs ...... -- 1,557,100 -- 3,228,454
Selling and Administrative Expenses ............. 3,039,363 1,192,466 8,043,650 3,702,091
------------ ------------ ------------ ------------
Total Selling & Administrative Expenses ........... 3,039,363 2,749,566 8,043,650 6,930,545
------------ ------------ ------------ ------------
Operating (Loss) .................................. (920,901) (1,171,575) (5,265,531) (2,464,789)
------------ ------------ ------------ ------------
Other Income (Expense):
Gain on settlement of Lawsuit ..................... 2,475,322 -- 2,475,322 --
Other Income ...................................... 31,804 75,461 105,902 304,120
Interest Expense .................................. (32,787) (36,432) (106,339) (76,600)
Interest and Investment Income .................... 8,467 3,919 47,801 59,721
------------ ------------ ------------ ------------
Total Other Income ................................ 2,482,806 42,948 2,522,686 287,241
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes and
minority interest ................................. 1,561,905 (1,128,627) (2,742,845) (2,177,548)
Federal and State Income Tax ...................... 65,230 12,905 42,357 87,030
------------ ------------ ------------ ------------
Net Income (Loss) before minority interest ........ 1,496,675 (1,141,532) (2,785,202) (2,264,578)
Minority interest in (income)/loss of consolidated
subsidiary ........................................ 8 -- (20,978) --
------------ ------------ ------------ ------------
Net Income (Loss) ................................. 1,496,683 (1,141,532) (2,806,180) (2,264,578)
Accretion of Preferred Stock Dividends ............ -- (95,000) -- (285,000)
Deemed dividend from beneficial conversion feature
of Series B Preferred Stock ....................... (583,000) -- (1,749,000) --
Series B Preferred Stock Dividend ................. (120,822) -- (367,836) --
------------ ------------ ------------ ------------
Net Income (Loss) applicable to common shareholders $ 792,861 $(1,236,532) $(4,923,016) $(2,549,578)
============ ============ ============ ============
Net Income (Loss) Per Common Share:
Basic ............................................. $ .06 (.12) (.39) (.24)
============ ============ ============ ============
Diluted ........................................... $ .05 (.12) (.39) (.24)
============ ============ ============ ============
Average Common Shares Outstanding ................. 12,621,468 10,635,924 12,589,920 10,487,202
Dilutive Potential Common Shares:
Warrants and Options .............................. 3,998,978 -- -- --
------------ ------------ ------------ ------------
Average Common Shares
Outstanding-assuming dilution ..................... 16,620,446 10,635,924 12,589,920 10,487,202
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
4
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS
ENDED MARCH 31, 2005
(UNAUDITED)
Convertible Additional Total
Common Stock Preferred Preferred Paid-In (Accumulated Treasury Stock Stockholders'
Shares Par Value Stock Stock Capital Deficit) Shares Cost Equity
---------- ------- ------- ------- ----------- ------------ ------ --------- -----------
Balance -
July 1, 2004 12,510,690 $25,021 $ -- $ -- $27,961,003 $(4,020,155) 25,800 $(28,831) $23,937,038
Exercise of
Stock Options
For cash 103,000 206 121,643 121,849
Issuance of
Common Stock
for consulting 27,000 54 186,246 186,300
fees
Deemed dividend
from beneficial
conversion
feature of (1,749,000) (1,749,000)
Series B
Preferred Stock
Dividends Paid
on Series B
Preferred Stock (367,836) (367,836)
Stock Repurchase
Plan 9,100 (70,508) (70,508)
Net Loss for
the nine
months ended (2,806,180) (2,806,180)
March 31, 2005
---------- ------- ------- ------- ----------- ------------ ------ --------- -----------
Balance-
March 31, 2005 12,640,690 $25,281 $ -- $ -- $28,268,892 $(8,943,171) 34,900 $(99,339) $19,251,663
========== ======= ======= ======= =========== ============ ====== ========= ===========
See accompanying notes to condensed consolidated financial statements.
