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 March 31, 2004
[ ] 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) 952-0214
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act.
YES [ ] NO [X]
As of the close of business on May 14, 2004, there were 18,662,391 shares of the
Registrant's Common Stock outstanding.
INTERPHARM HOLDINGS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements & Notes .......................................1-19
Item 2. Managements Discussion & Analysis of
Financial Condition and Results of Operations......................20-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk............27
Item 4. Controls and Procedures...............................................27
PART II OTHER INFORMATION REQUIRED IN REPORT
Items 1 through 6 not Applicable
Forward Looking Statements and Associated Risks...............................28
Signatures Page...............................................................29
Exhibits/Certifications....................................................30-32
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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ASSETS
March 31, June 30,
2004 2003
----------- -----------
(Unaudited) (Audited)
CURRENT ASSETS
Cash and cash equivalents $ 1,770,650 $ 2,336,203
Marketable securities, at fair market value 50,388 48,462
Accounts receivable, net 7,909,313 4,930,109
Notes receivable, current -- 1,000,000
Inventories 6,061,575 4,583,205
Prepaid expenses and other current assets 401,565 224,149
Deferred tax assets 23,500 23,500
----------- -----------
Total Current Assets 16,216,991 13,145,628
Property and equipment, net 5,624,113 4,085,302
Notes receivable, long-term -- 524,092
Deferred tax assets 2,537,900 2,537,900
Deposits 1,069,279 45,873
----------- -----------
TOTAL ASSETS $25,448,283 $20,338,795
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-1-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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LIABILITIES AND STOCKHOLDERS' EQUITY
March 31, June 30,
2004 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 5,497,341 5,314,341
------------ ------------
Total Current Liabilities 5,922,188 7,603,375
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OTHER LIABILITIES
Bank notes payable, less current maturities -- 237,521
Other liabilities 29,535 29,535
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Total Other Liabilities 29,535 267,056
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TOTAL LIABILITIES 5,951,723 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, $.01 par value, 70,000,000 shares
authorized; shares issued - 19,286,536 and 15,671,649,
respectively 192,865 156,717
Additional paid-in capital 16,832,343 12,076,237
Accumulated other comprehensive income 13,505 11,579
Retained earnings 2,904,744 669,678
Treasury stock at cost, 624,145 shares at March 31, 2004
and June 30, 2003 (797,868) (797,868)
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TOTAL STOCKHOLDERS' EQUITY 19,496,560 12,468,364
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 25,448,283 $ 20,338,795
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-2-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
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(UNAUDITED)
For The Three Months For The Nine Months
Ended March 31, Ended March 31,
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
SALES, Net $ 11,307,974 $ 7,191,002 $29,889,553 $ 19,759,807
COST OF SALES (including related
party rent expense of $102,000 and
$306,000 for the three months and nine
months ended March 31, 2004
and 2003, respectively) 8,492,823 5,824,712 23,024,297 16,110,304
------------- ------------- ------------- -------------
GROSS PROFIT 2,815,151 1,366,290 6,865,256 3,649,503
------------- ------------- ------------- -------------
OPERATING EXPENSES
Selling, general and administrative expenses 1,165,945 502,552 3,059,780 1,713,970
Related party rent expense 18,000 18,000 54,000 54,000
Research and development 80,535 43,450 269,570 310,218
------------- ------------- ------------- -------------
TOTAL OPERATING EXPENSES 1,264,480 564,002 3,383,350 2,078,188
------------- ------------- ------------- -------------
OPERATING INCOME 1,550,671 802,288 3,481,906 1,571,315
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSES)
Related party interest expense -- (40,812) -- (134,874)
Gain on sale of property and equipment 2,554 -- 2,554 --
Interest expense (5,483) (28,451) (16,482) (78,012)
Interest income 11,208 -- 16,413 63
------------- ------------- ------------- -------------
TOTAL OTHER INCOME (EXPENSES) 8,279 (69,263) 2,485 (212,823)
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-3-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
----------------------------------------------------------------------------------------------------
(UNAUDITED)
For The Three Months For The Nine Months
Ended March 31, Ended March 31,
-----------------------------------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Forward)
INCOME BEFORE INCOME TAXES 1,558,950 733,025 3,484,391 1,358,492
PROVISION FOR INCOME TAXES 575,420 252,450 1,249,325 438,300
----------- ----------- ----------- -----------
NET INCOME $ 983,530 $ 480,575 $ 2,235,066 $ 920,192
=========== =========== =========== ===========
EARNINGS PER SHARE
Basic earnings per share $ 0.05 $ 0.06 $ 0.11 $ 0.11
=========== =========== =========== ===========
Diluted earnings per share $ 0.01 $ 0.01 $ 0.03 $ 0.03
=========== =========== =========== ===========
Basic weighted average shares outstanding 18,457,790 6,151,178 17,389,913 6,151,178
=========== =========== =========== ===========
Diluted weighted average shares and
