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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from to
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Commission File Number 0-22710
INTERPHARM HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-3673965
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State or other jurisdiction of (I.R.S. Employer
corporation or organization) Identification Number)
69 Mall Drive, Commack, New York 11725
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (631) 543-2800
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.
YES [ ] NO [X]
As of the close of business on November 3, 2003, there were 17,393,886
shares of the Registrant's Common Stock outstanding.
INTERPHARM HOLDINGS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements & Notes ....................................1-15
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations...................16-21
Item 3. Quantitative and Qualitative Disclosures about Market Risk.........21
Item 4. Controls and Procedures.........................................21-22
PART II OTHER INFORMATION REQUIRED IN REPORT
Item 1. Legal Proceedings..................................................23
Item 2. Changes in Securities and use of Proceeds..........................23
Item 3. Defaults Upon Senior Securities....................................25
Item 4. Submission of Matters to a Vote of Security Holders................23
Item 5. Other Information..................................................23
Item 6. Exhibits and Report on Form 8k.....................................23
Signatures Page...............................................................24
Exhibits/Certifications....................................................25-28
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
September 30, June 30,
2003 2003
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 2,431,577 $ 2,336,203
Marketable securities, at fair market value 49,642 48,462
Accounts receivable, net 4,084,579 4,930,109
Notes receivable, current -- 1,000,000
Inventories 6,869,436 4,583,205
Prepaid expenses and other current assets 603,830 224,149
Deferred tax assets 23,500 23,500
----------- -----------
Total Current Assets 14,062,564 13,145,628
Property and equipment, net 5,013,811 4,085,302
Notes receivable, long-term -- 524,092
Deferred tax assets 2,537,900 2,537,900
Deposits 262,260 45,873
----------- -----------
TOTAL ASSETS $21,876,535 $20,338,795
=========== ===========
See Notes To Condensed Consolidated Financial Statements
-1-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, June 30,
2003 2003
------------ ------------
(Unaudited) (Audited)
CURRENT LIABILITIES
Lines of credit, bank $ 424,847 $ 2,064,793
Current maturities of bank notes payable -- 224,241
Accounts payable, accrued expenses, and other
liabilities 5,852,615 5,314,341
------------ ------------
Total Current Liabilities 6,277,462 7,603,375
------------ ------------
OTHER LIABILITIES
Bank notes payable, less current maturities -- 237,521
Other liabilities 29,535 29,535
------------ ------------
Total Other Liabilities 29,535 267,056
------------ ------------
TOTAL LIABILITIES 6,306,997 7,870,431
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stocks, 10,000,000 shares authorized; issued
and outstanding - 7,195,876 and 7,300,876, respectively;
aggregate liquidation preference of $5,494,080 350,971 352,021
Common stock, $.001 par value, 70,000,000 shares
authorized; shares issued - 18,018,031 and 15,671,649,
respectively 180,181 156,717
Additional paid-in capital 14,926,378 12,076,237
Accumulated other comprehensive income 12,759 11,579
Retained earnings 897,117 669,678
Treasury stock at cost, 624,145 shares at September 30, and
June 30, 2003 (797,868) (797,868)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 15,569,538 12,468,364
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 21,876,535 $ 20,338,795
============ ============
See Notes To Condensed Consolidated Financial Statements
-2-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended
September 30,
----------------------------
2003 2002
------------ ------------
SALES, Net $ 6,875,348 $ 5,932,585
COST OF SALES (including related party
rent expense of $102,000 for the three
months ended September 30, 2003
and 2002, respectively) 5,443,518 4,853,785
------------ ------------
GROSS PROFIT 1,431,830 1,078,800
------------ ------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,033,775 572,199
Related party rent expense 18,000 18,000
Research and development 35,000 130,555
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TOTAL OPERATING EXPENSES 1,086,775 720,754
------------ ------------
OPERATING INCOME 345,055 358,046
------------ ------------
OTHER INCOME (EXPENSES)
Related party interest expense -- (46,987)
Interest expense (6,147) (27,553)
Interest income 2,759 10
------------ ------------
TOTAL OTHER EXPENSES (3,388) (74,530)
------------ ------------
INCOME BEFORE INCOME TAXES 341,667 283,516
PROVISION FOR INCOME TAXES 114,228 87,409
-------------------------- ------------ ------------
NET INCOME $ 227,439 $ 196,107
============ ============
EARNINGS PER SHARE
Basic earnings per share $ .01 $ .02
============ ============
Diluted earnings per share $ .00 $ .01
============ ============
Basic weighted average shares outstanding 16,328,011 6,151,178
============ ============
Diluted weighted average shares and
equivalent shares outstanding 68,612,676 35,935,062
============ ============
See Notes To Condensed Consolidated Financial Statements
-3-
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INTERPHARM HOLDINGS, INC. AND SUBISIDARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Three Months Ended September 30, 2003
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Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Capital Income