5
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
2005 2004
------------- -------------
Operating Activities:
Net (Loss) ........................................... $ (2,806,180) $ (2,264,578)
------------- -------------
Adjustments to Reconcile Net (Loss) to Net Cash
(Used for) Provided by Operating Activities:
Depreciation and Amortization ...................... 1,150,323 480,982
Deferred Income Taxes .............................. (4,000) (20,000)
Allowance for Inventory ............................ 7,500 7,500
Bad Debt Expense ................................... 7,500 7,500
Issuance of Common Stock for consulting services ... 186,300 --
Minority Interest .................................. 20,978 --
Changes in Assets and Liabilities:
(Increase) Decrease in:
Refundable Federal Income Taxes .................... -- (19,420)
Accounts Receivable ................................ (1,682,021) (876,155)
Inventories ........................................ (3,169,269) (2,163,442)
Deposit for Inventory .............................. -- 108,000
Due From Paxis Pharmaceuticals, Inc. - Related Party -- (908,000)
Prepaid Expenses and Other Current Assets .......... (286,536) (400,910)
Security Deposits and Other Assets ................. 51,433 207,194
(Decrease) Increase in:
Accounts Payable ................................... 1,569,912 1,198,560
Federal and State Income Taxes Payable ............. (47,025) (8,591)
Accrued Expenses and Other Liabilities ............. 475,587 108,032
------------- -------------
Total Adjustments ...................................... (1,719,318) (2,278,750)
------------- -------------
Net Cash - Operating Activities ........................ (4,525,498) (4,543,328)
------------- -------------
Investing Activities:
Purchase of Intangible Assets ........................ (250,000) (775,000)
Investment in Joint Venture .......................... (25,366) (94,999)
License Fee .......................................... -- (90,000)
Goodwill ............................................. -- (483,256)
Purchase of Property and Equipment ................... (1,504,636) (3,136,556)
------------- -------------
Net Cash - Investing Activities ........................ (1,780,002) (4,579,811)
------------- -------------
Financing Activities:
Proceeds from Exercise of Stock Options .............. 121,849 138,160
Dividends Paid ....................................... (367,836) --
Treasury stock ....................................... (70,508) --
Proceeds from Notes Payable .......................... -- 36,525
Repayment of Notes Payable ........................... (19,655) (124,058)
------------- -------------
Net Cash - Financing Activities ........................ (336,150) 50,627
------------- -------------
Net (Decrease) in Cash and Cash Equivalents ............ (6,641,650) (9,072,512)
Cash and Cash Equivalents - Beginning of Periods ....... 9,548,046 10,406,390
------------- -------------
Cash and Cash Equivalents - End of Periods ............. $ 2,906,396 $ 1,333,878
============= =============
See accompanying notes to condensed consolidated financial statements.
6
INTEGRATED BIOPHARMA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
March 31,
2005 2004
------------- -------------
Supplemental Disclosures of Cash Flow Information:
Cash paid during the periods for:
Interest $ 115,731 $ 67,187
Income Taxes $ 46,138 $ 98,625
See accompanying notes to condensed consolidated financial statements.
7
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 Annual Report on Form
10-KSB of Integrated BioPharma, Inc. (the "Company") for the fiscal year ended
June 30, 2004. Certain prior period financial statement amounts have been
reclassified to be consistent with the presentation of the current period. The
results of operations for the three and nine month periods ended March 31, 2005
are not necessarily indicative of the results for the entire fiscal year ending
June 30, 2005.
The Company is engaged primarily in the manufacturing, marketing and sales of
vitamins, nutritional supplements and herbal products; the manufacture and
distribution of paclitaxel, which is the primary chemotherapeutic agent in the
treatment of breast cancer; and technical services through its recently acquired
contract research organization, InB: Hauser Pharmaceutical Services, Inc.
("Hauser"). The Company's customers are located primarily throughout the United
States.
InB: Paxis Pharmaceuticals, Inc. ("Paxis"), the Company's paclitaxel
manufacturing and distribution subsidiary, completed setting up its
manufacturing facilities prior to the end of fiscal 2004. The operating results
of Paxis for the nine months ended March 31, 2005 have been included in the
consolidated sales, gross profit, and selling and administrative expenses.
Because the Paxis subsidiary was a start up operation for the three and nine
months ended March 31, 2004, the start up expenses were shown separately for the
comparative period.
On September 16, 2004, the Company completed the purchase of substantially all
of the assets of Hauser Technical Services, Inc. and Hauser, Inc., including
substantially all of its laboratories, development and manufacturing facilities
and equipment; its intellectual property, including that related to paclitaxel
and other taxanes; goodwill, professional staff and certain of its ongoing
contracts. As part of the transaction, the Company also acquired Hauser's rights
under a prior contract to receive royalties and other payments from Paxis for
Hauser intellectual property used by Paxis in the manufacture of paclitaxel.
Transactions for the period beginning September 10, 2004 through March 31, 2005
have been included in the Company's consolidated financial statements. The
acquisition price of $1,697,076 was allocated as follows:
Inventory $ 780,524
Machinery & Equipment 916,552
-----------
Total $ 1,697,076
===========
On October 1, 2004, the Company acquired a 51% interest in Micro Nutrition Inc.
(a newly formed entity) for a cash payment of $362,486. The accounts of Micro
Nutrition are consolidated with those of the Company. Micro Nutrition, Inc. is a
California corporation in the mail order business selling primarily nutritional
specialty food items.
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 or majority owned with an offset to minority interest. Intercompany
transactions and balances have been eliminated in consolidation.
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
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 Various
Machinery and Equipment 7 Years
Machinery and Equipment Under Capital Leases 7 Years
Transportation Equipment 5 Years
Leasehold improvements are being amortized over various periods not to exceed
its useful lives or the lease terms whichever is shorter.
Machinery and equipment are depreciated on a straight-line basis while
leasehold improvements are amortized on a straight-line basis. Depreciation
expense was $324,998 and $244,902 for the three months ended March 31, 2005 and
2004 and $920,245 and $450,982 for the nine months ended March 31, 2005 and
2004, respectively.
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 of
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 believes that recognizing revenue at shipment is
appropriate because the Company's sales policies meet the four criteria of SAB
104, 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 recognizes income in its Hauser subsidiary upon monthly
customer invoicing. The invoice amount is based upon on time and materials spent
in the month.
The Company realized fee income from managing warehouse and office operations
for an unrelated company of $30,000 and $60,000 for the three months ended March
31, 2005 and 2004 and $100,000 and $180,000 for the nine months ended March 31,
2005 and 2004, respectively. Such amounts are included in "Other income."