equivalent shares outstanding 69,336,012 35,935,062 68,692,068 35,935,062
=========== =========== =========== ===========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-4-
INTERPHARM HOLDINGS, INC. AND SUBISIDARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Nine Months Ended March 31, 2004
-----------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive
Shares Amount Shares Amount Capital Income
------ ------ ------ ------ ------- ------
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
Valuation adjustments
related to
Reverse merger -- -- -- -- 10,238 --
Shares issued for
options and
warrants exercised -- -- 4,927 49 (49) --
Tax expense in
connection with
exercise of Employee
stock options -- -- -- -- 545,000 --
Unrealized gain on
marketable securities,
net -- -- -- -- -- 11,557
Net income -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
BALANCE -
December 31, 2003 7,195,876 $ 350,971 18,022,958 $ 180,230 $ 15,481,567 $ 24,316
============ ============ ============ ============ ============ ============
Total
Retained Treasury Stock Stockholders'
Earnings Shares Amount Equity
-------- ------ ------ ------
BALANCE - July 1, 2003 $ 669,678 624,145 $ (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
Valuation adjustments
related to
Reverse merger -- -- -- 10,238
Shares issued for
options and
warrants exercised -- -- -- --
Tax expense in
connection with
exercise of Employee
stock options -- -- -- 545,000
Unrealized gain on
marketable securities,
net -- -- -- 11,557
Net income 1,024,097 -- -- 1,024,097
------------ ------------ ------------ ------------
BALANCE -
December 31, 2003 $ 1,921,214 624,145 $ (797,868) $ 17,160,430
============ ============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-5-
INTERPHARM HOLDINGS, INC. AND SUBISIDARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
For the Nine Months Ended March 31, 2004
-------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other
Preferred Stock Common Stock Paid-In Comprehensive Retained
Shares Amount Shares Amount Capital Income Earnings
------ ------ ------ ------ ------- ------ --------
BALANCE -
December 31, 2003 7,195,876 $ 350,971 18,022,958 $ 180,230 $ 15,481,567 $ 24,316 $ 1,921,214
Shares issued for
options and
warrants exercised -- -- 1,259,578 12,595 796,816 -- --
Tax expense in
connection with
exercise of
Employee stock
Options -- -- -- -- 554,000 -- --
Settlement shares -- -- 4,000 40 (40) -- --
Unrealized loss
on marketable
securities, net -- -- -- -- -- (10,811) --
Net income -- -- -- -- -- -- 983,530
BALANCE -
------------ ------------ ------------ ------------ ------------ ------------ ------------
March 31, 2004 7,195,876 $ 350,971 19,286,536 $ 192,865 $ 16,832,343 $ 13,505 $ 2,904,744
============ ============ ============ ============ ============ ============ ============
Total
Treasury Stock Stockholders'
Shares Amount Equity
------ ------ ------
December 31, 200 624,145 ($ 797,868) $ 17,160,430
Shares issued for
options and
warrants exercised -- -- 809,411
Tax expense in
connection with
exercise of
Employee stock
Options -- -- 554,000
Settlement shares -- -- 0
Unrealized loss
on marketable
securities, net -- -- (10,811)
Net income -- -- 983,530
BALANCE -
------------ ------------ ------------
March 31, 2004 624,145 ($ 797,868) $ 19,496,560
============ ============ ============
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-6-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHSENSIVE INCOME
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(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ -----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
NET INCOME $ 983,530 $ 480,575 $2,235,066 $ 920,192
OTHER COMPREHENSIVE INCOME
Unrealized (loss) gain on marketable
securities, net (10,811) 5,335 1,926 4,992
---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE
INCOME $ 972,719 $ 485,910 $2,236,992 $ 925,184
========== ========== ========== ==========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-7-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED)
Nine Months Ended
March 31,
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 2,235,066 $ 920,192
----------- -----------
Adjustment to reconcile net income to net
cash (used in) provided by operating activities
Depreciation and amortization 643,273 426,181
Gain on sales of property and equipment (2,554) --
Deferred tax expense -- 28,500
Tax expense in connection with exercise of employee
stock options credited to additional paid-in-capital 1,219,000 --
Changes in operating assets and liabilities
Accounts receivable (2,979,204) (728,785)
Inventories (1,478,370) (653,118)
Prepaid expenses and other current assets (177,416) 73,001
Deposits (98,406) --
Accounts payable, accrued expenses and other liabilities 183,001 189,014
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TOTAL ADJUSTMENTS (2,690,676) (665,207)
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NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (455,610) 254,985
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from notes receivable 1,524,092 --
Deposit on new building (925,000) --
Proceeds from sale of property and equipment 19,000 --
Purchases of property and equipment (2,198,531) (638,944)
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NET CASH USED IN INVESTING ACTIVITIES (1,580,439) (638,944)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in line of credit, bank (1,639,946) 1,099,999
Repayments of bank notes payable (461,762) (188,545)
Due to related parties -- (648,846)
Deferred acquisition costs -- (103,564
Cash received in reverse merger transaction 64,029 --
Proceeds from option exercise 3,508,175 --
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES $ 1,470,496 $ 159,044