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BALANCE - July 1, 2003 7,300,876 $ 352,021 15,671,649 $ 156,717 $12,076,237 $ 11,579
Shares issued for options
and warrants exercised -- -- 2,241,382 22,414 2,676,350 --
Conversion of series J
convertible preferred
stock to common stock (105,000) (1,050) 105,000 1,050 -- --
Valuation adjustments
related to Reverse merger -- -- -- -- 53,791 --
Tax expense in connection with
exercise of Employee stock
options 120,000
Unrealized gain on marketable
securities, net -- -- -- -- -- 1,180
Net income -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
BALANCE - September 30, 2003 7,195,876 $ 350,971 18,018,031 $ 180,181 $14,926,378 $ 12,759
------- =========== =========== =========== =========== =========== ===========
Total
Retained Treasury Stock Stockholders'
Earnings Shares Amount Equity
--------------------------------------------------------
BALANCE - July 1, 2003 $ 669,677 624,145 (797,868) $12,468,364
------
Shares issued for options
and warrants exercised -- -- -- 2,698,764
Conversion of series J
convertible preferred
stock to common stock -- -- -- --
Valuation adjustments
related to Reverse merger -- -- -- 53,791
Tax expense in connection with
exercise of Employee stock
options 120,000
Unrealized gain on marketable
securities, net -- -- -- 1,180
Net income 227,439 -- -- 227,439
----------- ----------- ----------- -----------
BALANCE - September 30, 2003 $ 897,117 624,145 $ (797,868) $15,569,538
-------- =========== =========== =========== ===========
See Notes To Condensed Consolidated Financial Statements
-4-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
(Unaudited)
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Three Months Ended
September 30,
----------------------
2003 2002
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NET INCOME $ 227,439 $ 196,107
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OTHER COMPREHENSIVE INCOME
Unrealized gain (loss) on marketable securities, net 1,180 (2,906)
--------- ---------
TOTAL COMPREHENSIVE INCOME $ 228,619 $ 193,201
========= =========
See Notes To Condensed Consolidated Financial Statements
-5-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
September 30,
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 227,439 $ 196,107
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Adjustment to reconcile net income to net
cash used in operating activities
Depreciation and amortization 193,237 130,991
Deferred tax expense -- 7,000
Accrued interest on related party loans -- 46,987
Tax expense in connection with exercise of employee
Stock options credited to additional paid-in-capital 120,000 --
Changes in operating assets and liabilities
Accounts receivable 845,530 440,903
Inventories (2,286,231) (488,315)
Prepaid expenses and other current assets (329,681) 15,187
Deposits (216,387) --
Accounts payable, accrued expenses and other
Current liabilities 538,274 (479,327)
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NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
(907,819) (130,467)
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from notes receivable 1,524,092 --
Purchases of property and equipment (1,121,746) (97,938)
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NET CASH USED IN INVESTING ACTIVITIES 402,346 (97,938)
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CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of line of credit, bank (1,639,946) --
Repayments of bank notes payable (461,762) (61,623)
Due to related parties -- (12,000)
Cash received in reverse merger transaction 3,791 --
Proceeds from option exercise 2,698,764 --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 600,847 $ (73,623)
=========== ===========
See Notes To Condensed Consolidated Financial Statements
-6-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended
September 30,
2003 2002
-----------------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 95,374 $ (302,028)
CASH AND CASH EQUIVALENTS - Beginning 2,336,203 443,612
---------- ----------
CASH AND CASH EQUIVALENTS - Ending
$2,431,577 $ 141,584
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 15,449 $ 25,753
========== ==========
Income taxes $ 84,456 $ 90,000
========== ==========
Non-cash investing and financing activities:
Conversion of Series J preferred stock to common stock $ 1,050 $ --
========== ==========
Valuation Adjustment related to reverse merger $ 50,000 $ --
========== ==========
See Notes To Condensed Consolidated Financial Statements
-7-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated financial statements
include the accounts of Interpharm Holdings, Inc. and its subsidiaries
that are hereafter referred to as (the "Company"). All intercompany
accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. In the
opinion of management, such interim statements reflect all adjustments
(consisting of normal recurring accruals) necessary to present fairly
the financial position and the results of operations and cash flows for
the interim periods presented. The operating results for the quarter
ended September 30, 2003 are not necessarily indicative of the results
that may be expected for the fiscal year ending June 30, 2004. See Note
2, Change of Fiscal Year. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's Transition Report on Form 10-K for the six month transition
period ended June 30, 2003.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
Interpharm Holdings, Inc. and Subsidiaries (the "Company") through its
wholly-owned subsidiary, Interpharm, Inc. ("Interpharm, Inc.") is in the
business of developing, manufacturing and marketing generic prescription
strength and over-the-counter pharmaceutical products for wholesale
distribution throughout the United States. The majority of the Company's
sales have been derived from sales of Ibuprofen tablets in both
over-the-counter and prescription strength.