Investment in Joint Venture - Paxis entered into a joint venture as of July 16,
2003 with Chatham Biotec, Ltd. ("Chatham"), a Canadian company which harvests
and dries biomass, to form a Canadian-based joint venture to produce extract and
intermediate precursor paclitaxel from Canadian Taxus biomass. Chatham supplies
the Canadian biomass and the joint venture processes it, using Paxis' extraction
expertise in a facility currently controlled by the joint venture. The joint
venture supplies Paxis' requirements for extract at cost, from which Paxis
produces its paclitaxel and related products. The joint venture may sell extract
and intermediate products to third parties. The Company has a 50% interest in
this joint venture. The management agreement provides for profits and losses to
be allocated based on the Company's 50% interest. As of March 31, 2005, the
$121,388 represents the Company's investment. The investment in the joint
venture is reflected using the equity method. The results of operations were not
significant for the nine months ended March 31, 2005. The Company can give no
assurance that the joint venture can be operated successfully.
9
Goodwill and Other Intangible Assets - The Financial Accounting Standards Board
("FASB") has issued Statement of Financial Accounting Standards No. 142 ("SFAS
142"), "Goodwill and Other Intangible Assets." SFAS 142 requires that goodwill
and intangible assets with indefinite lives no longer be amortized against
earnings, but instead tested for impairment at least annually based on a
fair-value approach as described in SFAS 142. The Company performed the annual
test as of May 11, 2005, and determined that there were no indications of
goodwill impairment.
Intangible assets with finite lives are amortized over their estimated useful
lives. The useful life of an intangible asset is the period over which the asset
is expected to contribute directly or indirectly to future cash flows. The
carrying value of intangible assets with finite lives is evaluated whenever
events or circumstances indicate that the carrying value may not be recoverable.
The carrying value is not recoverable when the projected undiscounted future
cash flows are less than the carrying value. Tests for impairment or
recoverability require significant management judgment, and future events
affecting cash flows and market conditions could result in impairment losses. As
of March 31, 2005, the Company believes that there is no impairment to
intangibles.
Other intangible assets consist of intellectual property, trade names, license
fees, license agreements, and unpatented technology. Amortization is being
recorded on the straight line basis over periods ranging from 10 years to 20
years based on contractual or estimated lives.
Long-Lived Assets - The Company reviews the carrying values of its long-lived
assets for possible impairment on an annual basis and whenever circumstances
indicate the carrying amount of an asset may not be recoverable.
Advertising - Costs incurred for producing and communicating advertising are
expensed when incurred. Advertising expense was $139,097 and $38,112 for the
three months ended March 31, 2005 and 2004 and $476,736 and $88,322 for the nine
months ended March 31, 2005 and 2004, respectively.
Stock-Based Compensation - The Company has adopted the disclosure-only
provisions of SFAS No.148, "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 nine months ended
March 31, 2005 and 2004, respectively, consistent with the provision of SFAS No.
123, the Company's net income and earnings per share would have been reduced to
the pro forma amounts indicated below.
Nine Months Ended
March 31,
2005 2004
------------- -------------
Net loss available to common stockholders, as reported $ (4,923,016) $ (2,264,578)
Add: Stock-based employee compensation
expense included in net loss,
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 (839,147) (2,790,722)
------------- -------------
Pro forma net loss available to common stockholders
$ (5,762,163) $ (5,055,300)
============= =============
Earnings per share:
Basic-as reported $ (0.39) $ (0.24)
============= =============
Basic-pro forma $ (0.46) $ (0.48)
============= =============
Diluted-as reported $ (0.39) $ (0.24)
============= =============
Diluted-pro forma $ (0.46) $ (0.48)
============= =============
10
Earnings Per Share - In accordance with FASB Statement No. 128, "Earnings Per
Share," basic earnings per common share are based on weighted average number of
common shares outstanding. Diluted earnings per share amounts are based on the
weighted average number of common shares outstanding, plus the incremental
shares that would have been outstanding upon the assumed exercise of all
potentially dilutive stock options, warrants, and convertible preferred stock,
subject to antidilution limitations.
As of March 31, 2005, stock options and warrants with exercise prices below
average market price in the amount of 4,642,595 shares and Series B Convertible
Preferred Stock in the amount of 700 shares were not included in the computation
of diluted earnings per share as they are antidilutive as a result of net losses
during the periods presented.
As of March 31, 2005, options and warrants to purchase 1,563,666 shares of
common stock were outstanding but were not included in the computation of
diluted earnings per share because their exercise price was greater that the
average market price of the common shares.
3. Goodwill and other Intangible Assets
In accordance with SFAS No. 142, goodwill is not amortized. The Company
completed its annual impairment test prescribed by SFAS 142 at May 11, 2005 and
concluded that no impairment of goodwill existed.
At March 31, 2005, goodwill consisted of:
Goodwill - Paxis acquisition $ 542,728
Goodwill - Aloe acquisition 145,410
------------
Total $ 688,138
----- ============
At March 31, 2005, intangible assets were made up of the following:
Gross Carrying Accumulated
Amount Amortization Net
----------- ------------ -----------
Intellectual Property $ 1,577,455 $ 196,887 $ 1,380,568
License Fee 90,000 15,750 74,250
Trade Names 1,508,000 106,817 1,401,183
Unpatented Technology 547,000 130,000 417,000
License Agreement 611,730 40,823 570,907
----------- ------------ -----------
Total $ 4,334,185 $ 490,277 $ 3,843,908
=========== ============ ===========
Amortization expense recorded on the intangible assets was $86,825 and $10,000
for the three months ended March 31, 2005 and 2004 and $230,078 and $30,000 for
the nine months ended March 31, 2005 and 2004, respectively. Amortization
expense is recorded on the straight line method of periods ranging from 10 years
to 20 years.