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-8-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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(UNAUDITED), Continued
Nine Months Ended
March 31,
2004 2003
----------- -----------
NET DECREASE IN CASH AND CASH
EQUIVALENTS $ (565,553) $ (224,915)
CASH AND CASH EQUIVALENTS - Beginning 2,336,203 443,612
----------- -----------
CASH AND CASH EQUIVALENTS - Ending
$ 1,770,650 $ 218,697
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the periods for:
Interest $ 16,482 $ 530,845
Income taxes $ 99,054 $ 476,235
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
-9-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying interim unaudited consolidated financial statements
include the accounts of Interpharm Holdings, Inc. and its subsidiaries
that are hereafter referred to as (the "Company"). All intercompany
accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
of America for complete financial statements. In the opinion of
management, such interim statements reflect all adjustments (consisting
of normal recurring accruals) necessary to present fairly the financial
position and the results of operations and cash flows for the interim
periods presented. The operating results for the three and nine months
ended March 31, 2004 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. 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.
ATEC issued to the stockholders of Interpharm, Inc. a total of 6,151,178
shares of common stock and 2,050,393 shares of Series K Convertible
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.
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
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. Significant estimates include deferred tax asset valuations
and inventory overhead costing estimates.
STOCK BASED COMPENSATION
At March 31, 2004, the Company had two stock-based employee plans. As
permitted under Statement of Financial Accounting Standards ("SFAS") No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which amended SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company has elected to continue to follow the
intrinsic value method in accounting for its stock-based employee
compensation arrangements as defined by Accounting Principles Board
Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees," and
related interpretations including Financial Accounting Standards Board
("FASB") Interpretation ("FIN") No. 44, "Accounting for Certain
Transactions Involving Stock Compensation", an interpretation of APB No.
25. No stock-based employee compensation cost is reflected in operations,
as all options granted under those plans have an exercise price equal to
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net income and net income per
share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
STOCK BASED COMPENSATION
Three Months Nine Months
Ended March 31, Ended March 31,
---------------------- ---------------------------
2004 2003 2004 2003
---------- --------- ------------- -----------
Net income, as reported $ 983,530 $ 480,575 $ 2,235,066 $ 920,192
Less: Stock-based employee
compensation expense
determined under fair value-based
method for all awards 212,550 545,977 --
---------- --------- ------------- -----------
Pro forma net income $ 770,980 $ 480,575 $ 1,689,089 $ 920,192
========== ========= ============= ===========
Basic net income per share
As reported $ 0.05 $ 0.06 $ 0.11 $ 0.11
========== ========= ============= ===========
Pro forma $ 0.04 $ 0.06 $ 0.08 $ 0.11
========== ========= ============= ===========
Diluted net income per share
As reported $ 0.01 $ 0.01 $ 0.03 $ 0.03
========== ========= ============= ===========
Pro forma $ 0.01 $ 0.01 $ 0.02 $ 0.03
========== ========= ============= ===========
The fair values of Company common stock options granted to employees were
estimated on the date of grant using the Black-Scholes option-pricing
model with the following assumptions: (1) expected volatility of 124%,
(2) risk-free interest rate of 3.4% and (3) expected average lives of 5
years.
The Company granted 415,000 options during the Quarter ended March 31,
2004. The fair value of the options were $3.70 per share.
NOTE 3 - INVENTORIES
Inventories consist of the following:
March 31, June 30,
2004 2003
--------------- --------------
Finished goods $ 356,303 $ 347,189
Work in process 2,574,418 2,227,139
Raw materials 2,839,280 1,733,109
Packaging materials 291,574 275,768
------- -----------
Total $6,061,575 $4,583,205
========== ==========
-12-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
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 - PROPERTY AND EQUIPMENT
During November 2003, the Company entered into an agreement to acquire an
existing facility of approximately 92,000 square feet on approximately
thirty-seven acres in Yaphank, NY. The purchase price for the building
and land is $9,250,000, of which $925,000 has been paid as a deposit. The
Company anticipates completing the transaction sometime during quarter
ending June 30, 2004.
NOTE 6 - BANK DEBT
The Company had a credit facility agreement with a Bank, which consisted
of an advised secured line of credit totaling $5,000,000 and a $2,000,000
non-revolving secured facility for equipment purchases. Borrowings under
this credit facility were collateralized by substantially all assets of
the Company and personally guaranteed by four of the Company's
stockholders. In addition, the Company was required to comply with
certain financial covenants. As of March 31, 2004, the Company had
outstanding borrowings of $424,847 under the line of credit, which will
be repaid under the new credit facility discussed below.