REVERSE MERGER
On May 30, 2003, Interpharm, Inc. was acquired by ATEC Group, Inc.
("ATEC"), which simultaneously changed its name to Interpharm Holdings,
Inc. In this transaction, ATEC acquired all of the issued and
outstanding shares of Interpharm, Inc. in exchange for both ATEC common
stock and Series K Convertible Preferred Stock, which totaled
approximately 48% of ATEC's voting securities after the transaction was
consummated.
-8-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
ATEC issued to the stockholders of Interpharm, Inc. a total of 6,151,178
shares of common stock and 2,050,393 shares of preferred stock in
exchange for all outstanding shares of Interpharm, Inc. In addition,
Interpharm, Inc. assumed the equity structure of ATEC, which comprised
of 9,495,471 shares of common stock, less 624,145 shares of treasury
stock and four classes of preferred stock totaling 395,094 shares.
CHANGE OF FISCAL YEAR
The Company has changed its fiscal year end from December 31 to June 30.
A Transition Report on Form 10-K was filed for the six month transition
period ended June 30, 2003.
EARNINGS PER SHARE
Basic earnings per share ("EPS") of common stock is computed by dividing
net income available to common stockholders by the weighted average
number of shares of common stock outstanding during the period. Diluted
EPS reflects the amount of earnings for the period available to each
share of common stock outstanding during the reporting period, giving
effect to all potentially dilutive shares of common stock from the
potential exercise of stock options and warrants and conversions of
convertible preferred stocks.
The effect of the recapitalization of Interpharm, Inc. has been given
retroactive application in the earnings per share calculation. The
common stock issued and outstanding with respect to the pre-merger ATEC
Group, Inc. has been included since the effective date of the reverse
merger. The Company has used the two-class method to calculate the
effect of the participating Series K Convertible Preferred Stock on the
calculation of Basic EPS. The if-converted method has been used to
calculate the effect of the participating Series K Convertible Preferred
Stock on diluted EPS.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
-9-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
STOCK BASED COMPENSATION
At September 30, 2003, the Company had two stock-based employee plans.
As permitted under Statement of Financial Accounting Standards ("SFAS")
No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations including Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No.
25. No stock-based employee compensation cost is reflected in
operations, as all options granted under those plans have an exercise
price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income
and net income per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation:
Three Months Ended September 30,
-----------------------------------
2003 2002
---------------- ------------------
Net income $227,439 $196,107
As reported
Less: Stock-based employee
compensation expense
determined under fair
value-based method for all awards 167,000 --
--------- --------
Pro forma $ 60,439 $196,107
========= ========
Three Months Ended September 30,
-----------------------------------
2003 2002
---------------- ------------------
Basic net income per share
As reported $.01 $.02
==== ====
Pro forma $.00 $.02
==== ====
Diluted net income per share
As reported $.00 $.01
==== ====
Pro forma $.00 $.01
==== ====
The fair values of Company common stock options granted to employees are
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility of 124%,
(2) risk-free interest rate of 3.4% and (3) expected average lives of 5
years.
-10-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 3 - INVENTORIES
Inventories consist of the following:
September 30, June 30,
2003 2003
--------------- --------------
Finished goods $ 145,171 $ 347,189
Work in process 4,118,065 2,227,139
Raw materials 2,334,004 1,733,109
Packaging materials 272,196 275,769
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Total $6,869,436 $4,583,205
========== ==========
NOTE 4 - NOTES RECEIVABLE
Two notes receivable acquired as part of the reverse merger (Note 2)
with an aggregate amount of $1,524,092 were repaid in full during the
three months ended September 30, 2003.
NOTE 5 - BANK DEBT
At September 30, 2003, the Company has a credit facility agreement
with a bank, as amended on August 6, 2003, consisting of an advised
secured line of credit totaling $5,000,000 and a $2,000,000
non-revolving secured facility for equipment purchases ("Equipment
Purchase Line"). Any borrowings under the credit facility are
collateralized by substantially all assets of the Company and
personally guaranteed by four of the Company's stockholders. In
addition, the Company must comply with certain financial covenants.
The line of credit is scheduled to be reviewed by November 30, 2003.
As of September 30, 2003, the Company had outstanding borrowings of
$424,847 under the line of credit.
At June 30, 2003, there were four separate notes outstanding under
the Equipment Purchase Line. Such notes were to mature at various
dates through August 2006. During the three months ended September
30, 2003, all of the notes were paid in full.