The estimated annual amortization expense for intangible assets for the five
succeeding twelve months is as follows:
Amortization
March 31, Expense
----------- ------------
2006 $ 329,649
2007 329,649
2008 329,649
2009 329,649
2010 329,649
Thereafter 2,195,663
------------
Total $ 3,843,908
============
11
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 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.
4. Inventories
Inventories consisted of the following at March 31, 2005:
Raw Materials $ 5,501,877
Work-in-Process 1,678,648
Finished Goods 3,130,044
-----------
Total $10,310,569
----- ===========
5. Property and Equipment
Property and equipment comprised the following at March 31, 2005:
Land and Building $ 1,250,000
Leasehold Improvements 2,140,253
Machinery and Equipment 8,506,107
Machinery and Equipment Under Capital Leases 162,827
Transportation Equipment 37,714
-----------
Total 12,096,901
Less: Accumulated Depreciation and Amortization (4,646,531)
-----------
Total $ 7,450,370
----- ===========
6. Notes Payable
Notes Payable are summarized as follows at March 31, 2005:
Promissory note provided by Bank of America dated August 6, 2003 in the amount
of $4,500,000 with interest at a variable rate based on 1.25% over the current
LIBOR rate. The loan was due on September 4, 2004 and was subsequently renewed
through September 2005. The loan is guaranteed by Mr. Carl DeSantis, a
shareholder and director of the Company. At March 31, 2005, the interest rate
was 4.1%.
7. Loan Payable-Trade Investment Services
Demand loan provided by Trade Investment Services, LLC ("TIS"), a former
shareholder of Paxis, dated July 1, 2002 with interest at 9%.
8. Research and Development Expense
Research and development costs are expensed as incurred. The Company incurred
$87,823 and $0 for the three months ended March 31, 2005 and 2004 and $215,797
and $37,583 for the nine months ended March 31, 2005 and 2004, respectively.
Such costs are included in selling and administrative expenses.
9. Significant Risks and Uncertainties
Concentrations of Credit Risk - Cash - The Company maintains balances at several
financial institutions. Accounts at each institution are insured by the Federal
Deposit Insurance Corporation up to $100,000. At March 31, 2005 the Company's
uninsured cash balances totaled approximately $2,019,255.
12
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 March 31, 2005 was $51,113.
10. Major Customer
Approximately 72% and 53% of revenues were derived from two customers for the
three months ended March 31, 2005 and 2004 and approximately 71% and 75% for the
nine months ended March 31, 2005 and 2004, respectively. The loss of either
customer would have an adverse effect on the Company's operations. Accounts
receivable from these customers comprised approximately 61% of total accounts
receivable at March 31, 2005.
11. Commitments and Contingencies
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 Senior Vice President of Administration
and Operations and former Chief Financial Officer. The lease was effective on
January 10, 1997 and provides for a minimum annual rental of $323,559 through
May 31, 2015, plus increases in real estate taxes and building operating
expenses. On July 1, 2004, the Company leased an additional 24,810 square feet
of warehouse space on a month-to-month basis. Rent expense on this lease was
approximately $248,000 and $135,000 for the three months ended March 31, 2005
and 2004 and $626,000 and $370,000 for the nine months ended March 31, 2005 and
2004, respectively, and is included in both manufacturing and selling and
administrative expenses. The increase in rent is due primarily to an increase in
utility charges.
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 (5) 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 was $61,195 and $87,713 for the three months
ended March 31, 2005 and 2004 and $243,235 and $238,184 for the nine months
ended March 31, 2005 and 2004, respectively, and is included in cost of goods
sold.
The Company leases warehouse and office facilities through March 31, 2006. The
lease was effective on March 6, 2004, and provides for a minimum monthly rental
of $9,967. The Company leases office space through September 30, 2005. The lease
was effective on June 1, 2004, and provides for a minimum monthly rental of
$2,248.The Company leases warehouse equipment for a five (5) year period with an
annual rental of $15,847 and office equipment for a five (5) year period with 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
March 31, Commitment Commitment Total
--------- ---------- ----------- -----------
2006 $ 645,549 $ 323,559 $ 969,108
2007 220,570 323,559 544,129
2008 3,102 323,559 326,661
2009 -- 323,559 323,559
2010 -- 323,559 323,559
Thereafter -- 1,802,612 1,802,612
--------- ---------- ----------- -----------
Total $ 869,221 $ 3,420,407 $ 4,289,628
--------- ========== =========== ===========
13
Total rent expense, including real estate taxes and maintenance charges, was
approximately $441,000 and $246,000 for the three months ended March 31, 2005
and 2004 and $1,200,000 and $692,000 for the nine months ended March 31, 2005
and 2004, respectively. Rent expense is stated net of sublease income of
approximately $800 and $2,300 for the three months ended March 31, 2005 and 2004
and $2,000 and $7,975 for the nine months ended March 31, 2005 and 2004,
respectively.