On March 29, 2004, the Company obtained a $21 million credit facility
from the same Bank. The new credit facility consists of approval of a
$7.4 million mortgage loan, which is subject to customary closing
conditions, for the purchase of the Company's second manufacturing plan
in Yaphank, NY (Note 5). In addition, the credit facility consists of
$8.6 of credit lines primarily to acquire new equipment and for
renovations, and a $5 million general line of credit. This credit
facility replaces the $7 million credit facility discussed above. Details
of the new facility are as follows:
o The $7,400,000 mortgage loan is to be repaid with 119 monthly
installments, based upon an amortization schedule of twenty
years, and a balloon payment due in ten years for the balance.
o Two advised credit lines aggregating $6,600,000 primarily to
acquire new equipment and for renovations of the Company's new
Yaphank, NY plant. The balance of the funds accessed through
these credit lines will convert to fully amortizing five year
term loans.
o A $2 million advised non-revolving secured facility for equipment
purchases. Each advance cannot exceed 90% of the invoice amount
of the new equipment and is convertible into separate notes that
fully amortize over 60 months.
o The $5,000,000 advised line of credit is primarily for working
capital and general corporate purposes.
This new credit facility will be collaterzlized by substantially all
assets of the Company and will no longer require the personal guarantees
of four of the Company's stockholders. At the option of the Company,
interest will generally be calculated at (i) LIBOR plus 1.5% for 3 to 36
month periods, or (ii) at the Bank's then fixed prime rate. In addition,
the Company will be required to comply with certain financial covenants.
The Bank will review the new credit facility annually; the next review is
scheduled to occur no later than November 30, 2004. The credit lines are
terminable by the Bank at any time as to undrawn amounts.
-13-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 7 - 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 nine month period ended
March 31, 2004, stock options were exercised which generated
approximately $10,000,000 of additional NOLs (Note 9). Of this amount,
approximately $3,700,000 was utilized as a deduction for tax purposes
during the nine months ended March 31, 2004, resulting in a cash benefit
of $1,219,000. 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 March 31, 2004 the Company has remaining
NOLs of approximately $14,000,000 to reduce future taxable income. These
losses expire through 2024 and could become subject to substantial
limitations pursuant to Section 382 of the Internal Revenue Code
regarding substantial changes in Company ownership.
-14-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 8 - EARNING PER SHARE
The calculations of basic and diluted EPS are as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- -------------------------
2004 2003 2004 2003
----------- ----------- ----------- -----------
Numerator:
Net income $ 983,530 $ 480,575 $ 2,235,065 $ 920,192
Less: Preferred stock
dividends 41,392 -- 124,176 --
Less: Net income
attributable to Series K
preferred stockholders 93,264 120,144 208,960 230,048
----------- ----------- ----------- -----------
Numerator for basic EPS 848,874 360,431 1,901,929 690,144
Effect of dilutive securities:
Net income attributable to
Series K preferred
stockholders 93,264 120,144 208,096 230,048
----------- ----------- ----------- -----------
Numerator for diluted EPS $ 942,138 $ 480,575 $ 2,110,025 $ 920,192
=========== =========== =========== ===========
Denominator:
Denominator for basic EPS
Weighted average shares
outstanding 18,457,790 6,151,178 17,389,913 6,151,178
Effect of dilutive securities:
Convertible Series K preferred
stock 43,779,647 29,783,884 43,102,897 29,783,884
Convertible Series A, B, C and
J preferred stocks 7,438 -- 12,783 --
Stock options 7,091,137 -- 8,186,475 --
----------- ----------- ----------- -----------
Denominator for diluted EPS 69,336,012 35,935,062 68,692,068 35,935,062
=========== =========== =========== ===========
Basic EPS $ 0.05 $ 0.06 $ 0.11 $ 0.11
=========== =========== =========== ===========
Diluted EPS $ 0.01 $ 0.01 $ 0.03 $ 0.03
=========== =========== =========== ===========
-15-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 8 - EARNING PER SHARE, continued
As of May 13, 2004, the total number of common shares outstanding and the
number of common shares potentially issuable upon exercise of all
outstanding stock options and conversion of preferred stocks (including
contingent conversions) is as follows:
Common stock outstanding - March 31, 2004 18,662,391
Stock options and Warrants outstanding -
May 13, 2004 9,490,000
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) 43,923,426
----------
76,938,644
==========
NOTE 9 - EQUITY SECURITIES
PREFERRED STOCKS
The Company's preferred stocks consist of the following at March 31,
2004:
Shares Issued
Shares and Liquidation
Authorized Outstanding Par Value Preference
----------------- ------------------ ----------------- -------------------
Preferred Stocks:
*Series A cumulative
Convertible 29,233 7,631 $ 763 $ 763,100
Series A-1 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.