NOTE 6 - INCOME TAXES
As part of the reverse merger transaction (Note 2), approximately
$7,680,000 of ATEC's Federal net operating loss carryforwards ("NOLs")
became utilizable by the Company. During the three month period ended
September 30, 2003, stock options were exercised which generated
approximately $9,000,000 of additional NOLs (Note 8). Of this amount,
$300,000 was utilized as a deduction for tax purposes during the three
months ended September 30, 2003, resulting in a cash benefit of
$120,000. The financial statement tax benefit of the deduction for the
exercise of these employee stock options are credited to additional
paid-in capital in the period that such tax benefit is recognized for
financial statement purposes. At September 30, 2003 the Company has
remaining NOLs of approximately $16,300,000 to reduce future taxable
income. These losses expire through 2024 and may be subject to
substantial limitations pursuant to Section 382 of the Internal Revenue
Code regarding substantial changes in Company ownership.
-11-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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NOTE 7 - EARNING PER SHARE
The calculations of basic and diluted EPS are as follows:
Three Months Ended September 30,
------------------------------------
2003 2002
---------------- -------------------
Numerator:
Net income $227,439 $196,107
Less: Preferred stock dividend 41,392 --
Less: Net income attributable to Series K preferred
stockholders 19,619 49,027
--------- ---------
Numerator for basic EPS 166,428 147,080
Effect of dilutive securities:
Net income attributable to
Series K preferred stockholders 19,619 49,027
--------- ---------
Numerator for diluted EPS
$186,047 $196,107
======== ========
Denominator:
Denominator for basic EPS Weighted average shares
outstanding 16,328,011 6,151,178
Effect of dilutive securities:
Convertible Series K preferred stock 42,684,688 29,783,884
Convertible Series A, B, C and J preferred stocks 23,452 --
Stock options 9,576,525 --
----------- ------------
Denominator for diluted EPS 68,612,676 35,935,062
========== ==========
Basic EPS $.01 $.02
==== ====
Diluted EPS $.00 $.01
==== ====
-12-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 7 - EARNING PER SHARE, continued
As of November 11, 2003, the total number of common shares outstanding
and the number of common shares potentially issuable upon exercise of
all outstanding stock options and conversion of preferred stocks
(including contingent conversions) is as follows:
Common stock outstanding - September 30, 2003 17,393,886
Common stock issued October 1 to November 11, 2003 --
Stock options outstanding - November 11, 2003 10,334,578
Common stock issuable upon conversion of preferred stocks:
Series A 1,526
Series A-1 (maximum contingent conversion) 4,855,389
Series B 292
Series C 5,620
Series K (maximum contingent conversion) 43,887,718
----------
76,479,009
NOTE 8 - EQUITY SECURITIES
PREFERRED STOCKS
The Company's preferred stocks consist of the following at September
30, 2003:
Shares Issued
Shares and Liquidation
Authorized Outstanding Par Value Preference
---------------------------- -------------- --------------
Preferred Stocks:
*Series A-1 cumulative
Convertible
(Forward) 29,233 7,631 $ 763 $ 763,100
Series A- cumulative
convertible 5,000,000 4,855,389 48,554 3,311,375
*Series B convertible 12,704 1,458 145 14,580
*Series C convertible 350,000 281,005 281,005 1,405,025
*Series J convertible 105,000 -- -- --
Series K convertible 3,000,000 2,050,393 20,504 --
--------- --------- ------------ ------------
Total preferred 8,496,937 7,195,876 $ 350,971 $ 5,494,080
========= ========= =========== ============
* Classes of preferred stock assumed in the ATEC reverse merger.
-13-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 8 - EQUITY SECURITIES, continued
At September 30, 2003, the Company had six authorized series of
preferred stock; Series A Cumulative Convertible (par value $.10),
Series A-1 Cumulative convertible (par value $.01), Series B Convertible
(par value $.10), Series C Convertible (par value $1), Series J
Convertible (par value $.01) and Series K Convertible (par value $.01)
(hereafter referred to as the "A", "A-1", "B", "C", "J" and "K" shares,
respectively).
The A shares have an annual dividend rate of 10% of the par value, which
is cumulative. They are senior to all other series or classes of capital
stock. The B shares have a non-cumulative stated annual dividend rate of
$1 each and are senior to all but the rights of the A stockholders. The
C and J shares have no dividend rights, except as may be authorized at
the sole discretion of the Company's Board of Directors. The K shares
are entitled to receive dividends to the same extent and in the same
amounts as the common stock. The A-1 shares have a cumulative annual
dividend of $.0341 per share when and as declared by the Board of
Directors. At September 30, 2003, dividends accumulated, but not
declared, were approximately $55,000.
Each of the A, B, C and K shares has the right to one vote on all
matters in which stockholders are entitled to vote. The holders of
Series A-1 and J shares shall not be entitled to any voting rights. Each
of the A, B, C and A-1 shares carry dissolution rights upon liquidation
amounting to $100, $10, $5 and $.682 per share, respectively. The A
shares grant the Company the right to redeem such shares at a price of
$100 per share. The A, B and C shares may be converted into shares of
common stock at an exchange rate of five, five and fifty shares,
respectively, for each share of common stock or approximately 7,438
shares. The conversion rights of the J, K and A-1 shares are described
below.