Litigation - On October 14, 2004, the Company was served with a product
liability complaint. The complaint is in the early stages of discovery and has
been turned over to the Company's insurance carrier for defense.
Development and Supply Agreement - On March 13, 1998, the Company signed a
development and supply agreement with Herbalife International of America, Inc.
("Herbalife") under which the Company develops, manufactures, and supplies
certain nutritional products to Herbalife. The agreement has been renewed
through December 31, 2006. The agreement provides that Herbalife is required to
purchase a minimum quantity of products each year for the term of the agreement
in order to be eligible for rebate incentives. If Herbalife purchases the
minimum amount, then Herbalife will be entitled to certain rebates of an amount
not exceeding $300,000 per year. For the nine months ended March 31, 2005, there
were no rebates due.
Consultant Agreement - On October 20, 2003, the Company entered into a one year
consultant agreement with an investor relations consultant. The Company paid
$80,000 over the term of the agreement. In addition, the Company initially
agreed to issue to the consultant 36,000 shares of its common stock. On July 13,
2004, the Company terminated the agreement. Under the terms of the termination
agreement, the Company will not be obligated to pay the $10,000 per month fee
after July 15, 2004. Additionally the Company issued to the consultant 27,000
shares of common stock valued at the fair market price on the date of issuance
in lieu of the original 36,000 shares. The 27,000 shares of common stock were
valued at $186,300 and are included in selling and administrative expenses.
Intellectual Property Agreement - In connection with the acquisition in January
2004 of intellectual property developed by the Center for Molecular
Biotechnology of Fraunhofer USA, Inc., the Company will pay up to a maximum of
$2,500,000 for services to be performed by Fraunhofer USA, Inc. over a five year
period. As of March 31, 2005 $1,000,000 has been paid.
12. 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 was
$3,300 for the three months ended March 31, 2005 and 2004 and $9,900 for the
nine months ended March 31, 2005 and 2004, respectively.
The second agreement is with EVJ, LLC, a limited liability company controlled by
Robert Kay, a director of the Company. The total consulting expense under this
agreement was $45,000 for the three months ended March 31, 2005 and 2004 and
$135,000 for the nine months ended March 31, 2005 and 2004, respectively.
13. New Accounting Pronouncements
In April 2004, the Emerging Issues Task Force issued Statement No. 03-06 ("EITF
03-06"), "Participating Securities and the Two-Class Method Under FASB Statement
No. 128, Earnings Per Share." EITF 03-06 addresses a number of questions
regarding the computation of earnings per share by companies that have issued
securities other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and if, it declares
dividends on its common stock. The issue also provides further guidance in
applying the two-class method of calculating earnings per share, clarifying what
constitutes a participating security and how to apply the two-class method of
computing earnings per share once it is determined that a security is
participating, including how to allocate undistributed earnings to such a
security. EITF 03-06 is effective for fiscal periods beginning after March 31,
2004. The Company does not expect the adoption of this statement to have a
material impact on its financial position or results of operations.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs." SFAS 151
amends ARB No. 43, "Inventory Pricing", to clarify the accounting for certain
costs as period expense. The Statement is effective for fiscal years beginning
after June 15, 2005; however, early adoption of this Statement is permitted. The
Company does not anticipate an impact from the adoption of this Statement.
14
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment, "which
is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS
123(R) requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. The compensation cost will
be measured based on the fair value of the equity or liability instruments
issued. The Statement is effective as of the beginning of the first interim or
annual period beginning after December 15, 2005. The Company does not yet know
the impact that any future share-based payment transactions will have on its
financial position or results of operations.
14. Equity Transactions
Stock Option Plan and Warrants - On March 24, 2005, the Company granted 34,723
incentive stock options and 9,277 non-statutory stock options to certain of its
directors and employees for a period of ten years at an exercise price equal to
the market price of $6.36.
Treasury Stock Purchases - Through the Company's stock repurchase plan, the
Company purchased an aggregate of 9,100 shares of its common stock for a
purchase price of $70,508 during July 2004.
15. Gain on Settlement of Lawsuit - In January 2005 the Company received a
$2,475,322 cash payment in connection with a multidistrict class action brought
on behalf of direct purchases of vitamin products, in which the plaintiffs
alleged violations of Section 1 of the Sherman Antitrust Act and other wrongful
anti-competitive conduct violation of various federal and state laws.
16. Segment Information
The basis for presenting segment results generally is consistent with overall
Company reporting. The Company reports information about its operating segments
in accordance with FASB Statement No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which establishes standards for reporting
information about a company's operating segments.
The Company has divided its operations into three reportable segments as
follows: Sales of vitamins and nutritional supplements, sales of its active
pharmaceutical ingredient paclitaxel and sales of technical services through its
Hauser subsidiary. The international sales for the nine months ended March 31,
2005 were $4,107,363.