PREFERRED STOCKS,
At March 31, 2004, 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
-16-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 9 - EQUITY SECURITIES
PREFERRED STOCKS, CONTINUED
$.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 March
31, 2004, dividends accumulated, but not declared, were approximately
$138,000.
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 Small
Cap 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.
-17-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
NOTE 9 - EQUITY SECURITIES, continued
PREFERRED STOCKS, 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 AND STOCK OPTIONS
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 resulted in tax deductions allowed for
employee stock options approximating $9,000,000.
During the three months ended December 31, 2003, 8,750 options were
exercised on a cashless basis resulting in a net stock issuance of 4,927
shares.
During the three months ended March 31, 2004, 1,259,578 options were
exercised generating cash proceeds to the Company of approximately
$800,000, and resulted in additional tax deductions of approximately
$1,000,000.
During the three months ended March 31, 2004, the Company issued an
aggregate of 415,000 options to four employees. Vesting is 20% on each
December 31, 2004 through 2008, with an exercise price of $4.41.
NOTE 10 - ECONOMIC DEPENDENCY
MAJOR CUSTOMERS
The Company had the following customer concentrations for the three and
nine month periods ended March 31, 2004 and March 31, 2003:
Sales - Percent of Revenue
Three Months Ended March 31, Nine Month Ended
March 31,
---------------------------- ------------------------------------
2004 2003 2004 2003
-------------- ------------- ------------------ -----------------
Customer "A" 24% 2% 29% 3%
Customer "B" 35% 38% 29% 45%
Customer "C" 8% 11% 10% 9%
-18-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
Note 10- ECONOMIC DEPENDENCY - continued
Accounts Receivable
March 31,
-----------------------------------
2004 2003
---------------- ------------------
Customer "A" $ 1,465,429 $ 41,489
Customer "B" 3,612,946 2,391,350
Customer "C" 836,280 767,681
The Company complies with its supply agreement to sell various strengths
of Ibuprofen to the Department of Veteran Affairs through one of its
primary customers who is the intermediary wholesale prime vendor.
MAJOR SUPPLIERS
For the three and nine month periods ended March 31, 2004, the Company
purchased materials from three suppliers totaling approximately 73% and
85% of the Company's total purchases, and for the three and nine month
periods ended March 31, 2003, the Company purchased raw materials from
two suppliers totaling approximately 68% and 71% of the Company's total
purchases respectively. At March 31, 2004 and 2003, amounts due to these
suppliers included in accounts payable, were approximately $3,095,000 and
$2,348,000 respectively.
NOTE 11 - CONTINGENCIES
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management,
it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact on the Company's financial
condition, liquidity or results of operations.
-19-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Interpharm Holdings, Inc. ("Interpharm," "we," or "us"), through its
wholly-owned subsidiary, Interpharm, Inc., is engaged in the business of
developing, manufacturing and marketing generic over-the-counter and
prescription strength pharmaceutical products. We make sales both under our own
label and to wholesalers and distributors which sell our products under their
labels.
We market our products primarily to wholesalers, drug distributors, repackagers,
and other manufacturers through our internal sales staff as well as independent
sales representatives. Some of our wholesalers and distributors purchase
products that are warehoused for drug chains, independent pharmacies, state and
federal governmental agencies and managed healthcare organizations. Sales are
recognized when the product is shipped and appropriate provisions are made for
returns.
Our operating results for the three and nine-month periods ended March 31, 2004
reflect our continuing expansion plan, including continuing investments in
increasing our production capacity and our pursuit of strategic alliances.
Presented below are some of our financial highlights for the three and
nine-month periods ended March 31, 2004, as compared to the same periods in
2003:
Three-Months Ended March 31,
-----------------------------------------------------------------------------------------
2004 2003
------------------------ ----------------------
(Unaudited)
(Unaudited)
------------------------ ----------------------
Revenue Increased 57% $11,308,000 $7,191,000
Gross Profit Increased 106% $2,815,000 $1,366,000
Operating Income Increased 93% $1,551,000 $802,000
Net Income Increased 105% $984,000 $481,000
Nine-Months Ended March 31,
-----------------------------------------------------------------------------------------
2004 2003
------------------------ -----------------------
(Unaudited)
(Unaudited)
------------------------ -----------------------
Revenue Increased 51% $29,890,000 $19,760,000
Gross Profit Increased 88% $6,865,000 $3,650,000
Operating Income Increased 122% $3,482,000 $1,571,000
Net Income Increased 143% $2,235,000 $920,000
We believe that a key component of our growth has been, and, will continue to
be, our commitment to capital investment to increase production capacity. During
the calendar year 2002, and the six-month period ended June 30, 2003, we
acquired approximately $1,200,000 and approximately $1,000,000, respectively, of
new machinery and equipment. In addition, during the nine-month period ended
March 31, 2004, we invested approximately $2,200,000 in new equipment.