During the three month period ended September 30, 2003, 105,000 of the J
shares, representing all of the issued and outstanding J shares,
automatically converted into 105,000 shares of the Company's common
stock. These shares were automatically converted pursuant a mandatory
conversion provision of J shares which the Company triggered when its
common stock had a closing price of five dollars for three consecutive
days.
The K shares are convertible into shares of common stock, no sooner than
May 30, 2004, upon the happening of any of the following events (the
"Triggering Events"): (i) the Company is deemed by AMEX to be in
compliance with applicable listing standards; (ii) deemed by another
exchange to be in compliance with its applicable listing standards in
the event the Company's securities are listed on such exchange; or (iii)
the Company is no longer listed on AMEX, the Nasdaq National Market or
SmallCap Market, or the New York Stock Exchange. Upon the occurrence of
any of the above Triggering
Events, the K shares become convertible into an aggregate total number
of shares of common stock in accordance with a defined formula, which
assumes the conversion of the A, B, C and J shares into common stock.
The net effect of the conversion feature, which has been deemed to be a
contingent event, together with the shares of common stock issued in the
reverse merger, would be to issue to Interpharm, Inc. stockholders,
common stock totaling approximately 80% of the total number of shares of
common stock and voting convertible preferred stock, outstanding as of
the date of the Triggering Event, after giving effect to the conversion,
less shares of common stock which may be issued between the date of the
closing of the reverse merger and the date of the Triggering Event
arising out of obligations which arose after the date of closing.
-14-
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
--------------------------------------------------------------------------------
NOTE 8 - EQUITY SECURITIES, continued
The A-1 shares convert on a 1:1 basis into Company common stock subject
to the definitive terms in the list of designations upon (i) the Company
reaching $150 million in sales or (ii) a merger, consolidation, sale of
assets or similar transaction.
COMMON STOCK
During the three months ended September 30, 2003, 2,241,382 options and
warrants were exercised generating cash proceeds to the Company of
approximately $2,700,000, and resulting in tax deductions allowed for
employee stock options approximating $9,000,000.
NOTE 9 - ECONOMIC DEPENDENCY
MAJOR CUSTOMERS
The Company had the following customer concentrations for the three
month period ended September 30, 2003 and 2002:
Sales - Percent of Revenue
Three Months Ended September 30,
------------------------------------
2003 2002
---------------- -------------------
URL/Mutual 29% --%
Dr. Reddy's Labs/Cheminor 28% 46%
Department of Veterans Affairs 12% 11%
Accounts Receivable
September 30,
----------------------------------
2003 2002
--------------- ------------------
URL/Mutual $1,405,956 $ --
Dr. Reddy's Labs/Cheminor 1,754,822 2,255,334
Department of Veterans Affairs 391,818 152,812
MAJOR SUPPLIERS
The Company purchased materials from three suppliers totaling
approximately 86% and two suppliers totaling approximately 65% of the
Company's total purchases, during the three month period ended September
30, 2003 and 2002, respectively. At September 30, 2003 and 2002, amounts
due to these suppliers included in accounts payable, were approximately
$3,380,000 and $1,692,000, respectively.
NOTE 10 - SUBSEQUENT EVENTS
On November 14, 2003, the Company entered into a contract to acquire an
additional production facility of approximately 92,000 square feet and
37 acres of land at 50 Horseblock Road, Yaphank, New York. The purchase
price for the building and land is $9,250,000, of which $925,000 has
been paid as a deposit. The contract calls for a closing on or before
March 31, 2004.
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ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
OVERVIEW
Interpharm Holdings, Inc., through its wholly owned subsidiary,
Interpharm, Inc., is engaged in the business of developing, manufacturing and
marketing generic over-the-counter and prescription strength pharmaceutical
products. We make sales both under our own label and to wholesalers and
distributors which sell our products under their labels.
We market our products primarily to wholesalers, drug distributors,
repackagers, and other manufacturers through our internal sales staff as well as
independent sales representatives. Some of our wholesalers and distributors
purchase products that are warehoused for drug chains, independent pharmacies,
state and federal governmental agencies and managed healthcare organizations.
Sales are recognized when the product is shipped and appropriate provisions are
made for returns. Consistent with industry practice, we have a returned goods
policy.
As was the case during the six-month period ended June 30, 2003 and the
year ended December 31, 2002, we have been faced with increased demand for our
existing products from our existing customers. These customers have expressed
satisfaction with the quality of our products, our prices, and our reliability.
During the quarter, we began producing Allopurinol and Atenolol which resulted
in $763,174 and $1,138,147 in sales respectively during the quarter, and
increased sales of Naproxen to $456,454 for the quarter from $287,192 in the
same period last year. During the quarter, the launch of Allopurinol and
Atenolol and increased demand resulted in a bottleneck of inventory awaiting
packaging of approximately $1 million.