Financial information relating to the nine months ending March 31, 2005
operations by business segment follows:
Technical
Nutraceutical Pharmaceutical Services Total
------------ ------------- ------------- -------------
Sales
U.S. Customers $ 16,091,648 $ 547,507 $ 540,371 $ 17,179,526
International 4,107,363 -- -- 4,107,363
------------ ------------- ------------- -------------
Total Revenues $ 20,199,011 $ 547,507 $ 540,371 $ 21,286,889
Segment operating
profit/(loss) $ (164,206) $ (3,964,621) $ (1,136,704) $ (5,265,531)
Depreciation $ 323,340 $ 525,983 $ 70,922 $ 920,245
Capital Expenditures $ 52,166 $ 456,503 $ 995,967 $ 1,504,636
Total assets $ 21,131,733 $ 8,089,101 $ 1,906,012 $ 31,226,846
15
Financial information relating to the three months ending March 31, 2005
operations by business segment follows:
Technical
Nutraceutical Pharmaceutical Services Total
------------ ------------- ------------- -------------
Sales
U.S. Customers $ 6,785,012 $ -- $ 298,877 $ 7,014,889
International 1,853,406 -- -- 1,853,406
------------ ------------- ------------- -------------
Total Revenues $ 8,638,418 $ -- $ 298,877 $ 8,868,295
Segment operating
profit/(loss) $ 1,155,835 $ (1,577,920) $ (498,816) $ (920,901)
Depreciation $ 109,830 $ 182,435 $ 32,733 $ 324,998
Capital Expenditures $ 23,335 $ 142,247 $ 63,820 $ 229,402
17. Subsequent Events
On April 20, 2005, Gregory A. Gould was appointed Chief Financial Officer and
Senior Vice President of the Company. At the same time, Mr. Eric Friedman, the
former Chief Financial Officer, was appointed Chief Executive Officer of the
Agrolabs, Inc. subsidiary and Senior Vice President of Administration and
Operations for the Company.
16
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the accompanying
financial statements 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. 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
Purchased intangibles consisting of patents and unpatented technological
expertise, intellectual property, license fees and trade names purchased as part
of business acquisitions are presented net of related accumulated amortization
and are being amortized on a straight-line basis over the remaining useful
lives.
The Company records impairment losses on other intangible assets when events and
circumstances indicate that such assets might be impaired and the estimated fair
value of the asset is less than its recorded amount in accordance with Statement
of Financial Accounting Standards ("SFAS") No 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The Company reviews the value of
its long-lived assets for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully
recoverable or that the useful lives of these assets are no longer appropriate.
Conditions that would necessitate an impairment assessment include material
adverse changes in operations, significant adverse differences in actual results
in comparison with initial valuation forecasts prepared at the time of
acquisition, a decision to abandon certain acquired products, services, or
marketplaces, or other significant adverse changes that would indicate the
carrying amount of the recorded asset might not be recoverable.
Income Taxes
Net operating loss carryforwards of approximately $3,013,000 will expire in 2024
for federal purposes and 2011 for state purposes. Until sufficient taxable
income to offset the temporary timing differences attributable to operations and
the tax deductions attributable to options are assured, a valuation allowance
equaling the net operating loss is being provided.
17
Results of Operations
Nine months ended March 31, 2005 compared to nine months ended March 31, 2004
The Company's net loss for the nine months ended March 31, 2005 was $(2,806,180)
as compared to net loss of $(2,264,578) for the nine months ended March 31,
2004. This increase in net loss of approximately $540,000 was primarily the
result of a decrease in gross profit of approximately $1,690,000, an increase in
selling and administrative expenses of approximately $1,100,000 including Paxis
start up costs, an increase in other income of approximately $2,240,000, and a
decrease in federal income and state income taxes of approximately $45,000.
Sales for the nine months ended March 31, 2005 and 2004 were $21,286,889 and
$18,313,616, respectively, an increase of approximately $3,000,000 or 16%. This
increase was due to the introduction of new nutraceutical products and the
increase in sales related to the Paxis Pharmaceuticals, Inc. and Hauser, Inc.
subsidiaries. Gross profit for the nine months ended March 31, 2005 was
$1,687,637 lower than gross profit for the nine months ended March 31, 2004.
This decrease in gross profit was attributable to the inclusion of Paxis
manufacturing expenses. Exclusive of the Paxis subsidiary, the gross profit
percentage for the nine months ended March 31, 2005 was 27% as compared to 24%
for the nine months ended March 31, 2004. For the nine months ended March 31,
2005 and 2004, approximately 71% and 75% of revenues were derived from two
customers. The loss of these customers would have an adverse affect on the
Company's operations.
Nutraceutical sales for the nine months ended March 31, 2005 and 2004 were
$20,199,011 and $18,222,113, respectively, an increase of $1,976,898 or 11%.
On September 16, 2004 the Company completed the purchase of substantially all of
the assets of Hauser Technical Services, Inc. and Hauser, Inc. Sales for the six
months ended March 31, 2005 were $540,371.
Paxis completed setting up its manufacturing facilities and operations and began
production in the fourth quarter of 2004. In anticipation of fulfilling orders,
Paxis has built up raw material and work in process inventories of approximately
$3,000,000. Sales for the nine months ended March 31, 2005 totaled $547,507.
Cost of sales increased to $18,508,770 for the nine months ended March 31, 2005
as compared to $13,847,860 for the nine months ended March 31, 2004. Cost of
sales increased as a percentage of sales to 87% for the nine months ended March
31, 2005 as compared to 76% for the nine months ended March 31, 2004. The
increase in cost of sales was due to the inclusion of $3,565,987 attributable to
both Paxis and Hauser. Exclusive of Paxis and Hauser, cost of sales would have
been 74% for the nine months ended March 31, 2005 as compared to 76% for the
nine months ended March 31, 2004.