-20-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
We anticipate closing the purchase of an approximately 100,000 square foot
facility in Yaphank, New York, which has been disclosed in previous filings,
during quarter ending June 30, 2004. Once we close on the building and FDA
approval is obtained, this facility will double our current available space of
approximately 100,000 square feet and provide us with sufficient additional
acreage for potential further expansion of our production facilities in the
future. Until we obtain FDA approval for manufacturing at the Yaphank facility,
which we believe should occur in calendar 2005, we may opt to use the new
facility for warehousing and other activities, which would enable us to free up
space for additional manufacturing in our current plant.
We have obtained $7.4 million in financing for the purchase of the Yaphank
facility as part of a $21 million new credit facility which is also comprised of
three credit lines aggrgating $8.6 million, primarily to acquire new equipment
or for renovations, and a $5.0 million credit line primarily for working capital
and general corporate purposes. (See Note 6) At our option, interest will be
calculated (i) at LIBOR plus 1.5% for 3,6,9,12,24,or 36 months, or (ii) at the
lendor's then fixed prime rate.
In order to exploit our primary strength in efficient and cost effective
manufacturing, we continue to pursue new strategic alliances. In addition, we
have budgeted over $1.7 million for research and development through December
31, 2004 with the goal of increasing our pipeline of drugs in various stages of
development by seven to nine in that period. We currently have seven drugs in
various stages of development. In addition, in March, 2004, we obtained FDA
approval for an Abbreviated New Drug Application for Hydrocodone Bitartrate and
Ibuprofen Tablets, 5 mg/200 mg.
-21-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
THREE AND NINE MONTHS ENDED MARCH 31, 2004, COMPARED TO MARCH 31, 2003.
REVENUES
Net sales for the three-month period ended March 31, 2004 were $11,308,000
compared to $7,191,000 for the three-months ended March 31, 2003, an increase of
$4,117,000. This increase was primarily attributable to sales of Atenolol,
Allopurinol and Naproxen, which totaled approximately $4,025,000 during the
quarter. During the same period last year we did not produce Atenolol or
Allopurinol, and Naproxen sales were approximately $265,000.
Net sales for the nine-months ended March 31, 2004 were $29,890,000 compared to
$19,760,000 for the nine-months ended March 31, 2003, an increase of
$10,130,000. This increase was primarily attributable to sales of Atenolol,
Allopurinol and Naproxen which totaled approximately $11,400,000. During the
same period last year we did not produce Atenolol or Allopurinol, and Naproxen
sales were approximately $750,000. Sales of drugs other than Atenolol,
Allopurinol and Naproxen decreased by approximately $500,000 during the
nine-month period ended March 31, 2004 due to management's decision to
temporarily reassign available manufacturing capacity to higher margin products.
Our increase in net sales and corresponding increases in production were made
possible by approximately $4,400,000 in purchases of new equipment since
January, 2002. We plan to continue our investment in new equipment in order to
meet increasing demand for our existing products and to facilitate the
manufacturing of new products under development.
During the three and nine-month periods ended March 31, 2004, 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.
COST OF SALES
Raw material prices have remained relatively constant during the three and
nine-month periods ended March 31, 2004 when compared to the same periods in
2003. We have continued to increase our labor force 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 he or she can be fully incorporated into our production
process.
Our gross profit percentages for the three and nine-month periods ended March
31, 2004 were 24.9% and 23.0%, respectively. This represents an increase of 5.9
and 4.5 percentage points, respectively, from the same periods in 2003. Our
increasing margins are primarily the result of the production of higher margin
products through the diversification of our product line as well as increased
manufacturing efficiency. We believe that, subject to raw material costs and
other market conditions, as to which there can be no assurance, gross profit
should continue to remain higher than in previous reporting periods.
-22-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include salaries and related costs,
commissions, travel, facilities, communications costs and promotional expenses
for the Company's direct sales and marketing staff, administrative and executive
salaries and related benefits, legal, accounting and other professional fees as
well as general corporate overhead.
Selling, general and administrative expenses increased approximately $663,000 to
approximately $1,166,000, or 10.3% of net sales during the three-months ended
March 31, 2004, from approximately $503,000, or 7.0% of net sales, during the
same period in 2003. The significant components of this increase are: salaries,
including payroll taxes and benefits ($271,000); selling commissions ($168,000),
insurance ($25,000), legal, accounting and professional fees ($32,000); rent
($24,000) and listing and transfer agent fees ($45,000). The increase in
salaries, payroll taxes, benefits, insurance, legal, accounting and professional
fees and listing and transfer agent fees is primarily attributable to our recent
expansion and status as a public company. The increase in selling commissions is
primarily attributable to our increased sales.