In order to address the bottleneck while continuing to produce new
products, we have accelerated our ongoing efforts to upgrade production capacity
using cash we acquired in the reverse merger transaction (see note 2 to the
consolidated financial statements)and cash received from option exercises.
First, on November 14, 2003, we entered into a contract with Arrow
Electronics, Inc. to acquire an additional production facility of approximately
92,000 square feet and 37 acres of land, at 50 Horseblock Road, Yaphank, New
York. This facility includes an additional 30,000 square feet of mezzanine space
which can be utilized for certain production activities. The purcahse price for
the building and land is $9,250,000, of which $925,000 has been paid as a
deposit. The contract calls for a closing on or before March 31, 2004.
Upon closing, we will have two facilities with a combined size of
approximately 200,000 square feet. In order to be used for manufacturing, the
new facility will need to be approved by the FDA. Pending such approval, the new
facility can be used for warehousing and other activities, thereby creating
additional capacity in our current manufacturing plant.
Second, we have spent approximately $2.1 million on capital
improvements since January 1, 2003, including two new packaging lines. One of
the packaging lines went into operation in October, 2003, and the other went
into operation in November, 2003. Prior to October, we had two packaging lines.
We have budgeted expenditures of approximately $1 million over the next six to
eight months on additional equipment, including the addition of a fifth
packaging line to supplement the four existing lines.
Third, Interpharm has assembled a new internal research and development
team. In addition, Interpharm has budgeted expenditures of between $2 million to
$3 million on research and development over the next twelve to fifteen months.
We believe we can increase our pipeline of drugs under various stages of
development by at least ten to twelve in the same period.
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We began our expansion plan in 2002. During the year ended December 31,
2002 and six-months ended June 30, 2003, we spent approximately $1.2 million and
$1 million respectively on new production equipment. During the fiscal year
ended December 31, 2002, we also leased an additional 38,000 square feet of
space in the building we currently occupy.
In order to enhance our growth, we are also actively seeking to create
strategic alliances with companies whose strengths would compliment ours. To
that end, we have, in July and August 2003, launched Allopurinol and Atenolol
which generated approximately $2.0 million in sales during the quarter. We
manufacture these products for United Research Laboratories, Inc. and Mutual
Pharmaceutical Company, Inc. ("URL/Mutual") on a contract basis. We believe that
our future growth is dependent upon other mutually beneficial arrangements with
companies such as URL/Mutual, as well as obtaining new clients and aggressively
increasing our product line.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002.
REVENUES
Financial Highlights
o Net sales increased 15.9% or $0.940 million, to $6.9 million from $5.9
million.
o Gross profit increased 32.72% or $0.35 million, to $1.4 million from
$1.1 million.
o Operating income decreased 3.6% or $12,991, to $345,055 from $358,046.
o Net income increased 16% or $31,322, to $227,439 from $196,107.
NET SALES AND GROSS PROFIT
Net sales for the three months ended September 30, 2003 were $6.9
million compared to $5.9 million for the three months ended September 30, 2002,
an increase of $.94 million. This 15.9% increase in net sales was due to
approximately $2.0 million in sales of Allopurinol and Atenolol, which are
manufactured under agreement for URL/Mutual. We did not produce either product
in the same period last year. In addition, we have also increased our sales of
Naproxen which were $456,454 for the quarter as compared to $287,192 in the same
period last year. The increase in net sales was not attributable to any change
in prices which, for all products in Interpharm, Inc.'s product line, remained
stable.
We had planned for an additional packaging line to be operational in
mid-September. The line however, was put into service in early October. As a
result of this delay our inventory awaiting packaging increased approximately
$1.0 million. This had the impact of increasing our October sales for goods that
were expected to ship in September. Most of the inventory awaiting packaging was
Ibuprofen due to management's decision to prioritize the shipping of other
products. Despite this, however, we continue to experience increasing demand for
Ibuprofen.
During the three-month period ended September 30, 2003 and the six-month
period ended June 30, 2003, we did not experience returns of material quantities
of any of the products we sell. Therefore, we do not believe that we are subject
to a material risk attributable to returns.
Gross profit for the three months ended September 30, 2003 was $1.4
million, an increase of 32.7% or $.35 million from the $1.1 million for the
prior year.
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COST OF SALES
Cost of sales increased 12.1% or $0.6 million to $5.4 million in the
three months ended September 30, 2003, from $4.8 million in the three months
ended September 30, 2002 due to increased production and sales. Raw material
prices were constant during the period. 71.3% of the increase was labor costs,
including payroll taxes and benefits. We have increased our labor force
significantly over the past year to accommodate both our current growth and our
projected future growth. The FDA regulates most aspects of our manufacturing
processes. Therefore, we provide extensive training to all of our employees,
which results in a three month lag between the hiring of a new employee and when
they can be fully incorporated into our production process.