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Nine Months Ended
March 31,
2005 2004 Change
----------- ----------- -----------
Advertising Expense ................... $ 476,736 $ 88,322 $ 388,414
Bad Debt Expense ...................... (3,553) 7,342 (10,895)
Royalty & Commission Expense .......... 259,363 79,985 179,378
Officers Salaries ..................... 310,866 358,702 (47,836)
Auto, Travel & Entertainment .......... 718,065 595,541 122,524
Office Salaries ....................... 1,522,047 705,604 816,443
Depreciation & Amortization ........... 434,244 156,650 277,594
Consulting Fees ....................... 749,792 256,449 493,343
Regulatory Fees ....................... 22,864 19,250 3,614
Professional Fees ..................... 552,671 518,141 34,530
Research & Development Expense ........ 215,797 37,583 178,214
Other selling and administrative expenses 2,784,758 878,522 1,906,236
Paxis Pharmaceuticals, Inc. ............ -- 3,228,454 (3,228,454)
----------- ----------- -----------
Total ..................................$ 8,043,650 $ 6,930,545 $ 1,113,105
=========== =========== ===========
18
The increase in advertising expense was due to an increase in
advertising relating to the sales of new nutraceutical products. Royalty and
commission expense increased as a result of the sales of new nutraceutical
products. Office salaries increased due to the addition of two new sales and
marketing employees and the inclusion of Paxis salary expenses reflected in the
nine months. In previous quarters these costs were included in Paxis startup
expenses. The increase in depreciation and amortization expenses was a result of
the inclusion of Paxis expenses. Consulting fees increased as a result of the
termination of the agreement made on July 8, 2004, which resulted with the
issuance of 27,000 shares of common stock and an increase in sales promotion
costs. The increase in research and development expense was attributable to the
inclusion of Paxis expenses reflected in the nine months.
Other income (expense) was $2,522,686 for the nine months ended March 31, 2005
as compared to $287,241 for the nine months ended March 31, 2004, an increase of
$2,235,445. The increase was due to a $2,475,322 cash payment in connection with
a multidistrict class action brought on behalf of the Company and other direct
purchasers of vitamin products, in which the plaintiffs alleged violations of
Section 1 of the Sherman Antitrust Act and other wrongful anti-competitive
conduct in violation of various federal and state laws.
Three months ended March 31, 2005 compared to three months ended March 31, 2004
The Company's net income for the three months ended March 31, 2005 was
$1,496,683 as compared to net loss of $(1,141,532) for the three months ended
March 31, 2004. This increase in net income of approximately $2,600,000 was
primarily the result of an increase in gross profit of approximately $540,000,
an increase in selling and administrative expenses of approximately $290,000
including the Paxis start up costs, an increase in other income of approximately
$2,400,000, and an increase in federal income and state income taxes of
approximately $52,000.
Sales for the three months ended March 31, 2005 and 2004 were $8,868,295 and
$6,560,784, respectively, an increase of approximately $2,300,000 or 35%. This
increase was due to the introduction of new nutraceutical products and the
increase in sales related to the Paxis Pharmaceuticals, Inc. and Hause, Inc.
subsidiaries. Gross profit for the three months ended March 31, 2005 was
$540,471 higher than gross profit for the three months ended March 31, 2004. The
increase in gross profit was attributable to an increase in sales with higher
profit margins. Exclusive of the Paxis subsidiary, the gross profit percentage
for the three months ended March 31, 2005 was 37% as compared to 24% for the
three months ended March 31, 2004. For the three months ended March 31, 2005,
the Company had sales to two customers, who accounted for 78% of net sales in
2005 and 65% in 2004. The loss of these customers would have an adverse affect
on the Company's operations.
Nutraceutical sales for the three months ended March 31, 2005 and 2004 were
$8,638,418 and $6,389,987, respectively, an increase of $2,248,431 or 35%.
On September 16, 2004 the Company completed the purchase of substantially all of
the assets of Hauser Technical Services, Inc. and Hauser, Inc. Sales for the
three months ended March 31, 2005 were $229,877.
Paxis completed setting up its manufacturing facilities and operations and began
production in the fourth quarter of 2004. In anticipation of fulfilling orders,
Paxis has built up raw material and work in process inventories of approximately
$3,000,000.
Cost of sales increased to $6,749,833 for the three months ended March 31, 2005
as compared to $4,982,793 for the three months ended March 31, 2004. Cost
of sales remained constant as a percentage of sales at 76% for the three months
ended March 31, 2005 and for the three months ended March 31, 2004. Exclusive of
Paxis and Hauser, cost of sales would have been 58% for the three months ended
March 31, 2005.