Selling, general and administrative expenses for the nine-months ended March 31,
2004 were $3,060,000, or 10.2% of sales, an increase of $1,346,000 when compared
to $1,714,000, or 8.7% of sales for the nine-months ended March 31, 2003. The
significant components of this increase are: salaries, including payroll taxes
and benefits ($725,000); selling commissions ($257,000), insurance ($68,000),
freight ($64,000); depreciation ($34,000); listing and transfer agent fees
($59,000); data processing ($30,000); and utilities ($31,000). The increase in
the foregoing expenses is consistent with our overall growth, increase in sales
and status as a public company.
INCOME TAXES
The effective tax rate for the nine-months ended March 31, 2004 was 36% compared
to 32% for the nine-months ended March 31, 2003. The tax provision for the
nine-months ended March 31, 2004 has resulted in a $1,219,000 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 the exercises of stock options. Net
cash used in operating activities for the nine-months ended March 31, 2004 was
$456,000, as compared to $255,000 for net cash provided by operating activities
for the same period last year. When comparing the nine-month periods ended March
31, 2004 and 2003, our net income increased by $1,315,000. This increase in net
-23-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
income was offset by significant changes in our balance sheet; both accounts
receivable and inventories increased $2,979,000 and $1,478,000, respectively
during the nine-month period ended March 31, 2004. The increase in inventory is
necessary in order to fulfill increased demand for our products. Our accounts
payable, accrued expenses and other liabilities increased by $183,000. During
the nine-months ended March 31, 2004, we were able to pay down bank loans
aggregating $462,000 and bank lines of credit by $1,640,000. As discussed in
Note 6, we recently secured a $21,000,000 credit facility consisting of:
o The $7,400,000 mortgage loan is to be repaid with 119 monthly installments,
based upon an amortization schedule of twenty years, and a balloon payment
due in ten years for the balance.
o Two advised credit lines aggregating $6,600,000 primarily to acquire new
equipment and for renovations of the Company's new Yaphank, NY plant. The
balance of the funds accessed through these credit lines will convert to
fully amortizing fie year term loans.
o A $2 million advised non-revolving secured facility for equipment
purchases. Each advance cannot exceed 90% of the invoice amount of the new
equipment and is convertible into separate notes that fully amortize over
60 months.
o The $5,000,000 advised line of credit is primarily for working capital and
general corporate purposes.
This new cr4edit facility will be collateralized by substantially all assets of
the Company and will no longer require the personal guarantees of four of the
Company's stockholders. At the option of the Company, interest will generally
be calculated at (i) LIBOR plus 1.5% for 3 to 36 months periods, or (ii) at the
Bank's then fixed prime rate. In addition, the Company will be required to
comply with certain financial covenants. The Bank will review the new credit
facility annually; the next review is scheduled to occur no later than November
30, 2004. The credit lines are terminable by the Bank at any time as to undrawn
amounts.
Net cash used in investing activities was $1,580,000 for the nine-months ended
March 31, 2004, which is as a result of increases in fixed assets of $2,199,000
and, a security deposit for a new facility of $925,000 in Yaphank, New York,
offset by the collection of $1,524,000 of notes receivable from the reverse
merger, and the sale of property and equipment of $19,000. Net cash provided by
financing activities was $1,470,000 for the nine-months ended March 31, 2004,
which resulted from the receipt of $3,508,000 from option exercises and $64,000
of additional cash received after the reverse merger transaction, less repayment
of various bank lines of approximately $2,102,000. As of March 31, 2004, the
amount outstanding on these credit lines was $425,000.
As a result of our cash flows from operations and financing activities during
the nine-months ended March 31, 2004, working capital increased $4,800,000 to
$10,300,000 from $5,500,000 at June 30, 2003.
We believe the financing arrangements described above, our increased working
capital, funds generated from operations and cash provided by option exercises
will allow us to continue our expansion plans and will be sufficient to continue
meet our operating requirements. We may nevertheless, choose to raise additional
funds or seek other financing arrangements to facilitate more rapid expansion,
to develop new products at a faster pace, or to acquire or invest in
complimentary businesses, technologies, services or products.
At March 31, 2004, we had approximately $14,000,000 in Federal net operating
loss carryforwards ("NOLs") available to reduce future taxable income. These
NOLs could result in savings of approximately $4,900,000 in future income tax
payments (although there will be no corresponding benefit on income tax
expenses).
-24-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
ACCOUNTS RECEIVABLE
Our accounts receivable at March 31, 2004 was $7,909,000 compared to $4,930,000
as at June 30, 2003. This increase is primarily attributable to increased sales
volume. The quality of our accounts receivable are such that we have encountered
little or no bad debt exposure.