As set forth above, we increased production to satisfy existing
demand from existing customers which have additional purchasing capacity. In
addition, we introduced Atenolol and Allopurinol.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $1.0 million, in
the three months ended September 30, 2003, or 15.0% of net sales, compared to
$.6 million, or 9.6% of net sales, for the three months ended September 30,
2002.
Selling, general and administrative expenses for the three months
ended September 30, 2003 were primarily made up of salaries, including payroll
taxes and benefits ($375,613), selling commissions ($65,970) freight expenses
($78,402), legal, accounting services ($206,958) and insurance expense
($40,703). Salaries increased $157,279, or 72% from the same period last year,
almost entirely due to administrative salaries which increased 102.1% from
$154,518 to $305,736 due to our growth and to accommodate our planned expansion.
Legal, accounting and other professional services increased $151,022, or 270.0%
from the same period last year due to costs associated with being a public
company.
OPERATING INCOME
Operating income for the three-month period ended September 30, 2003
decreased $12,991 to $345,055 as compared to $358,046, or 3.6% as compared to
the same period last year. The three-month period ended September 30, 2003
included an increase of approximately $151,022 of legal and accounting costs, as
compared to the same period in 2002.
INCOME TAXES
The effective tax rate for the three months ended September 30, 2003
was 33% compared to 31% for 2002. The tax provision for the three months ended
September 30, 2003 has resulted in a $120,000 increase in additional paid in
capital due to the utilization of deductions from stock options exercised during
the period.
Liquidity and Capital Resources
We currently finance our operations and capital expenditures through
cash flows from operations, bank loans, lines of credit, cash acquired in our
reverse merger in May, 2003 and cash received from option exercises. Cash used
in operating activities for the three-months ended September 30, 2003 was
$1,027,819, an increase of $897,352 from the same period last year. This
increase is primarily due to an increase in inventories in order to enable us to
meet customer demand more rapidly.
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Net cash provided by investing activities was $402,346 for the
three-months ended September 30, 2003, which resulted from the proceeds of $1.5
million notes from the Baar Group, Inc. relating to the sale of our computer
operations which was offset by $1.1 million of equipment purchases.
Net cash provided by financing activities was $600,847 for the three
months ended September 30, 2003, which resulted from $2.7 million in proceeds
from option exercises which were offset by $2.1 million in repayments of bank
notes and lines of credit.
As a result of our cash flows from operations and financing activities
during the three months ended September 30, 2003, working capital increased $2.5
million to $7.8 million from $5.2 million at June 30, 2003. In August 2003, we
increased our credit lines from $3.5 million to $7 million. As of September 30,
2003, the amounts outstanding on these credit lines were 424,847. We believe
that our increased working capital, cash provided by option exercises and
increased credit lines will allow us to continue our expansion plans, and will
be sufficient to meet our operating needs for the next 12 months.
At September 30, 2003, we had approximately $7,680,000 in Federal net
operating loss carryforwards ("NOLs") available to reduce future taxable income.
These NOLs could result in savings of up to $2,700,000 in future income tax
payments (although there will be no effect on income tax expenses).
In addition, the exercise of 2,251,382 employee stock options and
warrants from July 1, 2003 to September 30, 2003 resulted in additional future
tax deductions approximating $9,000,000, which could result in cash savings of
up to $3,000,000.
INVENTORY
In late 2000 and early 2001, Interpharm, Inc. commenced a program to
increase inventory production levels to meet increasing demand. At September 30,
2003, our inventory increased to $6.9 million from $4.6 million at June 30,
2003, primarily as a result of our program to increase inventory, but also
because of a $1 million bottleneck of inventory awaiting packaging and an
increase in raw materials by approximately $700,000 for new products Atenolol
and Allopurinol.
ACCOUNTS PAYABLE
The accounts payable, accrued expenses and other liabilities
increased approximately $538,274 in the three months ended September 30, 2003 as
compared to June 30, 2003 due to the increase in inventories.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents at September 30, 2003 were approximately
$2.4 million as compared to $2.3 million at June 30, 2003. While net cash was
increased by financing and investing activities, this was offset by equipment
and inventory purchases and the repayment of credit lines.
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We believe that one of the most important factors in our ability to
continue to grow our business will be our ability to launch new products. To
that end, as set forth above, we have devoted, and plan to devote, substantially
greater resources to our research and development efforts than we have in
previous years. In addition, we are devoting the assets we acquired in becoming
a public company, the cash obtained from options exercises and those resources
we already had, to increasing our production capacity through the purchase of
new equipment, acquiring a new production facility and improving our existing
production facility.
While we anticipate that our cash flow and current credit
arrangements will be sufficient for at least the next 12 to 18 months, we may
choose to raise additional funds or seek other financing arrangements to
facilitate more rapid expansion, to develop new products at a faster pace, or to
acquire or invest in complimentary businesses, technologies, services or
products.