19
A tabular presentation of the changes in selling and administrative expenses is
as follows:
Three Months Ended
March 31,
2005 2004 Change
----------- ----------- -----------
Advertising Expense ................... $ 139,097 $ 38,112 $ 100,985
Bad Debt Expense ...................... 2,494 2,500 (6)
Royalty & Commission Expense .......... 148,523 40,364 108,159
Officers Salaries ..................... 114,069 111,138 2,931
Auto, Travel & Entertainment .......... 245,558 175,158 70,400
Office Salaries ....................... 505,148 257,260 247,888
Depreciation & Amortization ........... 163,947 53,639 110,308
Consulting Fees ....................... 115,249 84,062 31,187
Regulatory Fees ....................... 12,610 5,000 7,610
Professional Fees ..................... 79,338 125,686 (46,348)
Research & Development Expense ........ 87,823 -- 87,823
Other selling and administrative expenses 1,425,507 299,547 1,125,960
Paxis Pharmaceuticals, Inc. ........... -- 1,557,100 (1,557,100)
----------- ----------- -----------
Total ................................. $ 3,039,363 $ 2,749,566 $ 289,797
=========== =========== ===========
The increase in advertising expense was due to an increase in in-store
advertising relating to the sales of new nutraceutical products. Royalty and
commission expense increased as a result of the sales of new nutraceutical
products. Office salaries increased due to the addition of two new sales and
marketing employees and the inclusion of Paxis salary expenses reflected in the
three months. In previous quarters these costs were included in Paxis startup
expenses. The increase in depreciation and amortization expenses was a result of
the inclusion of Paxis. Consulting fees increased as a result of sales promotion
costs. The increase in research and development expense was attributable to the
inclusion of Paxis expenses reflected in the nine months.
Other income (expense) was $2,482,806 for the three months ended March 31, 2005
as compared to $42,948 for the three months ended March 31, 2004, an increase of
$2,439,858. The increase was due to a $2,475,322 cash payment in connection with
a multidistrict class action brought on behalf of the Company and other direct
purchasers of vitamin products, in which the plaintiffs alleged violations of
Section 1 of the Sherman Antitrust Act and other wrongful anti-competitive
conduct in violation of various federal and state laws.
Inventories
The inventory at March 31, 2005 increased by $3,169,269 from the inventory at
June 30, 2004. The increase was attributable to an increase in new nutraceutical
products of approximately $950,000, an increase in Manhattan Drug Inc.'s
inventory of approximately $995,000, an increase in Paxis' inventory of
approximately $160,000, and the acquisition of the Hauser inventory of
approximately $800,000.
Liquidity and Capital Resources
At March 31, 2005 the Company's working capital was $9,498,290, a decrease of
$3,415,371 in working capital from June 30, 2004. Cash and cash equivalents were
$2,906,396 at March 31, 2005, a decrease of $6,641,650 from June 30, 2004. The
Company utilized $4,525,498 and $4,543,328 from operations for the nine months
ended March 31, 2005 and 2004, respectively.
The primary reasons for the decrease in cash used in operations for the nine
months ended March 31, 2005 was net loss of approximately $2,800,000, an
increase in accounts receivable of approximately $1,700,000, an increase in
inventories of approximately $3,200,000, and an increase in accounts payable of
approximately $1,600,000. Based upon the increase in the Company's vitamin and
supplement sales and the commencement of the Company's Pharmaceutical and
Technical Services operating segments, the Company anticipates that cash flows
from operations and existing cash balances will be sufficient to fund operations
through fiscal 2006. The Company anticipates that it will be able to renew the
existing promissory note with terms similar to the existing facility.
20
The Company utilized $1,780,002 and $4,579,811 in investing activities for the
nine months ended March 31, 2005 and 2004, respectively. The Company utilized
$336,150 and generated $50,627 from debt financing activities for the nine
months ended March 31, 2005 and 2004, respectively.
The Company's total annual commitment at March 31, 2005 for the next five years
of $3,999,609 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 nine months ended March 31, 2005 and
2004 were $1,504,636 and $3,136,556 respectively. The capital expenditures
during these periods were primarily attributable to the purchase of machinery
and equipment.
The Company has budgeted approximately $100,000 for capital expenditures for the
remaining three months of fiscal 2005. Such amount will be funded from current
cash balances.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
21
Item 3. 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 that it files or submits under the Exchange Act is
recorded, processed, 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.
22
Part II: OTHER INFORMATION
Item 1: Legal Proceedings
Of the three separate actions against the Company brought by NatEx Georgia LLC,
Wolfe Axelrod Weinberger Associates, LLC and Body Systems Technology, Inc.,
respectively, each described in the Company's Annual Report on Form 10-KSB for
the year ended June 30, 2004, filed with the U.S. Securities and Exchange
Commission on September 28, 2004, only the NatEx Georgia LLC action is still
pending. This action has been remanded to state court, and the Company has filed
a motion to dismiss the action. The remaining two actions have been settled with
no material financial impact upon the Company.
On October 14, 2004 the Company was served with a product liability complaint.
The complaint is in the early stages of discovery and has been turned over to
the Company's insurance carrier for defense.
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3: Defaults Upon Senior Securities
None
Item 4: Submission of Matters to a Vote of Security Holders
None
Item 5: Other Information
None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of Periodic Report by Chief Executive Officer
Pursuant to Rules 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 Rules 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 February 11, 2005 pursuant to
Item 7.01 (Regulation FD) and Item 9.01 (Financial Statements and
Exhibits)
Current Report on Form 8-K filed on April 20, 2005 pursuant to
Item 5.02 (Departure of Directors or Principal Officers) and Item
9.01 (Financial Statements and Exhibits)
23
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: May 16, 2005 By: /s/ E. Gerald Kay
---------------------
E. Gerald Kay
Chief Executive Officer
Date: May 16, 2005 By: /s/ Gregory A. Gould
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Gregory A. Gould
Senior Vice President and Chief Financial Officer