INVENTORY
At March 31, 2004, our inventory was $6,062,000, an increase of $1,479,000 from
$4,583,000 at June 30, 2003. Our inventory turnover of 5.7 annualized turns
decreased slightly when compared to December 31, 2003 - 5.8 average turns and
6.1 at June, 2003. We believe this to be within acceptable limits to our
expansion plan.
ACCOUNTS PAYABLE
The accounts and accrued expenses payable increased slightly by approximately
$183,000 during the nine months ended March 31, 2004 as compared to June 30,
2003.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased by $565,000 from $2,336,000 at June 30, 2003
to $1,771,000 at March 31, 2004. During the nine-months ended March 31, 2004, we
funded our operations primarily from two sources: (i) collection of $1,524,000
of notes receivable associated with the reverse merger and (ii) through the
collection of approximately $3,508,000 from the exercise of stock options. These
inflows were offset by: (i) net cash used in operating activities of $465,000,
consisting of net income of $2,235,000, offset by net funds used in operating
activities of $2,700,000; (ii) acquisition of new packaging equipment and other
fixed assets aggregating $2,199,000; (iii) the deposit on a new facility of
$925,000; and (iv) repayment of various bank lines of credit and bank notes
payable totaling approximately $2,102,000.
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.
-25-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
We consider the following accounting policies to be most critical in
understanding the more complex judgments that are involved in preparing our
financial statements and the uncertainties that could impact results of
operations, financial condition and cash flows.
REVENUE RECOGNITION
Revenues from the sale of our products are recognized upon shipment of the
product. Revenues are recorded net of provisions for rebates, charge-backs,
discounts and returns, which are established at the time of sale. Estimates for
rebates, charge-backs, and discounts are calculated based on actual experience
and also cover chargebacks on sales to intermediary wholesale prime vendors for
the supply of Ibuprofen to the Department of Veterans Affairs.
We purchase raw materials from suppliers, which is then used in the
manufacturing of completed goods and sold back to the suppliers or by direct
drop shipment to the supplier's customers. The raw materials are also used in
the manufacturing of products for other customers.
We also (i) have the general inventory risk by taking title to all of the raw
material purchased, (ii) establish the selling price for the finished product
and, (iii) significantly change the raw materials into the finished product
under our specifications and formulas. These factors among others, qualify us as
the principal under the indicators set forth in EITF 99-19, Reporting Revenue
Gross as a Principal vs. Net as an Agent. If the terms and substance of the
arrangement change, such that we no longer qualify to report these transactions
on a gross reporting basis, our net income and cash flows would not be affected.
However, our sales and cost of sales would both be reduced by a similar amount.
INVENTORY
Our inventories are valued at the lower of cost or market, determined on a
first-in, first -out basis, and includes the cost of raw materials 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.
-26-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
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 March 31, 2004, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman and Chief Executive Officer, and our 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, and the 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, except with respect to inventory costing and
segregation of duties within our accounting department. Management has, and
continues to assess the nature of the additional controls, systems and
procedures to improve reporting and information with respect to inventory and to
implement additional controls within our accounting department.
Management has devoted additional resources to assure that inventory has been
properly costed and to mitigate the risks of a lack of segregation of duties in
the accounting department. As a result Management believes that our financial
statements for the quarter ended March 31, 2004 are fairly presented in all
material respects.
-27-
INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISK
Certain statements in this Report, and the documents incorporated by reference
herein, constitute "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of
1934 and the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause deviations in actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied. Such factors include but are not limited to:
the difficulty in predicting the timing and outcome of legal proceedings, the
difficulty of predicting the timing of U.S. Food and Drug Administration ("FDA")
approvals; court and FDA decisions on exclusivity periods; competitor's ability
to extend exclusivity periods past initial patent terms; market and customer
acceptance and demand for our pharmaceutical products; our ability to market our
products; the successful integration of acquired businesses and products into
our operations; the use of estimates in the preparation of our financial
statements; the impact of competitive products and pricing; the ability to
develop and launch new products on a timely basis; the regulatory environment;
fluctuations in operating results, including spending for research and
development and sales and marketing activities; and, other risks detailed from
time-to-time in our filings with the Securities and Exchange Commission.
The words "believe, expect, anticipate, intend and plan" and similar expressions
identify forward-looking statements. These statements are subject to risks and
uncertainties that cannot be predicted or quantified and, consequently, actual
results may differ materially from those expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement
was made.
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INTERPHARM HOLDINGS, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTERPHARM HOLDINGS, INC.
(Registrant)
Date: May 17, 2004
By: /S/ GEORGE ARONSON
---------------------
George Aronson,
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 George Aronson pursuant to Exchange Act Rules
13(a)-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002;
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002;
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