CRITICAL ACCOUNTING POLICIES
Management's discussion and analysis of financial condition and results
of operations discusses our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires that Interpharm
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the reporting period. On an on-going basis, Interpharm evaluates
judgments and estimates made, including those related to revenue recognition,
inventories, income taxes and contingencies including litigation. Interpharm
bases its judgments and estimates on historical experience and on various other
factors that it believes to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying value of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions.
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing our
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
REVENUE RECOGNITION
Revenues from the sale of Interpharm products are recognized upon
shipment of the product. Revenues are recorded net of provisions for rebates,
charge-backs, discounts and returns, which are established at the time of sale.
Estimates for rebates, charge-backs, and discounts are calculated based on
actual experience and also cover chargebacks on sales to intermediary wholesale
prime vendors for the supply of Ibuprofen to the Department of Veterans Affairs.
We purchase raw materials from suppliers, which is then used in the
manufacturing of completed goods and sold back to the suppliers, or by direct
drop shipment to the supplier's customers. The raw materials are also used in
the manufacturing of products for other customers. We also (i) have the general
inventory risk by taking title to all of the raw material purchased, (ii)
establish the selling price for the finished product and, (iii) significantly
change the raw materials into the finished product under our specifications and
formulas. These factors among others, qualify us as the principal under the
indicators set forth in EITF 99-19, Reporting Revenue Gross as a Principal vs.
Net as an Agent. If the terms and substance of the arrangement change, such that
we no longer qualify to report these transactions on a gross reporting basis,
our net income and cash flows would not be affected. However, our sales and cost
of sales would both be reduced by a similar amount.
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INVENTORY
Our inventories are valued at the lower of cost or market, determined
on a first-in, first -out basis, and include the cost of raw materials and
manufacturing. We continually evaluate the carrying value of our inventories and
when factors such as expiration dates and spoilage indicate that impairment has
occurred, either a reserve is established against the inventories' carrying
value or the inventories are disposed of and completely written off in the
period incurred.
ISSUES AND UNCERTAINTIES
RISK OF PRODUCT LIABILITY CLAIMS
The testing, manufacturing and marketing of pharmaceutical products
subject us to the risk of product liability claims. We believe that we maintain
an adequate amount of product liability insurance, but no assurance can be given
that such insurance will cover all existing and future claims or that we will be
able to maintain existing coverage or obtain additional coverage at reasonable
rates.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not use any derivative financial instruments to hedge our exposure to
adverse fluctuations in interest rates, fluctuations in commodity prices or
other market risks, nor do we invest in speculative financial instruments.
Borrowings under our lines of credit are indexed to the prime rate.
Due to the nature of our borrowings and short-term investments, we
have concluded that there is no material risk exposure.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Controls and Procedures
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to our management to allow timely decisions regarding required
disclosure. Management necessarily applied its judgment in assessing the costs
and benefits of such controls and procedures, which, by their nature, can
provide only reasonable assurance regarding management's control objectives.
At the conclusion of the period ended June 30, 2003, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chairman and Chief Executive Officer, Chief Financial
Officer and General Counsel, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based upon that evaluation, the Chairman
and Chief Executive Officer, Chief Financial Officer and General Counsel
concluded that our disclosure controls and procedures were effective in alerting
them in a timely manner to information relating to the Company required to be
disclosed in this report but adopted additional disclosure controls and
procedures to improve the quality and timeliness of disclosure during our
transition from a private to a public company.
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FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by
reference herein, constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, Section 21E of the Securities
Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange Commission.
The words "believe, expect, anticipate, intend and plan" and similar
expressions identify forward-looking statements. These statements are subject to
risks and uncertainties that cannot be predicted or quantified and,
consequently, actual results may differ materially from those expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date the statement was made.
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Other
Information
September 30, 2003
PART II
OTHER INFORMATION
Item 1.- Legal Proceedings - None
Item 2.- Changes in Securities and use of Proceeds - In July, August and
September 2003 we issued 2,241,382 shares of common stock upon the exercise of
options. Proceeds received were $2,714,980 and will be used for working capital
needs.
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 Report on Form 8-K - On July 15, 2003 we filed a Form 8-K
that announced the financial results of our wholly owned subsidiary, Interpharm,
Inc. for the quarter ended March 31, 2003. On August 11, 2003 we filed an
amended Form 8-K that updated the information previously filed for the sale of
our computer operations and the acquisition of Interpharm, Inc. The financial
statements for Interpharm at March 31, 2003 were included and a proforma balance
sheet was presented as at March 31, 2003.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPHARM HOLDINGS, INC.
(Registrant)
Date: November 14, 2003
By: /S/ JAMES J. CHARLES
---------------------------
James J. Charles,
Chief Financial Officer
(Duly authorized to sign on
behalf of registrant)
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EXHIBITS
NUMBER DESCRIPTION
31.1 Certification of Dr. Maganlal K. Sutaria pursuant to Exchange Act Rules
13(a)-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
31.2 Certification of James Charles pursuant to Exchange Act Rules
13(a)-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002;
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